First-party and third-party complementary apps: investment in research and development, launching, and merger and acquisition

With the enormous growth of app usage and smartphone penetration, an increasing number of third-party developers are offering apps that are complementary to the top-leading core apps, aiming to target the massive audiences of these apps and to enhance the user’s experience. At the same time, top-leading developers may launch their own complementary apps that compete with the third-party apps in terms of quality. The impact of the third-party developer on the first-party developer is twofold: on the one hand, the former creates added value for the core app, which translates into additional profit for the first-party developer. On the other hand, the competition between the first- and third-party substitutable apps calls into question the benefit of launching the first-party substitutable app. At the same time, the third-party developer relies upon the large market of the core app, while his own market share may be eroded due to the competition between the two substitutable apps. In this study, we develop a game-theoretical model of a market consisting of three apps: a core app and two partially substitutable apps that both complement the core app. We investigate the R&D strategies of the developers and derive the conditions under which they choose to launch their complementary apps. In addition, we analyze the M&A strategy of the core-app developer. Several counterintuitive results emerge from the analysis, such as: (i) competition between the two complementary apps can be mutually beneficial; and (ii) a reduction in the quality of the first-party complementary app may, paradoxically, lead to an increase in its demand.