How Junk Fees Distort Competition
Today, the White House hosted an event to highlight the costs imposed on Americans by junk fees, inviting scholars and practitioners to discuss the topic. This follows the National Economic Council’s blog post on the topic in October 2022 and the President’s call for Congress to pass a Junk Fee Prevention Act in February 2023. There has already been some progress, such as the Consumer Financial Protection Bureau’s (CFPB) proposed rule to cut most credit card late fees to no more than $8 and the Federal Communications Commission’s (FCC) finalized rule to require easy-to-read labels for cable and internet providers to list fees and services up front, among other initiatives. The Council of Economic Advisers (CEA) has compiled some examples of junk fees in order to highlight how Americans frequently encounter junk fees in their daily lives and to illustrate the challenge they can pose to consumers and to competition more broadly.
Concert Tickets and “Drip Pricing”
One manifestation of junk fees occurs when firms use a practice economists call “drip pricing,” where additional costs are “dripped in” as the consumer goes through the shopping process. This means consumers see an initial upfront price but face a higher true price at the end of the purchase process due to (non-government-imposed) fees. For instance, individuals shopping for concert or event tickets online may see a lower base ticket price when comparing between websites but only see the final price including service fees at checkout after inputting their contact and credit card information.
To illustrate how this drip pricing works in practice, the CEA compared advertised prices with true prices for resale tickets to a concert in Washington, D.C. (Table 1). Across two different platforms—Vivid Seats and SeatGeek—each vendor had a listing for an $87[1] general admission ticket to a mid-sized music venue for the same concert in March 2023. General admission at this venue is on a first-come-first-served basis, meaning these tickets are virtually identical and have no difference in quality.
While the advertised price for the two tickets was the same, the final price—inclusive of taxes, service fees, and/or fulfillment fees—ranged between $123.98 and $128.26. In one instance, these final prices were only revealed after spending time to input credit card information and an email address. Therefore, a consumer would have to spend a significant amount of time to accurately be able to compare the true price being charged by the different platforms, and may end up choosing a higher-priced option, even though the good being sold is identical.
Food Delivery and “Drip Pricing”
Another example of drip pricing exists on food delivery platforms. In recent years, the popularity of mobile apps and web-based platforms that allow individuals to order food from local restaurants has risen dramatically. Consumers pay the base price of the food plus additional fees, which are often tacked on at the end of the shopping process—often after consumers have to log into an account, complete their payment information, and enter the final stage of checkout. These can include a variety of fees, such as taxes, delivery fees, and service fees.
To illustrate this, the CEA compiled examples of the prices and fees that a hypothetical consumer might face when ordering on different platforms. In these examples, the consumer is purchasing identical menu item(s) from the same restaurant and having them delivered to the same location. The only difference is the platform they use to order their food. The results are shown in Figure 1.
There are three takeaways from this exercise. First, notice that the subtotal—the price of the menu item—is identical across the platforms.[2] Second, the breakdown of additional fees across services shows no systematic pattern. Even the taxes charged do not seem to be computed in a consistent way. Third, the final price before tip can vary by more than 5 percent across platforms (see the far-right example in Figure 1), and importantly, there is not one platform that is consistently the least expensive. This means that a consumer looking for the lowest-priced option would have to search all three platforms and then compare the final quoted prices.
Ultimately, the existence of these additional fees serves to obfuscate the true price for a consumer. While consumers can circumvent this by downloading multiple platforms and going through the checkout process on each to identify an actual price, this incurs additional “search costs” for the consumer—it can be timely and frustrating. The use of drip pricing (and the imposition of additional search costs), makes it more difficult for consumers to compare prices across platforms, softening price competition in the market. It is worth noting that these firms also charge fees to restaurants, but these fees are similar across services.[3]
Box 1: What Does the Evidence Say About Drip Pricing?
While these case studies illustrate how junk fees and drip pricing make comparison shopping more difficult for consumers, evidence from economic experiments reveals the tangible effect that more difficult comparison shopping has on consumers’ wallets.
