Does It Pay to Shroud In-App Purchase Prices?

Application (app) developers commonly sell their apps at relatively low prices and subsequently earn substantial revenue from in-app purchases. Although some consumers may do their research about in-app prices before deciding whether to buy the app, others only discover the in-app prices later in the purchase process. This paper presents an analytical model to examine the profit and welfare implications of hidden prices of the in-app purchases. This paper has three main contributions. First, it finds a profit-improvement effect of hidden prices under circumstances for which prior literature finds profit irrelevance. In this regard, the model identifies a new mechanism driving the profit-improvement result. Second, it finds when app developers can be made better off by platforms disclosing in-app purchase prices. Third, it shows how platform decisions intended to improve pricing transparency may actually diminish consumer welfare. We also consider a model variation whereby app developers can shroud in-app prices. The findings have implications for app developers considering hidden in-app purchases, as well as platforms such as Google, Apple, and Amazon, which can restrict this practice.