Benjamin Leyden - Cornell University

There’s An App (Update) For That: Understanding Product Updating Under Digitization

Abstract:  The digitization of consumer goods gives firms the ability to monetize and update already purchased products, changing firms’ product innovation incentives. I develop and estimate a structural model of the smartphone application (app) industry, to study how the availability of these tools affects the frequency and content of product updates. I construct a novel database of apps on Apple’s mobile platform, and employ natural language processing and machine learning techniques to classify product updates and define precise categorical markets. I find that the availability of these tools via digitization often result in an increase in the frequency of product updates, and, in particular, lead to an increase in the relative frequency of major, feature-adding updates compared to more minor, incremental updates. These results show that the manner in which product digitization changes firms’ product innovation incentives has a significant effect on firm behavior, and should be accounted for in future research on digital and digitizing industries.