National Consumers League

Hidden fees and the decline of the empowered consumer


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A fair and competitive marketplaces requires that consumers have the ability to make informed decisions and easily compare prices. A new report from the White House, however, finds that it’s becoming harder, not easier, for consumers to compare prices thanks to the proliferation of hidden fees in many industries.

One example the report cites is the growth of mandatory hotel resort fees, which are not included in advertised room prices. These fees make one room look artificially cheaper than a similar room that doesn’t charge a resort fee. And because it’s a mandatory fee, there’s no way for consumers to avoid it. This hurts competition by making it harder for consumers to find the “true” lowest room rates.

Another example is airline fees. Until recently, consumers could use an online travel agent and accurately compare the price of a plane ticket. Now, airlines are charging high fees for services that used to be included in the airfare, like baggage, seat assignments, and the ability to change or cancel a ticket. With some so-called “ultra low-cost” carriers, these fees can make a “deal” on airfare actually more expensive than buying a ticket from a traditional airline that doesn’t nickel-and-dime their customers.

Hidden fees are not just limited to airlines and hotels, either. The White House report details how companies in the automotive, banking, and telecom sectors hide their real prices from consumers by baking fees into their price structures. In short, the report argues that companies wanting to play fair with their customers are put at a disadvantage when their competitors look cheaper by deceptively burying fees in the fine print. This has profound and negative effects on competition and consumer welfare.

The White House report found three distinct ways that these deceptive pricing strategies are harming consumers. First, this pricing strategy prevents consumers from accurately comparing prices and may lead them to make the wrong shopping choices. Consumers who invest time in a checkout process that includes a steady drip of add-on fees are unlikely to restart the research and buying process over once the vendor reveals the true cost of a product. Thus, the typical consumer is likely to pay the extra costs even if the “deal” they found is no longer the cheaper or best option for them.

Second, the report found that these hidden fees condition consumers to think that a low price just means they will be slammed with fees at checkout. This in turn makes it harder for new cost-cutting competitors to enter the market since consumers just expect to be saddled with fees no matter what they do.

Finally, the report suggested that these fees may facilitate price collusion amongst competitors, particularly in the airline industry. Specifically, the report finds that these add-on fees provide an ideal anchor for coordinated pricing “because they are typically set at the national level and fluctuate less frequently than the base prices themselves.” Such practices are easily observed when, with few exceptions, all of the major U.S. airlines priced their ticket change fees in the same range. This pricing strategy has allowed the North American airlines to collect nearly $11 billion in 2015 off of de facto mandatory fees such as baggage and change fees.

 

The White House report provides a sobering account of the rise of hidden fees and the harm these deceptive pricing practices create. In its report, the White House stated that “consumers and consumer groups play a crucial role in moderating fees.” It is with this call to action in mind that NCL will continue to call attention to companies that increase hidden fees instead of competing in a fair and transparent way.