SMU SOE Seminar Series (December 4, 2024): Entry Effects of Commission Rates: Evidence from Mobile Applications in China

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ABSTRACT

Commissions are important revenue sources of platforms and cause antitrust concerns, yet empirical evidence on their effects is rare. This paper empirically studies the entry effects of commission rates by exploiting the increase of commission rates from 30% to 50% on Android mobile games in China. Using data on both Android apps and iOS apps, we highlight two new insights. First, a negative spillover effect on entry across platforms. We find that while higher Android commission rates lead to an industry-wide reduction in game development (negative profitability effect) and a higher likelihood of new games joining iOS (positive substitution effect), the former dominates the latter, leading to fewer new games not only on Android but also on iOS. The spillover turns out to be rooted in games that would not be developed if not joining both platforms. Second, the non-linearity of the entry effect with respect to app quality. We find that both low-quality and high-quality new games are significantly less developed with higher commission rates, while middle-quality new game development remains insignificantly affected. The result contrasts conventional ideas that high-quality products are immune from ad-valorem rate changes, and reflect more convexity in apps' development costs than lifetime revenues.

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