APPLIED MICRO: Selling Subscriptions; Professor Liran Einav (Stanford University)

Abstract:

Firms are increasingly selling products via subscriptions. In this paper, we study one benefit to firms of selling subscriptions: the prospect that consumers will continue to pay for subscriptions they no longer value. We use comprehensive data from a large payment card network and focus on credit and debit cards that get replaced (e.g., due to expiration). Replaced cards require an active subscription renewal decision, and we document much higher cancellation rates in replacement months for the ten subscription services we study. We specify and estimate two stylized models of subscription renewal in which consumer inertia is driven by either inattention or switching costs. Holding fixed the pool of initial subscribers, these cancellation frictions roughly double seller revenues on average, with substantial variation across the ten subscription services. We use the estimated models to explore the impact of possible regulatory remedies.

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