Platform Design and Innovation Incentives: Evidence from the Product Ratings System on Apple's App Store

Abstract

A lack of system-level competition among digital platforms can result in socially inefficientplatform designs and meaningful welfare losses, even independent of active anti-competitivebehavior. To illustrate the social costs that can be incurred in such scenarios, I investigate how alongstanding policy on Apple’s App Store affected innovative behavior by platform participants.In particular, I leverage an exogenous change in this policy to show that for nearly a decade,the structure of the App Store’s product ratings system led to less frequent product updatingby higher-quality products. In addition, I provide suggestive evidence that this policy resultedin lost, as opposed to simply delayed, innovation.