The Hidden Costs of Fairness in Platform Markets: The Dynamics of Lowering Developer Royalty Rates

Abstract

Multisided platforms crucially rely on indirect network effects. When trying to strengthen these effects, platform owners face a fundamental challenge, namely, designing incentives to enhance developer effort and simultaneously ensuring the release of high-quality products on the platform. This paper highlights the costs associated with lowering royalty rates to boost developer effort, as such reductions increase the relative supply of lower-quality offerings, worsening information congestion problems and amplifying the importance of visibility-enhancing investments. We leverage the quasi random announcements made by Apple and Google, declaring their intention to reduce the royalty rate applied to small app developers from 30% to 15%. We analyze the implications of these reforms using a difference-in-differences approach, finding a substantial increase in small developers’ likelihood of releasing lower-quality and less original apps on iOS and Android after the announcements. These effects are neither paralleled by a comparable increase in high-quality app releases nor by an increase in small developers’ likelihood of launching venture-backed apps. Consistent with worsening information congestion problems because of an influx of low-quality apps, our findings show an increase in the marginal value of experienced user certifications and developers’ app store optimization efforts post announcement. Additionally, we observe that venture capitalists are increasingly concentrating their investments in ventures with higher (observable) quality.