Assigning Default Position for Digital Goods: Competition, Regulation, and Welfare

Assigning Default Position for Digital Goods: Competition, Regulation, and Welfare

Yongmin Chen

University of Colorado at Boulder - Department of Economics

Marius Schwartz

Georgetown University - Department of Economics

Abstract

We analyze alternative ways to assign the default position for competing digital goods such as search engines. When two firms vie for the position through bidding, the higher-quality firm typically wins but delivers lower utility than the rival due to heightened monetization (e.g., unwanted ads), exploiting consumers’ switching costs. Paradoxically, increasing via regulation the rival’s default share tends to raise profit and harm consumers, at least in the short run. Delegating the default choice to consumers benefits them but harms the weaker firm. Our findings highlight the subtle welfare tradeoffs in default assignment, an important and controversial policy issue.