Issues with digital choice architecture can lead to more inefficient competition

The internet has been appraised for reducing search costs and increasing market efficiency. This article argues that economists should adopt a more critical view of digital markets because only a small part of the internet is easily accessible and information is easy to be presented suggestively.

Abstract

The internet has been appraised by economists for reducing search costs and increasing market efficiency. This article argues that economists should adopt a more critical view of digital markets because only a small part of the internet is easily accessible to consumers through search engines and this information is easy to be presented suggestively. The digital choice architecture is explored through the concept of digital nudges, which could be used to guide people to make better choices in digital environments.

Introduction

Digital nudge is defined as an aspect of a digital choice architecture, which alters people’s decisions online in a predictable way without forbidding any options or significantly changing economic incentives. This is a similar definition to how Thaler and Sunstein (2008) defined the general nudge. Weinmann et al. (2016) define digital nudges as “the use of user-interface design elements to guide people’s behaviour in digital choice environments.”

The goal of a nudge is to help people to make better decisions. However, often the elements of choice architecture lead people to make worse decisions. This kind of use of choice architecture is defined as “sludge”. (Thaler, 2018)

More and more decisions are being made online and these decisions can be influenced by considering psychological principles when designing the digital choice architecture. An excellent example of the use of the scarcity effect (Cialdini, 2007) is a hotel booking website advertising that you are booking the last room available. Similarly, the same site might benefit from the social proof effect (Cialdini, 2007) by saying that ten people are looking at the same room as you. A streaming service might attempt to hook you into watching multiple episodes in a row by automatically starting the next episode, which is an example of cognitive ease. (Kahneman, 2011) A smartphone might send out a notification informing you about a personal situation at a mobile game to lure you in with a method similar to nudging by presentation. (Thornhill et al., 2019; Acquisti et al., 2017)

Creating a digital choice architecture, where the user ends up making biased decisions is relatively easy and cost-effective. Our literature review found multiple examples of well-functioning digital nudges which show how digital choice architecture can impact people’s decisions online.

According to economic theory, reduced search costs will lead to improved and more efficient competition because comparing prices is easier and more information is available. Electronic marketplaces have been appraised for reducing search costs. (Petersen et al., 2002; Bakos, 1997; Goldfarb & Tucker, 2019) More efficient competition is good for the consumers because they can receive the best possible prices, quantity, and service.

However, the downside of electronic marketplaces is that altering the digital choice architecture is relatively easy making it possible to sludge consumers into buying your company’s product. Even though consumers might have access to more information online, the way in which information is presented also matters a great deal.

Another issue is with search engines, which can only access a small part of the internet. Furthermore, consumers are likely to click on only the first results offered by search engines.

Digital nudges

Multiple ways of digital nudging have been proposed. Already in 2002 Mandel and Johnson found that even changing the colours or background photo of a website can prime people to make different choices online.

Digital nudge

How it works?

Source

Decoy effect

Increases an option’s attractiveness by presenting the option alongside an unattractive option called the “decoy”.

Schneider et al. (2018)

Middle-option bias

People presented with three or more options tend to select the middle option

Schneider et al. (2018)

Scarcity effect

People tend to perceive scarce items as more desirable.

Schneider et al. (2018), Cialdini (2007)

Social proof

People are likely to conform to what other people are doing or deciding. 

Cialdini (2007)

Default options

People are often more likely to choose the default option and join an opt-out system rather than an opt-in system.

e.g. Thaler and Sunstein (2008) Acquisti et al. (2017)

Nudging by presentation

Nudges the user by displaying relevant information. Used for example in a nudge called BalancedView which shows relevant fact sources when a person is inputting a tweet.

Thornhill et al. (2019) Acquisti et al. (2017)

Cognitive ease

Designing a user experience, in which people can make their decisions based on System 1 using minimal effort.

Kahneman (2011)

Hiding nudge

Hiding nudge operates by obscuring

a trigger so that it becomes harder to respond to. For example, hiding notifications.

Purohit et al. (2020)

Pause-reminders

Can remind a user to take a break from using a for example a smartphone. Can be used to reduce social media usage.

Purohit et al. (2020)

Feedback nudge

A system, which sends feedback about an action you do online. Can be for example the information on how much time or money you spent online.

Purohit et al. (2020)

 

Digital nudges can be applied in multiple contexts. Okeke et al. (2018) recommend using digital nudges to reduce to use of digital devices in general and Purohit et al. (2020) develop a nudge to reduce the use of social media. Thornhill et al. (2019) create a tool to increase fact-checking and Acquisti et al. (2017) try to encourage people to make smarter decisions about sharing personal data. Weinmann et al. (2016) list a lot of ways to use digital nudges including displaying the strength of passwords, displaying limited room inventory during a hotel-booking process, giving incentives such as badges for participating in social media and providing feedback on activity levels to increase exercise. Gregor and Lee-Archer (2016) encourage using digital nudges in the social security administration.

The digital nudges presented here have mainly been designed to encourage better decision-making, but it is more than possible that there are more sludges than nudges in existing digital environments. Companies and organizations have an incentive to get people to support their causes or buy their products instead of just offering non-partial information. Several examples have already been discussed here, but maybe one of the most well-known is designing addictive systems by using cognitive ease and other nudges. This can cause issues like Internet addiction. (Young, 2017)

The digital choice architecture may also sometimes lead to discrimination. In online marketplaces, it is common that the sellers provide personal profiles of themselves to build trust. Edelman & Luca (2014) find that due to this feature non-black hosts charge approximately 12% more than black hosts for the equivalent rental in Airbnb.com.

