ABSTRACT In an experiment on markets for services, we find that consumers are likely to stick to defaults and achieve suboptimal outcomes. We unpack two key psychological reasons why they do this - complexity (in terms of non-linearity,... more
ABSTRACT In an experiment on markets for services, we find that consumers are likely to stick to defaults and achieve suboptimal outcomes. We unpack two key psychological reasons why they do this - complexity (in terms of non-linearity, number and bundling of tariffs) and consumer inattention. The complexity induced by product bundling, non-linearity and number of tariffs has an important role, but this is overstated if the explanatory power of inattention is neglected. We show that a ‘smart nudge’ policy of automatically switching default tariffs can be used to exploit inattention-based consumer inertia to achieve better consumer outcomes.
Research Interests:
In an experiment on markets for services, we find that consumers are likely to stick to default tariffs and achieve suboptimal outcomes.We find that inattention to the task of choosing a better tariff is likely to be a substantial problem... more
In an experiment on markets for services, we find that consumers are likely to stick to default tariffs and achieve suboptimal outcomes.We find that inattention to the task of choosing a better tariff is likely to be a substantial problem in addition to any task and tariff complexity effect. The institutional setup on which we primarily model our experiment is the UK electricity and gas markets, and our conclusion is that the new measures by the UK regulator Ofgem to improve consumer outcomes are likely to be of limited impact.
