White House: Hidden Fees “Threaten The Competitive Process”

Image courtesy of Don Buciak II

It seems like an increasing number of things you buy now come with fees that you don’t find out about until it’s time to make the purchase: Book a hotel room — there’s a “Resort Fee” that wasn’t in the advertised price. Going to a concert — there’s a “Convenience Fee” that can sometimes double the ticket price. Subscribe to cable TV — there are “Broadcast TV” fees for stations that are freely available over the air, and “Regional Sports” fees for stations that are often owned by the cable company. A new report from the White House says these hidden fees are cause for a broader concern about a lack of competition.

“The growing use of hidden fees and related tactics… threatens the incentives to create better goods and services,” reads the report [PDF] from the National Economic Council, which found that many industries have taken to adding un-advertised “mandatory or quasi-mandatory” fees to “effectively raise the final price – in order to drive down the perceived price and lure consumers to make purchasing decisions based on misinformation.”

Even when these fees are disclosed in a way that allows them to pass legal muster, the NEC says they still have the result of muddying the actual value of a product or service.

The NEC gives the example of someone buying a concert ticket with a budget of $70. That person might not buy a ticket priced at $80, but a $69 ticket is within their acceptable range.

However, when that person goes to finalize the purchase of their $69 ticket, they find out there are $11 in mandatory fees and surcharges. Because of the perception of the initial $69 price, that person may still buy the ticket because they are not associating the final price with breaking their budget. Even if they do make that connection, writes the NEC, the consumer may go ahead and buy the ticket because they are “now too committed to back out and will therefore just pay the $11.”

Companies can most easily get away with these sorts of fees when there is no or little competition in a certain market. In the concert ticket example, if the vendor with the $11 in fees is the only vendor selling tickets to that event, then you have no choice but to accept the add-on charges or not attend the show.

Even in markets where there is some competition, notes the NEC report, these hidden fees can confuse customers into thinking a company is making a better offer than the competition. If Company A advertises a product for $10 and Company B advertises a similar product for $6, people may go to Company B, not knowing that they will pay $4 in surcharges.

The report points out that there is also the likelihood that competitors will play the game of “follow the leader” with un-advertised fees, much like how most of the U.S. airline industry now charges for checked bags.

“The setting of ‘standard’ add-on fees, which are in theory not part of the negotiated price, provides an ideal anchor for tacit coordination because they are typically set at the national level and fluctuate less frequently than the base prices themselves,” explains the report. “As a result, for example, such fees make it easier for the airline industry to implement and sustain prices without an explicit agreement. In this example, the major airlines would likely find it easier to implement and sustain a ‘standard’ change fee of $250 as it may be easier to coordinate on that price than the prices for travel itself.”

No Way Out?

The NEC report looks at the various types of popular hidden fees and finds that in most cases, the customer has few or no options for avoiding the fee.

Resort fees, for example are “usually unavoidable” and “effectively part of the price, but typically not displayed in the advertised price.” While hotels claim the resort fees are for access to amenities that you don’t necessarily need — access to a gym, pool, “free” bottled water in the room — the hotels generally don’t allow guests to opt out.

When it comes to airlines, mandatory fees now have to be disclosed in the advertised price of a ticket. However, as NEC notes, there are some add-on fees — like baggage and change fees — that occupy a “gray zone” between mandatory and optional.

As we’ve covered in our previous stories on cable bills, the pay-TV and telecom industries like to tack on “recovery” fees to recoup the costs associated with everything from governmental regulation to regional sports channels.

These fees are often not only mandatory, but worded in a way that may imply to the consumer that they come from the government.

“Despite the titles of the services, which suggest that the money is charged for an official purpose, these fees are kept by the carrier and can be considered additions to the price of telephone service or a means of raising prices without changing advertised rates,” explains the NEC report.

The NEC also raises concerns about banks who advertise “free” accounts, while putting details about monthly maintenance costs and other fees in the fine print.

Anyone who has purchased a car in the last decade is more than familiar with the slew of often mandatory add-on costs that can come up before you leave the lot.

There’s the “Documentation Fee” which the dealership can charge for simply filling out paperwork. In some states, it’s capped — like New York, where $75 is the most you’ll pay — but in others this fee is entirely unregulated and could run you nearly $1,000, according to the NEC.

Then there are “Floor Plan” fees for the cost of keeping a vehicle in the dealer’s inventory,
“Dealer Preparation” fees to “prepare the car” for the buyer, “Advertising” fees to help the dealership recoup their ad expenses (and sometimes those of the manufacturer too), not to mention fees for delivering the car to the dealer.

“Transparent and accurate pricing is the foundation of an effective and efficient American economy, allowing consumers to make smart choices and to reward the providers of better goods and services,” concludes the report. “But when pricing is unclear, it threatens the competitive process by which consumers make decisions.”

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