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

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  • Keith M. Marzilli Ericson

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.

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  • Keith M. Marzilli Ericson, 2014. "When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects," NBER Working Papers 20127, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20127
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    Cited by:

    1. Kate Ho & Joseph Hogan & Fiona Scott Morton, 2017. "The impact of consumer inattention on insurer pricing in the Medicare Part D program," RAND Journal of Economics, RAND Corporation, vol. 48(4), pages 877-905, December.
    2. Bradley T. Shapiro, 2020. "Advertising in Health Insurance Markets," Marketing Science, INFORMS, vol. 39(3), pages 587-611, May.
    3. Keith Marzilli Ericson & Justin Sydnor, 2017. "The Questionable Value of Having a Choice of Levels of Health Insurance Coverage," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 51-72, Fall.
    4. Murooka, Takeshi & Schwarz, Marco A., 2018. "The timing of choice-enhancing policies," Journal of Public Economics, Elsevier, vol. 157(C), pages 27-40.
    5. Michael Grubb, 2015. "Failing to Choose the Best Price: Theory, Evidence, and Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 303-340, November.
    6. Keith M. Marzilli Ericson, 2014. "On the Interaction of Memory and Procrastination: Implications for Reminders," NBER Working Papers 20381, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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