Junk fees cost consumers tens of billions annually, in line with the White House

Fees on concert tickets, air fares, hotels and other so-called junk fees cost Americans tens of billions of dollars every 12 months, often obscuring the complete price of purchases from consumers, top economic experts will say on the White House on Tuesday.

“They take real money out of the pockets of families, they usually can distort competition in lots of markets,” Lael Brainard, director of the National Economic Council, said in comments prepared for delivery at a panel discussion spotlighting President Joe Biden’s call on industries and regulators to chop junk fees.

Biden is pushing Congress to enact the Junk Fees Prevention Act — a primary step in cracking down on extraneous surcharges attached to purchases like concert tickets, vehicle rentals and hotel reservations. The Consumer Financial Protection Bureau, which is leading the charge within the charge against the fees, released an updated list of probably illegal fees earlier this month.

Biden has also called on state legislators to handle junk fees at a March 8 virtual meeting with the White House.

Representatives from 16 federal agencies, including the Department of Transportation, the CFPB and the Federal Trade Commission, will attend the panel that is scheduled to start at 1 p.m. ET.

The eradication of junk fees can also be a bipartisan issue with positive advantages for the economy, Brainard will say.

Brainard says recent surveys show 75% of consumers support cutting junk fees, “with strong support across party lines.”

“As an economist, I do know that regulating junk fees has a powerful foundation in many years of scholarship. Junk fees weaken the forces of market competition, penalize honest businesses, and hit essentially the most vulnerable Americans the toughest,” she says in prepared remarks released ahead of the panel discussion.

Panelist Vicky Morowitz, a professor at Columbia Business School, says “partitioned practicing” and “drip pricing” are industry tools that conceal fees related to a purchase order until later within the transaction. Morowitz and colleagues coined the phrase “drip pricing,” the practice of dividing the fee of a product right into a base price and mandatory surcharges quite than charging a single, all-inclusive price.

“Normally, what research has shown is that when firms separate out mandatory surcharges vs. assessing one all-inclusive price, consumers are inclined to underestimate the whole price they may must pay, and are sometimes more likely to finish the acquisition,” Morowitz says. “This happens even when the surcharges are fully disclosed. And these effects are larger when the surcharges are made difficult to process reminiscent of once they are framed as a percent of the bottom price vs. a flat dollar amount, or once they are hidden within the small print.”

Drip pricing is usually utilized in the ticketing industry, in line with Morowitz. A firm will outline the fee of an item upfront and only reveal additional fees later within the purchasing process.

“What research has shown is that when surcharges are dripped, consumers find yourself being more more likely to buy a product that appears cheaper upfront based only on the bottom price, but that’s dearer in total given the dripped mandatory fees and charges for the chosen optional add-ons,” Morowitz says.

“These are examples of pricing schemes which are innovatively tricking consumers as a substitute of innovatively serving them,” David Laibson, professor of Economics at Harvard University, says of those and other pricing strategies. “These tricks-and-traps pricing schemes are anti-competitive, because they shroud the true cost of products and services and undermine the competitive forces that will normally raise societal well-being.”

Laibson also says the so-called traps have “a disproportionate adversarial impact on households with relatively low levels of monetary sophistication and a disproportionate advantageous impact on households with relatively high levels of monetary sophistication.”