Pay-per-download or Freemium: Revenue models in a competitive mobile app market

Abstract

This paper examines the revenue model selection of app developers in a duopoly setting. Two developers offering vertically-differentiated apps can adopt either a pay-per-download or a freemium strategy. Under the pay-per-download strategy, consumers pay a fee to acquire the app. Under the freemium strategy, consumers are offered with a free basic version and can choose to pay an additional fee for the full version. A game theoretical model is used to analyze the competition in the presence of network effect and learning effect. We find that when the quality difference is moderate, the pay-per-download strategy is optimal for the high-quality app if the quality of basic version is low, otherwise freemium strategy is optimal. Responding to the pay-per-download strategy of the high-quality app, adopting the pay-per-download strategy is optimal for the low-quality app if quality of basic version is high, otherwise freemium strategy is adopted.