Another similar example relates to the case of Roommates.com, which is discussed in more detail by Lavi (2018). The users of Roommates.com were able to fill out a personal profile and answer several questions including demographics like the user’s sex and sexual orientation. The service also required users to express their preferences with respect to roommates on these same criteria. Then the internal search engine filtered matches based on user preferences and the website also included an open section of user comments. The Fair Housing Council (FHC) sued Roommates.com claiming that the drop-down menus, the internal search engine, the filtering service, and the open comment section violated the federal Fair Housing Act and led to discrimination. FHC argued that Roommates.com was an information content developer and not just a passive transmitter of information. At first, Roommates.com was granted immunity based on the 230 Communications Decency Act, but after an appeal, the Ninth Circuit reversed the court’s decision declining the immunity regarding the drop-down menus, the internal search engine and the filtering service. Lavi (2018) argues that in reaching this conclusion the court majority recognized that leading nudges, as well as encouragement nudges, could expose the intermediary to liability.  

Deep web and search engines

Another issue in digital markets is the amount of information that the consumer can access. The term deep web was first coined by Bergman (2001), who estimated that public information on the deep Web was 400 to 550 times larger than the commonly defined World Wide Web. Deep web is the part of the internet which is not accessible with most common search engines. This includes pages like private social media pages, banking sites and webmail, but also simple sites that have not been indexed to search engines.

The actual information that is accessible by search engines is controlled mainly by one company: the Alphabet, which owns services like Google and YouTube. According to Statista, Google’s market share of desktop search engines was 87,76% in June 2021. (Johnson, 2021) Google makes money through advertising, so it will show first results from companies that can afford to pay enough to rank high in Google searches. After the advertised results, Google shows the so-called “organic” results, which are chosen by Google’s changing algorithm.

The way Google presents information is interesting, since according to estimates by the Search Engine Journal 28,5% simply click on the first organic result whereas hardly anyone ever investigates the second page of Google. (Southern, 2020) Therefore, it looks like consumers will access only the top companies and their pricing information when comparing prices online. It may be possible that it would simply take too much time to investigate more than a few search results online.

Since consumers are likely to click on the first results in Google and Google also shows advertisements at the beginning of searches, it is possible to ask how fair the competition in online searches is? Google’s algorithm is constantly changing, but the sites of big companies with a lot of backlinks will likely be shown before small company websites.

Designing a nudge

To test the effect of digital nudging, we designed a simple nudge using the default method. Our goal was also to develop a useful nudge, which is why we opted to attempt to nudge people into offsetting their carbon footprints online. This kind of nudge could be extremely useful for example in online stores, where it is these days possible to allow the customer to offset the carbon footprint caused by the product or the shipping.

All participants for the tests were recruited through Amazon MTurk and they were in countries, which use the euro to ensure that they understand the value of the currency.

Test 1 tested the effect of defaults. We hypothesized that people would be more likely to compensate their emissions caused by car driving if that was the default option. Interestingly, we received opposite results.

For Test 1 participates had to first answer whether they owned a car. Only the participants who replied “yes” were accepted for the experiment. The test had 160 participants. 28 were rejected due to not owning a car and 3 never finished the survey.

After that, the participants were randomly assigned into two groups. The control group answered a question about climate offsets with no default option in a dropdown menu and the treatment group answered a question with a default option designed with a slider.

Slider: Treatment group

Dropdown: Control group

The results show that people were more likely to pick “yes” if that was not the default option. The result stating that the population proportion who said “yes” is larger for the control group than the treatment group is also statistically significant at the 95% confidence level with the p-value of 0.0052.

Test 1 results

Control (no default)

Treatment (yes = default)

Yes

82,76 % (48)

63,38% (45)

No

17,24% (10)

36,62% (26)

Total

100% (58)

100% (71)

 

To go further, we wanted to see whether it was just the use of a slider, which caused the issue in our results, and we ran the test again but with two treatment groups. Test 3 included 197 participants and 9 never finished the survey.

Slider: Treatment 2

Dropdown default: Treatment 1

Dropdown: Control group

 

Test 2 results

Control (no default)

Treatment 1 (default dropdown)

Treatment 2 (default slider)

Yes

47.5 % (29)

52,5% (32)

51,5% (34)

No

52,5% (32)

47,5% (29)

48,5% (32)

Total

100% (61)

100% (61)

100% (66)

 

Test 2 doesn’t find a statistically significant difference when comparing the treatment and control groups. When controlling with demographic factors, we also didn’t find any significant explanation on why the default nudge didn’t work so well in this attempt. However, there exists strong evidence like Thaler and Benartzi (2004) which shows especially that opt-out systems attract more people than opt-in systems. It is possible that our nudge didn’t produce the needed result, because when attending a survey in a laboratory setting people were actively thinking about what to respond so the default didn’t have an effect, whereas in real life people might not even notice they have for example joined a retirement scheme if the system is opt-out.

Conclusion

Economists have often considered that the internet is good for the markets due to reduced search costs. However, this argument doesn’t consider the fact that it is extremely easy to present information suggestively online. The use of digital choice architecture might make it more difficult for the consumer to compare prices.

Furthermore, only a small part of the internet is accessible through search engines and only the companies who can afford to spend money on search engine optimization will rank on top, which means that consumers might be able to easily access only the relevant information from a few merchants.

Digital markets often lead to a situation where large companies like Google, Amazon, or Facebook control in large part the information that is offered to the consumer, which is yet again another issue for the functioning of the digital markets.

By using digital nudges, a lot of good could also be established. Nudges exist for example for reducing social media usage, improving personal security, or as presented here making people act more environmentally by offsetting their carbon emissions. However, often companies have a larger incentive to sludge people to use their products instead of nudging them to make better decisions.

To conclude, economists need to adopt a more critical view of digital markets. It might be true that the internet has reduced search costs, yet economists should also take note that only a small amount of information is easily accessible online and that this information can be presented suggestively.

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