Merger Analysis in the App Economy: An Empirical Model of Ad-Sponsored Media

61 Pages Posted: 11 Dec 2020 Last revised: 2 Nov 2021

See all articles by Kohei Kawaguchi

Kohei Kawaguchi

Hong Kong University of Science and Technology

Toshifumi Kuroda

Tokyo Keizai University

Susumu Sato

Institute of Economic Research, Hitotsubashi University

Date Written: November 1, 2021

Abstract

In the mobile app market, multiple monetizing policies such as paid and free ad-sponsored models co-exist. This paper proposes a novel model of ad-sponsored media with endogenous business model choice, that is applicable to the mobile app industry. The model defines an equilibrium over consumers’ downloads and usage decisions and app developers’ pricing and advertising decisions. The cost for a consumer to use an app is well defined regardless of the monetizing policy, enabling a Small, Non-transitory but Significant Increase in Cost (SSNIC) test for defining an antitrust relevant market. We estimate the model using mobile app data from Japan from 2015 to 2017. The SSNIC test shows that few non-game categories are relevant markets, whereas so are many game categories. The relevant market definition based on a full equilibrium simulation is aligned with this result. Furthermore, merger simulations show that the welfare damage is more pronounced in categories where the hypothetical monopolist's profit increases more in the SSNIC test, validating the use of SSNIC test as a convenient screening tool. Merger simulations suggest the importance of endogenous business model choice, because price increase is often caused by the shift from free to paid model. The endogenous business model choice also affects the implication of the platform transaction fee reduction. Contrary to the standard vertical relation, in the app economy, we find that a reduction in the transaction fee increases the price, because apps find it more profitable to charge price rather than show advertisements to consumers.

Keywords: Merger simulation, market definition, SSNIP, antitrust policy, ad-sponsored media, platform transaction fee, app economy, distributed word representation.

JEL Classification: L11, L13, L41, L86, M13, M21.

Suggested Citation

Kawaguchi, Kohei and Kuroda, Toshifumi and Sato, Susumu, Merger Analysis in the App Economy: An Empirical Model of Ad-Sponsored Media (November 1, 2021). TPRC48: The 48th Research Conference on Communication, Information and Internet Policy, Available at SSRN: https://ssrn.com/abstract=3746830 or http://dx.doi.org/10.2139/ssrn.3746830

Kohei Kawaguchi

Hong Kong University of Science and Technology ( email )

6070 LSK Building, HKUST
Clear Water Bay
Kowloon
Hong Kong

Toshifumi Kuroda (Contact Author)

Tokyo Keizai University

1-7-34, Minami-cho, Kokubunji-shi,
Tokyo, Tokyo 185-8502
Japan

HOME PAGE: http://www.tku.ac.jp/~kuroda/index.html

Susumu Sato

Institute of Economic Research, Hitotsubashi University ( email )

Tokyo
Japan

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