Monetizing Steering

A monopoly marketplace chooses an ad-valorem fee associated with transactions.It can steer consumers toward products either by using an algorithm or an ad auction that raises further revenues.In a single competitive retail market, the marketplace can extract full monopoly profits with either scheme, although the optimal fee depends on the steering method.Generally, we show when the marketplace (and consumers) strictly prefer steering by algorithm or by ad auction.The marketplace prefers ad auctions when markets vary in demand/cost conditions, but algorithms when sellers on the marketplace have market power, or consumers vary in susceptibility to steering.We also consider policy implications associated with vertical integration and steering with both ad auctions and algorithms.