The Timing of Choice-Enhancing Policies

Abstract

Recent studies investigate policies motivating consumers to make an active choice as a way to protect unsophisticated consumers. We analyse the optimal timing of such choice-enhancing policies when a firm can strategically react to them. In our model, a firm provides an automatic enrolment or renewal to consumers. We show that a conventional choice-enhancing policy, which decreases consumers’ switching costs when they are initially enroled, can be detrimental to consumer and social welfare. By contrast, an alternative policy that decreases consumers’ switching costs when the firm charges a higher price for the service increases consumer and social welfare more robustly.