Estimating demand for mobile applications in the new mobile economy

A fundamental change brought forth by the advent of the mobile internet has been the widespread adoption of mobile phone based applications (apps). Mobile apps are now being used worldwide to perform a variety of tasks - access social networks, read ebooks, play games, listen to music, watch videos and so on. As consumers increasingly use mobile apps, it is important to understand the drivers of demand for these apps. We build a builds a structural model of user demand for mobile apps and jointly estimate it with supply-side equations. We estimate the change in consumer surplus from the usage of mobile apps. We use a panel dataset consisting of apps' sales, prices, and characteristics data from the two leading app stores - Apple App Store and Google Play for 4 months in the South Korean market. Our results show that demand increases with the file size, app age (time since release), app description length, and number of screenshots. In terms of age-restriction, compared to "everyone" (or 4+) apps, "low maturity" (or 9+) and "medium maturity" (or 12+) apps lower demand. Compared to lifestyle apps, gaming apps have a positive impact on app demand while multimedia and education apps have a negative impact on demand. Notably, we find consumer preferences show strong correlation across apps from the same group (i.e., either within free apps or paid apps). We incorporate consumer heterogeneity in the model and find that older and male consumers tend to be less sensitive to the price of apps than younger and female consumers, respectively. In the supply-side we find app file size and app age are major cost component in app development. Also, our findings suggest there exist significant returns to scale in app development. Our counterfactual experiments show price discount strategy results in a greater increase of app demand in Apple App Store compared to Google Play and the effects of price discounts increase non-linearly. Our findings also indicate strong substitution effects between game apps and other apps such as utility and education apps. Using the estimated demand function, we find the top ranked apps in both app stores enhanced consumer surplus by approximately US $158 million over the 4 month period in South Korea.