Today, the White House hosted an event to highlight the costs imposed on Americans by junk fees, inviting scholars and practitioners to discuss the topic. This follows the National Economic Council’s blog post on the topic in October 2022 and the President’s call for Congress to pass a Junk Fee Prevention Act in February 2023. There has already been some progress, such as the Consumer Financial Protection Bureau’s (CFPB) proposed rule to cut most credit card late fees to no more than $8 and the Federal Communications Commission’s (FCC) finalized rule to require easy-to-read labels for cable and internet providers to list fees and services up front, among other initiatives. The Council of Economic Advisers (CEA) has compiled some examples of junk fees in order to highlight how Americans frequently encounter junk fees in their daily lives and to illustrate the challenge they can pose to consumers and to competition more broadly.
Concert Tickets and “Drip Pricing”
One manifestation of junk fees occurs when firms use a practice economists call “drip pricing,” where additional costs are “dripped in” as the consumer goes through the shopping process. This means consumers see an initial upfront price but face a higher true price at the end of the purchase process due to (non-government-imposed) fees. For instance, individuals shopping for concert or event tickets online may see a lower base ticket price when comparing between websites but only see the final price including service fees at checkout after inputting their contact and credit card information.
To illustrate how this drip pricing works in practice . . . .
Hotel Resort Fees
Hotels began charging “resort fees,” mandatory per-night fees that purported to cover some of the costs of the amenities offered at resorts, as early as 1997 (FTC 2017). These fees were highly unpopular with consumers as these fees were supposed to cover the use of amenities like a pool towel, fitness center access, or an airport shuttle that most consumers would expect to be included in the nightly hotel rate at the time of booking. Therefore, they resulted in surprising charges at the conclusion of a stay. Since an FTC action in 2012 (FTC 2012), many hotel operators and third-party booking websites have been more forthcoming about the inclusion of resort fees in total hotel prices for a stay, for example by allowing a search to return “total prices” for stays if the user checks a box.
These fees continue to frustrate some consumers as they can be collected in inconsistent ways, for example, at the time of booking when using a direct hotel website but collected at check-in when using third-party booking sites (FTC 2017). . . .
Mandatory Apartment Fees
Similar to hotels’ resort fees, some multi-tenant dwellings (i.e., apartment buildings) charge tenants an amenity fee for access to features like a fitness center, pool, or shared common areas. They can either be tacked onto a tenant’s monthly rent or charged as an up-front fee—which can be more than $500—when the tenant moves in. Other mandatory fees can be levied for things one would expect to be included in the rent, such as building insurance and hallway lighting. . . .
Bank Wire Transfer Fees
Bank fees have attracted the attention of various regulators, including the CFPB, which has launched a junk fees initiative to better understand the problem and potential policy actions. When selecting a bank, consumers frequently cite “low fees” as an important attribute of a bank. However, banks charge fees in many different situations, often detailed in the “fine print” when setting up an account, making it difficult to compare banks on the full schedule of fees they charge. For example, . . . .
Conclusion
Not all fees that consumers are charged are junk fees; some are legitimate fees for additional products or services that consumers value—things like paying for a room with an ocean view or adding bacon to your hamburger. However, sometimes these fees are excessive compared to the value they offer, hidden in the fine print, or added late in the purchase process, making it difficult for consumers to know what they are paying and what they are getting. Economic research shows that these types of fees–junk fees—are profitable for firms to employ at the expense of consumers. This post focused on a handful of fees to illustrate examples of where consumers may encounter them in their daily lives, how they can vary in different contexts, and to connect those experiences with the academic literature.
Blog:
https://www.whitehouse.gov/cea/written-materials/2023/03/21/how-junk-fees-distort-competition/
Remarks as Prepared for Delivery by NEC Director Lael Brainard on the Economic Case for Junk Fees Policies:
https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/03/21/remarks-as-prepared-for-delivery-by-nec-director-lael-brainard-on-the-economic-case-for-junk-fees-policies/