Abstract

This paper explores the fundamental influence of consumer rating behavior on an emerging third-party software application market, mobile app market. In app market, consumers’ ex ante belief on app utility essentially is determined by the app rating while at the same time the app rating itself is derived from the ex post utility obtained by purchased customers. We develop an analytical model which explicitly characterizes this bidirectional rating-utility conversion based on a newly introduced concept “reservation rating”. After building this conversion process into the utility function, we examine the market equilibrium and show how change in consumer rating attitude, such as being severer in offering ratings or being less critical in accepting ratings, would affect the developers’ optimal choices of app price and app quality level as well as the platform owner’s optimal revenue sharing policy.

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The Economic Role of Rating Behavior in Third-Party Application Market

This paper explores the fundamental influence of consumer rating behavior on an emerging third-party software application market, mobile app market. In app market, consumers’ ex ante belief on app utility essentially is determined by the app rating while at the same time the app rating itself is derived from the ex post utility obtained by purchased customers. We develop an analytical model which explicitly characterizes this bidirectional rating-utility conversion based on a newly introduced concept “reservation rating”. After building this conversion process into the utility function, we examine the market equilibrium and show how change in consumer rating attitude, such as being severer in offering ratings or being less critical in accepting ratings, would affect the developers’ optimal choices of app price and app quality level as well as the platform owner’s optimal revenue sharing policy.