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Combining Free and Paid: Revenue Models in the Apple App Store

Value propositions in the mobile app industry tend to converge. In such a leveled playing field, apps tap into the configuration of their revenue model as a way to distinguish themselves. App developers face intricate decisions concerning what to charge for and what not, and if charged, what configuration of the revenue model to use. They increasingly resort to revenue model configurations that involve perpetually free app distribution, either subsidized with the intention of enticing future customer expenditure on additional app functionalities, or by third-party-generated revenue from advertisement placings or affiliation. Using a weekly panel dataset on 808,866 mobile apps from the U.S. Apple App Store, we study how such revenue model configurations impact the number of downloads - a prerequisite for successful value appropriation. Our results account for endogeneity and show that apps with a revenue model generate more downloads as opposed to apps without a revenue model. Downloads further increase with a revenue model based on free app distribution, such that both third-party and customer-based revenue models favorably affect the number of downloads. On the contrary, downloads decrease when apps combine customer and third-party-based sources of revenue in their revenue model.

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