CHOICE SCREEN AUCTIONS by Michael Ostrovsky

 Mike Ostrovsky points out that small design decisions can have big consequences, and considers how European regulations have caused search engines to be allocated on Android phones.

CHOICE SCREEN AUCTIONS by Michael Ostrovsky, NBER Working Paper http://www.nber.org/papers/  (a less gated version is here)

"ABSTRACT: Choice screen auctions have been recently deployed in 31 European countries, allowing consumers to choose their preferred search engine on Google's Android platform instead of being automatically defaulted to Google's own search engine. I show that a seemingly minor detail in the design of these auctions—whether they are conducted on a “per appearance” or a “per install” basis—plays a major role in the mix and characteristics of auction winners, and, consequently, in their expected overall market share. I also show that “per install” auctions distort the incentives of alternative search engines toward extracting as much revenue as possible from each user who installs them, at the expense of lowering the expected number of such users. The distortion becomes worse as the auction gets more competitive and the number of bidders increases. Empirical evidence from Android choice screen auctions conducted in 2020 is consistent with my theoretical results."

The auction rules: "In each country auction, search providers will state the price that they are willing to pay each time a user selects them from the choice screen in the given country. The three highest bidders will appear in the choice screen for that country. The provider that is selected by the user will pay the amount of the fourth-highest bid."

...

"In this paper, I show that a seemingly minor detail of the implementation of choice screen auctions plays a major role in their outcomes—and thus in the overall effectiveness of the antitrust remedy. Specifically, while the answer in the Q&A section of the document states that an auction “allows search providers to decide what value they place on appearing in the choice screen and to bid accordingly,” the auction, as implemented, charges these providers not for appearing in the choice screen but for being chosen by a user. 

"While the difference may seem to be just a matter of language, it is not. To see the intuition for the difference, consider a version of the auction with just one available spot and two bidders. Bidder A gets revenue $10 from each user who installs its search engine, and if it is shown as an option in the choice screen, then the probability that a user will choose it is 10%. Bidder B gets revenue $20 from each user who installs its search engine, but the probability that a user will choose it (if it is shown as an option in the choice screen) is only 1%. The value that bidder A has for appearing on the screen is therefore $1, and the value that bidder B has for appearing on the screen is $0.20. Thus, if the auction is conducted on the “per appearance” basis, then bidder A will win, will pay $0.20 per appearance, and will have its search engine chosen by users 10% of the time, while the dominant platform’s own search engine will be chosen 90% of the time. If, instead, the auction is conducted as implemented, with bidding and payment on the “per install” basis, then bidder B will win and will pay $10 every time its search engine is chosen (corresponding to $0.10 per appearance). The winner’s search engine will be chosen only 1% of the time, and the dominant platform’s one will be chosen the remaining 99% of the time. Thus, relative to the per appearance auction, the per install auction results in a lower likelihood that an alternative search engine will be chosen by the user (making it correspondingly more attractive to the dominant platform) and gives advantage to search engines that generate higher revenue per user vs. those that are more popular but generate less revenue on a per-user basis. I