Hemant K. Bhargava, Jan Kramer, and Chayanin Wipusinawan, working paper January 2025.
In the search engine industry, there is intense scrutiny - and criticism, investigations, lawsuits and adverse judgements - of the practice of “preset defaults” wherein operators like Apple who control entry points (such as iPhones; or Google with Chrome browser) steer users’ choice of search engine towards the designated default product. Preset defaults are alleged to create and perpetuate dominance. A similar practice also occurs for popular applications (such as PDF reader and web browsers), and will occur in the next battleground for computing: large language models (LLMs) and chatbots. In contrast to many claims, we find that the economic implications of preset defaults are quite nuanced. First, preset defaults have two differently-acting mechanisms that tilt consumer adoption towards the designated firm: one, the inconvenience cost of switching borne by users who strongly prefer the rival firm always acts in favor of the designated firm and against the rival; but two, their effect on ``sheep'' users who blindly adopt the designated default can nudge both firms towards an anti-competitive action. Second, the direction of outcomes depends significantly on the magnitude of the product's network effects, besides other market-level characteristics. Crucially, preset defaults are more harmful for products with weak or no network effects than for digital products with strong network effects. Third, short term effects (monetization level or extent of advertising) are more negative than long-term effects (impact of defaults on innovation and quality). For products with strong network effects, preset default can incentivize the designated firm to invest more in product quality (which benefit users, beyond the increased monetization) because the default arrangement's positive impact on adoption increases the firm’s confidence that its innovation investments will pay off and tip the market in its favor.