In a large field experiment, Blake et al. (2021) randomly assigned half of the consumers who visited StubHub to a drip pricing scheme while the other half were shown all-inclusive prices up front. This experiment illustrated the connection between drip pricing and higher search costs—and its subsequent effect on consumers.
Individuals who were shown dripped prices were 56 percent more likely to go back after clicking on a choice and look at other tickets compared to shoppers who were shown all-inclusive prices. This suggested that dripping in prices makes it difficult for consumers to know how much they will end up paying, leading them to view multiple ticket listings. On the other hand, consumers who were shown all-inclusive prices were less likely to view multiple listings, presumably because they would be able to easily compare prices between the ticket options on the search display page. Furthermore, drip pricing caused consumers to pay nearly 21 percent more on their tickets than consumers who were shown all-inclusive prices. Consumers who were shown dripped prices were also 14 percent more likely to end up purchasing the tickets.
Drip pricing even had an effect on “experienced” consumers who had visited the website at least ten times before. Some might assume that these “experienced” consumers would be familiar with the pricing schemes and therefore would anticipate dripped prices as they go through the shopping process—this prior experience could, in theory, allow them to avoid the higher prices associated with drip pricing. Despite this, these consumers still paid 15 percent more with drip pricing than without.
Previous research has also cast a light on the mechanism by which this happens: taking advantage of consumers’ behavioral biases. At the end of the shopping process once all prices have been dripped in, frustrated consumers may not go back to other websites to compare the true prices including fees to be able to select the lowest-priced option. In fact, lab experiments have shown exactly this—once the full price is revealed to the consumer (i.e., all relevant prices have been dripped in), many consumers will not return to searching for lower prices even though they may find a lower-priced option (Santana, Dallas, and Morwitz 2020). Specifically, this occurs because of high search costs (e.g., the time it takes to look for an alternative product), self-justification, and incorrect beliefs about the possible gains from making a different initial choice.
Hotel Resort Fees
Hotels began charging “resort fees,” mandatory per-night fees that purported to cover some of the costs of the amenities offered at resorts, as early as 1997 (FTC 2017). These fees were highly unpopular with consumers as these fees were supposed to cover the use of amenities like a pool towel, fitness center access, or an airport shuttle that most consumers would expect to be included in the nightly hotel rate at the time of booking. Therefore, they resulted in surprising charges at the conclusion of a stay. Since an FTC action in 2012 (FTC 2012), many hotel operators and third-party booking websites have been more forthcoming about the inclusion of resort fees in total hotel prices for a stay, for example by allowing a search to return “total prices” for stays if the user checks a box.
These fees continue to frustrate some consumers as they can be collected in inconsistent ways, for example, at the time of booking when using a direct hotel website but collected at check-in when using third-party booking sites (FTC 2017). Industry advocates argue that these fees are simply bundling together popular add-ons in a way that saves consumers money. If this were true, these bundled add-ons would be offered as an add-on bundle as opposed to a mandatory fee, highlighting how this argument lacks merit. Even when disclosed, these fees can hamper competition because a “resort fee” is not a standardized bundle of amenities and may provide different benefits at different hotels, some of which the consumer may not intend to use, which further makes comparisons difficult.
To investigate this, the CEA conducted a review of hotel accommodations in New York City for two nights in February near Times Square (between 42nd and 48th Street and between 6th and 8th Avenue). The prices for nearly all of these rooms included either a destination or a resort fee (see Figure 2), but each fee was inclusive of different services at the hotel (see Table 2). For example, one hotel’s fee included “unlimited access to filtered hot and cold water,” streaming services from the traveler’s personal device, premium wireless internet access, 24/7 access to a fitness center, and a discount at a nearby bar. Meanwhile, another hotel’s fee included daily “grab & go” breakfast for two, Streetwise walking tours, wine hours, internet access, bottled water, a discount on laundry service, access to the fitness center, and unlimited local calling, plus discounts at nearby establishments.
