The Economic Value of Ratings in App Market

This paper investigates the influence of ratings on an emerging third-party software application market, app market. Given the nature of software application as experience good and the general scarcity of other quality signals such as advertising or branding for majority of app developers, consumers’ ex ante belief on app utility essentially relies on the app rating which itself is derived from the ex post utility received by peer consumers. We develop an analytical framework which explicitly characterizes this bidirectional rating-utility conversion process with a new concept “reservation rating.” After integrating this conversion process into utility functions, we derive the market equilibrium and show how the changes in consumer rating behavior affect developers and platform owner’s profits and how both developers and the platform owner should optimally react to various consumer rating behaviors in terms of the choices of app price, quality level and revenue sharing percentage. We also investigate how consumer rating attitude would impact the social welfare, suggesting consumers’ responsibility, in terms of proper rating behavior, to the overall goodness of app community. The rating-dependent utility function further enables us to derive a self-selection mechanism to achieve the separating equilibrium in which high and low cost rate developers choose differentiated revenue sharing percentages.