"There's an App (Update) for That: A Structural Model of Product Updating under Digitization"

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 result in an increase in the frequency of product updates of between 63% to 142%, and, in particular, lead to an increase in the relative frequency of major, feature-adding updates compared to 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.