Upward Pricing Pressure from Digital Platforms’ Imposition of Take Rates on App Developers

The vertical relationship between digital platforms and the app developers that ply their wares on such marketplaces (e.g. App Store, Play Store, Oculus Store) imposes a largely ignored upward pricing pressure on prices. Digital platforms aim to create walled gardens, leveraging lock-in to cabin consumer substitution within the platform’s boundaries. Digital marketplace owners are largely agnostic to intra-platform substitution, because they collect a platform fee, or “take rate” regardless of its destination. This article discusses the attendant effects: (1) upward pricing pressure on apps and in-app purchases as platforms benefit from eliminating price competition within their marketplaces, (2) limited usefulness of diversion ratios, and (3) recognition that in the event of the platforms acquires an app purchaser, the upward pricing effects are likely to overwhelm any countervailing elimination of double marginalization, even if EDM were shown to be merger-specific.

By Ted Tatos ^[1]

I. INTRODUCTION

The potential anticompetitive effects attendant to horizontal shareholding have drawn increasing scrutiny in recent literature. Economists define horizontal shareholding as ownership of substantial shares by entities that compete with each other in horizontal markets.^[2] Of course, such conduct may occur for innocuous reasons such as the establishment of a joint venture that enhances innovation or increases output. However, such examples appear more as excepti