Essays on the economics of the Smartphone and application industry

Abstract

This dissertation is in two parts. In Chapter 1, I empirically quantify the consumer welfare gains created by free smartphone apps that have recently emerged as one of the most used digital goods. I use a unique dataset of smartphone apps and transform sales ranks into quantities to overcome a lack of data on quantity. In the process, I suggest a new methodology of utilizing Google search data, which can also be used in future research. The estimation results show that smartphone apps created $5.7~10.9 billion and $13.5~23.3 billion of annual consumer benefits in 2010 and 2011, respectively -- which can be translated into $134~260 in 2010 and $157~271 in 2011 per smartphone user on average -- and more than 90% of the welfare gain is from free apps. In Chapter 2, I examine how the contributing effects of mobile applications on smartphone adoption differ across smartphone operating systems and the extent to which this difference is explained by the role of platforms, focusing on the case of Apple vs. Google. I estimate a model of consumer demand for both smartphones and compatible apps where I specify the benefit provided by apps as the sum of individual app utilities. It is first shown that the selection of different types of consumers onto platforms should be accounted for in estimating app demand and thereby measuring the complementary effects. I take a novel approach to constructing geographically disaggregated sales panel by using Google web search data, as a way of addressing the selection issue. After controlling for the user heterogeneity, the results still suggest that Apple provided more app benefits to users and Android's stronger sales over the sample period come entirely from advantages in the price-adjusted quality of hardware. The overall quality of apps in Google Play was not inferior to that of the App Store, but Google is estimated to have delivered lower utility for a given set of apps possibly due to its open strategy.