Abstract: Antitrust authorities around the globe are worried that big digital firms like Google exploit default settings at crucial “access points” – like the search market – to draw consumers into their “ecosystems.” This concern is consistent with internal memos by Google documenting the “power of defaults.” Going further, once a firm like Google has captured the consumer's attention with one service (say, Google search), it tries to direct the consumer towards its other services (say, Google flights), giving rise to a “cross-market default effect.” We build a simple model of (cross-market) default effects deriving from a consumer’s limited attention, and study implications for the incentive and ability of big digital firms to grow further.
We show that cross-market default effects imply two types of inefficiencies. Because big firms can monetize attention in many markets, they have a higher willingness-to-pay for the default position – and thereby the consumer's attention – at crucial access points. Hence, if such a default position is sold (like Apple does for search on iOS), big firms will outbid smaller rivals that offer better services, resulting in an allocative inefficiency. Capturing the consumer's attention at these access points, in turn, increases the incentive of big firms to enter new markets. And, by threatening to otherwise foreclose the consumer's attention, big firms can take over an already active firm at a discount. This makes new markets less contestable, reducing innovation and entry (for buy-out) – adding a dynamic inefficiency. Competition for take-overs does not fix the problem and, in fact, can reduce contestability even further. In sum, cross-market default effects do not only increase the incentive, but also the ability of big firms to grow even further.