According To The White House, Junk Fees Cost Consumers Billions Each Year

There are tens of billions of dollars in fees that are paid on concert tickets, air fares, hotel rooms and other so-called junk fees every year, which are often obscured from the consumer's view and prevent them from knowing the full cost of their purchases.

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The National Economic Council's director of policy, Lael Brainard, said in comments prepared for delivery at a panel discussion in support of President Joe Biden's call for industries and regulators to cut junk fees, that junk fees take real money out of the pockets of families and can distort competition in many markets.

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As a first step in cracking down on extraneous surcharges associated with purchases like concert tickets, car rentals and hotel reservations, Biden is pushing Congress to enact the Junk Fees Prevention Act. A new list of potentially illegal fees was released by the Consumer Financial Protection Bureau earlier this month, which is leading the charge against these fees.

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As part of a virtual meeting with the White House on March 8, Vice President Biden called on state legislators in his home state to address junk fees.

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A panel of representatives from 16 federal agencies will be attending the meeting, which is scheduled to begin at 1 p.m. Eastern Time. These include representatives from the Department of Transportation, the Consumer Financial Protection Bureau and the FTC.

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There is also bipartisan support for the elimination of junk fees, which Brainard will say has positive economic impacts on the domestic economy if it is achieved.

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There has been a strong support across party lines for cutting junk fees, according to a recent survey by Brainard, with 75% of consumers supporting doing so.

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It is clear that junk fees are an important issue due to the long history of research, and as a result I understand that regulation is a sound decision. According to a prepared statement released ahead of the panel discussion, junk fees weaken market competition, penalize honest businesses, and disproportionately affect the most vulnerable Americans.

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A professor at Columbia Business School, Vicky Morowitz, spoke at the conference to discuss "partitioned practice" and "drip pricing," two industry tools that hide the fees associated with a purchase until a later time. As a result of Morowitz and colleagues' research, the term "drip pricing" was coined to describe the process of charging a single, all-inclusive price for a product, instead of charging a base price followed by mandatory surcharges.

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There is no doubt that research has shown that when firms separate out mandatory surcharges from other charges, the market is more likely to be more competitive. Morowitz explains that when consumers assess one all-inclusive price, they are more likely to underestimate the total cost of the purchase and are more likely to complete it. The surcharges are disclosed fully, and yet this still happens. It is also important to note that the effects of these surcharges are increased when they are altered for ease of processing, such as when they are expressed as a percentage of the base price instead of a flat amount, or when they are hidden in small print."

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The ticketing industry often uses drip pricing in order to keep costs down. This method entails outlining the cost of a product upfront and then revealing other charges later on in the purchase process, according to Morowitz.

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Several studies have shown that consumers are more likely to purchase products with higher surcharges if the surcharges are dripped down. The result is that the product appears cheaper on the surface based only on the base price, but in the end it is more expensive in the end if you include the dripped mandatory fees and fees for the optional add-ons you select.

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A professor of Economics at Harvard University, David Laibson, describes these and other pricing strategies as examples that are innovatively tricking consumers instead of innovatively serving them. Essentially, these tricks and traps pricing schemes undermine societal well-being because they obscure the true price of goods and services and undermine the competitive forces that would normally raise the standards of living of society.

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The so-called traps, according to Laibson, "disproportionately adversely affect families with a low degree of financial sophistication and disproportionately advantageously affect households with comparatively high levels of financial complexity."

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StubHub's top lobbyist Laura Dooley called the federal regulations requiring "all-in pricing" "a positive step in the right direction for consumers, not only for live events ticketing, but in every aspect of commerce," and urged the administration, regulators, and Congress to apply the rules with "consistency, clarity, and strong enforcement" throughout the industry.

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On the panel was William Kovacic, former chair of the FTC under President George W. Bush and director of the George Washington Law School Competition Law Center.