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

37 Pages Posted: 19 May 2014

See all articles by Keith M. Marzilli Ericson

Keith M. Marzilli Ericson

Boston University - Markets, Public Policy, and Law; National Bureau of Economic Research (NBER)

Date Written: May 2014

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.

Suggested Citation

Ericson, Keith M. Marzilli, When Consumers Do Not Make an Active Decision: Dynamic Default Rules and Their Equilibrium Effects (May 2014). NBER Working Paper No. w20127, Available at SSRN: https://ssrn.com/abstract=2438548

Keith M. Marzilli Ericson (Contact Author)

Boston University - Markets, Public Policy, and Law ( email )

Boston, MA
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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