Working Paper: NBER ID: w20127
Authors: 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.
Keywords: dynamic defaults; consumer behavior; firm pricing; market design; inertia
JEL Codes: D01; D02; D03; D04; D81; D86; H23; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic defaults (C69) | price elasticity of repeat demand (D12) |
| automatic renewal defaults (Q21) | less price-sensitive consumers (D12) |
| automatic renewal defaults (Q21) | higher profits for firms (L21) |
| automatic switching defaults (C34) | increased price sensitivity of existing customers (D49) |
| automatic switching defaults (C34) | reduced equilibrium price differential between new and repeat customers (D43) |
| defaults (Y60) | broader market implications (F69) |
| socially optimal choice of defaults (D71) | differs from privately optimal choice for individuals (H49) |