Junk fees cost consumers tens of billions annually, according to the White House

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

“They take real money out of the pockets of families, and they can distort competition in many 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 cut junk fees.

related investing news

Biden is pushing Congress to enact the Junk Fees Prevention Act — a first 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 in the charge against the fees, released an updated list of potentially illegal fees earlier this month.

Biden has also called on state legislators to address 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’s scheduled to begin at 1 p.m. ET.

The eradication of junk fees is also a bipartisan issue with positive benefits 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 know that regulating junk fees has a strong foundation in decades of scholarship. Junk fees weaken the forces of market competition, penalize honest businesses, and hit the most vulnerable Americans the hardest,” 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 associated with a purchase until later in the transaction. Morowitz and colleagues coined the phrase “drip pricing,” the practice of dividing the cost of a product into a base price and mandatory surcharges rather than charging a single, all-inclusive price.

“In general, what research has shown is that when firms separate out mandatory surcharges vs. assessing one all-inclusive price, consumers tend to underestimate the total price they will have to pay, and are often more likely to complete the purchase,” Morowitz says. “This happens even when the surcharges are fully disclosed. And these effects are larger when the surcharges are made difficult to process such as when they are framed as a percent of the base price vs. a flat dollar amount, or when they are hidden in the small print.”

Drip pricing is commonly used in the ticketing industry, according to Morowitz. A firm will outline the cost of an item upfront and only reveal additional fees later in the purchasing process.

“What research has shown is that when surcharges are dripped, consumers end up being more likely to buy a product that appears cheaper upfront based only on the base price, but that is more expensive in total given the dripped mandatory fees and fees for the selected optional add-ons,” Morowitz says.

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

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