NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects

Keith M. Marzilli Ericson

NBER Working Paper No. 20127
Issued in May 2014
NBER Program(s):   IO   LE   PE

Dynamic defaults for recurring purchases determine what happens to consumers enrolled in a product or service who take no action at a decision point. Consumers may face automatic renewal, automatic switching, or non-purchase defaults. Privately optimal dynamic defaults depend on the contributions of adjustment costs versus psychological factors leading to inaction: both produce inertia under renewal defaults, but differ under non-renewal defaults. Defaults have equilibrium effects on pricing by changing the elasticity of repeat demand. Socially optimal defaults depend on firms' pricing responses as well; more elastic repeat demand restrains price increases on repeat customers and can reduce inefficient switching.

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Document Object Identifier (DOI): 10.3386/w20127

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