Consumer Inertia and Switching Behavior

Why do consumers not always switch to a cheaper alternative of a product or a contract? A common finding is that consumers invest too little into searching for the best available deal or switching to the best available option. This is problematic since consumer search and switching are crucial for generating competition between firms. The problem is well-documented in the economic literature, but there is currently little consensus about what psychological mechanisms cause consumer inertia, and what can be done about them. This project aims to develop better understanding for the observed widespread reluctance of consumers to search and switch to better deals. The project builds on a theoretical model that combines possibly behavioral consumers with profit-maximizing firms to ask what features of the market and regulation thereof foster consumer inertia. Once fully developed, this model as well as other potential explanations for consumer inertia will be investigated empirically. The latter will be done using a variety of data sets and methods. The project will design and conduct experiments that allow to disentangle different behavioral causes for consumer inertia such as inattention, procrastination, biased beliefs, and loss aversion. Moreover, versions of the experiment, which can be conducted with both convenience and representative subject pools, will be used to validate survey questions that capture the behavioral traits that lead to consumer inertia. In addition, the project will use a repeated representative consumer survey that combines information on consumers purchasing decisions, their socioeconomic characteristics, and their behavioral traits (such as attitudes towards risk and loss aversion or tendency for inattention and procrastination) in order to study what drives contract-switching behavior and to elicit beliefs about the expected surplus from switching. The novel panel study will, in addition, include randomly assigned treatments regarding, for example, switching reminders that are not only interesting from a policy perspective but help to distinguish the different traits.