Monetization on Mobile Platforms: Balancing in-App Advertising and User Base Growth

Monetizing the growth of mobile platforms is increasingly important as more and more users adopt mobile platforms such as the Google’s Android OS and the Apple’s iOS. In this study, we use a differential game theoretical model to study the problem of joint advertising investment and in-app advertising adoption decisions by platform owners and app developers on a mobile platform. A key finding is that a platform owner may delay or even not offer an in-app advertising program if the revenue from such a program is low, which could explain the termination of Apple’s iAd in-app advertising program. One unexpected result is that when determining advertising effort or the timing of an in-app advertising program, a platform owner does not need to consider the app developer’s advertising effectiveness. Another interesting result is that an app developer acts strategically with an increase in ease of app searching: he either follows the platform owner to increase advertising or decreases it to take a free ride, depending on the effectiveness of his advertising effort. Finally, our analysis shows that in order to coordinate the mobile platform system, a central planner should adopt a mixed transfer payment scheme that includes both revenue sharing and advertising cost sharing, regardless of whether competition exists.