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

Keith Ericson

No 20127, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D01 D02 D03 D04 D81 D86 H23 L1 (search for similar items in EconPapers)
Date: 2014-05
Note: IO LE PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as 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.

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Journal Article: When consumers do not make an active decision: Dynamic default rules and their equilibrium effects (2020)
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