Complexity and Smart Nudges with Inattentive Consumers

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.