Competition and Innovation by Search Engines in the Presence of Preset Defaults

This paper examines the impact of setting one product as the default on competition and innovation in digital markets with (data-driven) network effects, with the prime example being search engines. The paper presents a game-theoretic model with two search engines that compete for users through innovation, which improves the quality, and the level of monetization, which consumers dislike. A default setting steers a subset of consumers towards a particular search engine. Our findings indicate that default settings reduce competitive intensity, leading to greater monetization activities by all firms. However, the impact on innovation is mixed: when the firm chosen as the default is relatively dominant, the default can reduce the innovation efforts by the dominant firm, although it can increase innovation by a challenger.