Platform Competition in the Tablet PC Market: The Effect of Application Quality and Interoperability

Apple iOS is a closed platform; Google Android is open. In this paper, we combine tablet-level data with data on the quality of the top 1000 mobile applications from these platforms and estimate a structural demand model. We exploit variations over three periods and five European countries to find out whether quality of applications affects tablet demand. We then run two counterfactuals motivated by a stylized theory. In line with our model, the first counterfactual suggests that an improvement in app quality benefits tablet producers on that platform. The effect on demand is more pronounced for Android tablet devices. The second counterfactual hints that tablet producers adopting the store with lower quality applications (Google) gain the most from cross-platform app interoperability. We also show that interoperability stimulates the adoption of tablet PCs and generates consumer surplus on tablet demand. To reinforce the message from the theory, we use the predicted primitives of the structural demand estimation to calibrate our simple model and compare its results to those of the two counterfactuals. The results are similar.