When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects
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.
Portions of this paper were previous circulated as part of "Market Design when Firms Interact with Inertial Consumers: Evidence from Medicare Part D". I thank Raj Chetty, David Cutler, Stefano DellaVigna, Drew Fudenberg, Andreas Fuster, Larry Katz, David Laibson, Michael Grubb, Oliver Hart, Jim Rebitzer, Michael Salinger, Amanda Starc, and participants at the 2013 European Behavioral Economics Meeting for their thoughtful comments. I thank the Williams College Tyng Committee and the National Science Foundation for research support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Keith M. Marzilli Ericson, 2020. "When consumers do not make an active decision: Dynamic default rules and their equilibrium effects," Games and Economic Behavior, vol 124, pages 369-385. citation courtesy of