The Economics of App Stores and Platform Fees

Why app stores can charge developers a cut of every sale, and why that arrangement has become such a major economic and legal fight.

Every time you buy an app or make a purchase inside one on a major phone, a meaningful share of that payment - historically often around 30% - typically goes not to the app’s developer but to the company running the app store itself. This platform fee is one of the clearest, most concrete examples of the gatekeeper power discussed earlier in this module, and it has become one of the more contested economic arrangements in all of tech.

Why app stores can charge a fee at all

An app store is a two-sided market, connecting app developers with phone users, exactly like the marketplaces covered earlier in this module. The store provides real value in exchange for its fee: it handles payment processing, hosts and distributes the app, provides basic security screening, and gives developers access to a massive built-in audience of users they didn’t have to find on their own. In a competitive market, a fee like this would be constrained by developers’ ability to go elsewhere if the price felt too high.

The problem is that on many phones, there effectively isn’t an “elsewhere.” If a phone’s operating system only allows apps to be installed through one official store, that store isn’t just one option among several - it’s the only path to reach that phone’s users at all. This is what makes an app store a genuine gatekeeper: a company controlling the single required pathway between two groups who need each other.

A shopping mall that's also the only road into town

Imagine a shopping mall that charges stores a share of their sales in exchange for foot traffic - a normal, negotiable arrangement, since a store unhappy with the terms could open somewhere else in town instead. Now imagine that same mall is also the only road leading into town at all, so every single shopper has to pass through it no matter which store they're trying to reach. Suddenly the mall's fee isn't limited by competition from other roads - there aren't any. This is close to the economic position a dominant app store holds: it's not just a service developers choose to use, it's frequently the only route to an entire audience of users.

Walled gardens and vertical integration

A platform that tightly controls which apps, payment methods, and services are allowed to operate within it is often described as a walled garden - a closed, carefully controlled ecosystem rather than an open marketplace. Walled gardens can genuinely benefit users through consistent security standards and quality control, but they also concentrate a lot of economic power in one company’s hands. Tension escalates further when the platform engages in vertical integration, meaning it doesn’t just host other companies’ apps but also competes directly with some of them using its own competing products or services, all while controlling the very store shelf those competitors depend on - similar to the self-preferencing concern from the antitrust lesson earlier in this module.

"Developers could just build their own app store instead"

This sounds like a reasonable market solution, but it runs directly into the switching costs and network effects covered earlier in this module. Users are already on the dominant store, developers need to reach those existing users, and building a rival store from scratch means solving the exact chicken-and-egg critical-mass problem that made the dominant store so hard to unseat in the first place. "Just build a competitor" is much harder in a gatekeeper market than it sounds.

Why this debate keeps escalating

Because platform fees sit directly on top of gatekeeper power, they’ve become a major flashpoint for the antitrust concerns covered earlier in this module, with regulators in multiple countries requiring some platforms to allow alternative payment methods or app stores. The underlying economic question is simple to state and hard to resolve: how much should a company be allowed to charge for controlling the only door into a market it doesn’t otherwise participate in as a seller.

Key takeaways

App store platform fees are a concrete example of gatekeeper power over a two-sided market of developers and users.
These fees fund real services, but they escape normal competitive pressure when the store is the only path to an app's users.
A walled garden tightly controls what's allowed inside its ecosystem, offering consistency at the cost of concentrated power.
Vertical integration, where a platform competes with the developers who depend on it, intensifies antitrust concerns.
Building a competing app store is far harder than it sounds, due to existing network effects and switching costs.