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

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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