Biden’s fight against ‘junk fees’
Sneaky fees have become a big part of America’s consumer economy.
Hertz charges nearly $6 a day just for using a toll transponder in a rental car. Marriott and Hilton add “resort fees” to the bill, even at hotels that no one would consider resorts. American, Delta, and United offer airfare when you first search for a seat, then add fees for basic features like the ability to sit next to your spouse.
Ticketmaster is particularly aggressive in charging fees, as I experienced recently when buying two tickets to a football game. When I originally selected my seats from Ticketmaster’s online stadium map, they were $48. The bill at checkout was more than a third higher – $64.40.
President Biden announced a crackdown on these fees (which his administration calls “junk fees”), and he devoted a section of his State of the Union address to them. “Look, junk fees might not matter to the very wealthy, but they matter to most other people in homes like the one I grew up in,” he said. Tuesday evening. “I know how unfair it is when a company overcharges you and gets away with it.”
Today I want to explain why someone is even worried about this problem. After all, in a competitive capitalist economy like ours, shouldn’t the market have solved it already?
The market solution to sneaky fees seems simple. When Marriott starts charging a “resort fee” of $50 per night, Hilton can call its competitor and try to steal Marriott’s customers. And some companies are taking this approach: Southwest Airlines announces a “Bags Fly Free” policy, a clear swipe at its rivals.
But the growing number of fees has made it clear that competition does not usually eliminate the practice. Why not? Academic research has suggested that there are two main reasons.
First, human beings are not the efficiently rational machines that economic theory claims to be. An entire branch of the field, behavioral economics, has sprung up over the past few decades to make sense of our limited attention spans.
If you’re familiar with Daniel Kahneman’s best-selling “Thinking, Fast and Slow,” you’ll recognize these ideas. We lead busy lives that prevent us from analyzing every purchase, and we get distracted by salient but misleading information (like a low list price). Large companies, with the resources at their disposal, have learned to take advantage of these limitations. Economist Richard Thaler calls these practices “sludge,” the evil equivalent of nudges that use behavioral economics to improve lives.
Certainly, one company could appeal to another for the use of sludge. But that often requires a complex marketing message that tries to persuade people to overcome their psychological instincts (like the lure of a low list price). Because of this, Hilton can probably make more money charging its own sneaky resort fees than criticizing Marriott.
“Once a subset of hotels start charging these fees and generating a significant amount of revenue,” Bharat Ramamurti, a Biden adviser, told me, “it creates pressure on hotels to they do it, otherwise they are left behind”.
The second major reason is monopoly power. In some markets, consumers don’t have much choice. Ticketmaster’s fees outrage many people. But I had no choice when I bought those football tickets. No competing service was selling them.
In recent decades, many American industries have consolidated, in part because Washington has become more lax in enforcing antitrust laws. Thomas Philippon, an NYU economist, has estimated that increased corporate concentration costs the typical American household more than $5,000 a year.
In some industries, sludge and monopoly power feed off each other. The small number of dominant internet providers, for example, reduces the chances that a new entrant can devise a business strategy around cutting the sneaky fees from Comcast and Verizon. These new entrants do not exist. Comcast and Verizon have also figured out how to make canceling Internet service unpleasant and time-consuming. Airlines – another concentrated industry – use frequent flyer programs in the same way, effectively punishing customers for switching carriers.
The Biden administration is trying to tackle both causes of the sneaky fee. On antitrust, it has adopted a more divisive policy than any other administration in decades. This effort is in its early stages, without many big wins. Yet the administration seems to take corporate concentration seriously.
As for the sludge itself, the administration has already taken steps to restrict a few examples, such as late payment penalties on credit cards. Biden has asked Congress to pass legislation with stricter rules for other industries.
For now, the administration is focusing more on disclosure, which requires companies to tell consumers in advance what the total cost will be. The Ministry of Transport has proposed such a rule for airlines.
Disclosure rules often have the advantage of being easier to enforce than outright bans on sneaky fees: if the government prohibits one type of fee, companies can often repackage it in another way. “The best we can hope for is for consumers to see the full costs transparently and for the government to facilitate that,” Thaler, a Nobel laureate in economics, told me.
Ramamurti, Biden’s adviser, put it this way: “We don’t want companies competing to hide the true price of their product.”
The extent to which Biden’s actions will make a difference remains unclear. But the administration’s effort is based on an idea backed by ample evidence: the free market does not solve all problems.
Over the past half-century, the US government has moved toward an economic policy that often allows corporations to behave as they see fit, based on the theory that the free market will fix any excess. The results weren’t very good. During that same half-century, economic growth slowed, corporate profits rose faster than wages, income inequality soared, and living standards rose slowly.
Sneaky fees turn out to be a small but telling example of why the modern economy isn’t working so well for many Americans.
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