Sophisticated Consumers with Inertia: Long-Term Implications from a Large-Scale Field Experiment

Klaus M. Miller, Navdeep S. Sahni and Avner Strulov-Shlain
Additional contact information
Klaus M. Miller: HEC Paris
Navdeep S. Sahni: Stanford U
Avner Strulov-Shlain: U of Chicago

Research Papers from Stanford University, Graduate School of Business

Abstract: Consumer inertia, the tendency to remain inactive, is a robust and well-documented phenomenon. However, if consumers are aware of their future inertia they can act to mitigate its effects on their outcomes. Using a large-scale randomized field experiment with a leading European newspaper we investigate consumer response to inertia-inducing subscription contracts and study, in the same setting, both the actual inertia, and the inertia consumers anticipate before it actually takes place. We vary the promotional subscription price, the duration, and whether the contract automatically renews by default, or not, after the promotional period. Indeed, we find strong inertia. Roughly half of auto- renewal contract takers continue to a full pay subscription after the promotional period, relative to the auto-cancel contract takers who rarely renew. Those added auto-renewal subscribers do not use their subscription to access the newspaper. However, consumers preempt inertia; 24%-36% of potential subscribers avoid subscribing on the first weeks after being offered an auto-renewal contract. Further, the share of subscribers, at all, for two years after the promo is 10% lower due to being offered the auto-renewal contract. Overall, even though auto-renewal generates a higher revenue in the short term, auto-renewal and auto-cancel are revenue equivalent after one year, but with fewer subscribers in auto- renewal. Using a simple mixed-type model we quantify inertia, the share of inert readers, and the share of sophisticated readers who are aware of it. Our estimates suggest that half of the readers are inert. At most 41% of these inert individuals are unaware of their future inertia, equivalent to a 72% monthly chance of not cancelling an unwanted subscription. Finally, we show that targeting contract types to maximize revenue or subscriptions does not pick up, ex post, sophistication. Our results highlight the often-ignored effects of potentially exploitative inertia-inducing contracts: lower take up in the short- and long-run driven by sophisticated consumers.

Date: 2023-01
New Economics Papers: this item is included in nep-exp
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