Digital Platform Owners Face Unusual Challenges in Managing Their Categories

Digital platform owners face unusual challenges in managing their categories, a topic Associate Professor of Management Cameron Miller and colleagues are tackling in a series of papers. The first article— written with Shiva Agarwal, assistant professor of management at the University of Texas at Austin’s McCombs School of Business, and Martin Ganco, professor of management and human resources at the University of Wisconsin-Madison’s Wisconsin School of Business—was recently published in Strategic Management Journal.  

In the iOS App Store, an example of a multisided market, owner Apple offers space for developers to sell apps to users, with Apple taking a cut of the profits in the process. “But Apple doesn’t have the same tools a traditional retailer might, like price or individual contracts, to coordinate developers’ activities,” says Miller.  

In the study, the researchers explored other, non-price mechanisms platform owners use to steer developers. In the context of games, they looked specifically at third-party products with direct network effects, in which the value users experience depends to some extent on the number of other users. 

Massively multiplayer games, for example, become more fun as more players come on board. But as users cluster around popular products, their developers may also gain some bargaining power vis-à-vis the platform owners. Another effect is that players may be less willing to try out new apps, which initially have only small numbers of users, so fewer new apps can enter the market. Highly successful apps, on the other hand, may have little incentive for creativity and become stagnant.  

Analyzing a detailed dataset on gaming apps from 2012 to 2016, the co-authors found that the App Store uses Editor’s Choice Award badges (given sparingly and with significant effect) to nudge customers toward specific games and thereby strike that balance. Apps with network effects are more likely to receive an award than those without, and in less concentrated categories, Apple tends to promote successful developers who can attract users. Concentrated categories see fewer promotions, especially of apps introduced by a dominant producer. Rather, the App Store is more likely to award the badge to a challenger to the dominant developer.  

“So anytime it looks like things are tipping and someone might dominate, they try to bring back some parity, a kind of Goldilocks deal,” Miller says. 

Agarwal, S., Miller, C.D., and Ganco, M. (2023). Growing platforms within platforms: How platforms manage the adoption of complementor products in the presence of network effects. Strategic Management Journal, 44(8): 1879-1910.