There is no systematic pattern to the level of the fee and what it includes; in some cases, a higher fee at one hotel may include fewer services relative to another. This variation across hotels ultimately makes it difficult for consumers to quickly and easily compare the services they are paying for, given that these fees are all mandatory add-ons required for a reservation. In addition, many of the fees include services for amenities that consumers may already reasonably assume to be part of the cost of a hotel room, such as internet access, access to an existing on-site fitness center, use of an in-room safe, and access to filtered water. On the other hand, multiple hotels’ facility fees included discounts at local establishments and entertainment venues; nevertheless, there is no option for consumers to opt-out of the fee, meaning consumers have to pay for discounts that they may not intend to use.
Mandatory Apartment Fees
Similar to hotels’ resort fees, some multi-tenant dwellings (i.e., apartment buildings) charge tenants an amenity fee for access to features like a fitness center, pool, or shared common areas. They can either be tacked onto a tenant’s monthly rent or charged as an up-front fee—which can be more than $500—when the tenant moves in. Other mandatory fees can be levied for things one would expect to be included in the rent, such as building insurance and hallway lighting. See Figure 3 for several examples. While these fees may be disclosed to tenants before they sign a lease (like hotel resort fees), what they cover can vary across dwellings. This practice is sometimes referred to as “partition pricing”—which has been shown to make comparisons difficult as consumers may tend to compare “rent” across different potential dwellings while not factoring in all of the partitioned prices (Morwitz, Greenleaf and Johnson 1998).
While the data on the extent to which these fees are utilized are sparse, there is anecdotal evidence showing that they do affect a meaningful number of apartment residents, including a class action lawsuit against an apartment for the use of these fees. The court ruled that charging tenants such a fee for amenities like a fitness center and pool were in violation of Massachusetts state law governing security deposits, which stipulates that the only charges allowed at move-in are first and last month’s rent, a security deposit, and a new lock and key fee. Figure 3 shows a sample of different mandatory fees faced by renters in addition to their rent in Arizona based on a local news report.
In addition, some multi-tenant dwellings contract with companies to help collect payments for utilities like trash, water, and sewage. These companies charge a “convenience fee” or “service fee” simply for providing tenants with a consolidated monthly billing statement. Tenants are often not informed of these prices when they sign their lease, nor are tenants able to opt out of the fees (e.g., by paying with a check or directly through the utilities companies). While there is limited empirical evidence of this practice, in 2022, a class action lawsuit was settled for $2.5 million against one of these contractors, alleging that tenants were charged “service fees” to receive their utility bills.
These apartment fees are harmful because they take advantage of “captive consumers,” making them pay higher prices than they otherwise would. In this case, tenants are locked into long-term contracts with their apartment building, allowing the apartments to impose these junk fees without fear of losing consumers.
Box 2: What is the Evidence on Captive Consumers?
Previous economic literature has illustrated precisely how fees imposed on captive consumers allow companies to extract profits at the expense of individuals who have limited alternatives. For example, Seim, Vitorino, and Muir (2017a) conducted an empirical analysis of the effects of drip pricing at a driving school market in Portugal. In this market, students sign up for an initial driving course with 28 theory lessons and 32 on-road driving lessons plus an exam (the base service). If students fail their first attempt, they must pay for an additional test plus five extra driving lessons—the “add-on service.” While students could hypothetically switch to another school, this is often very costly; students are prohibited from transferring their initial course credits when switching to another school, so opting for a new program often involves starting over from the beginning. This results in “captive consumers,” i.e., students who are virtually locked-in to purchasing from one company.
The authors found that as more firms enter the market, competition brings down the price of the initial class, but the price of the subsequent classes and exams remains the same, implying the use of drip pricing strategies dampens the effect of competition in the marketplace. In other words, firms had a strong incentive to compete for new customers by offering low prices for the base product—the first set of classes plus the driving exam. The use of drip pricing, however, hinders this competitive effect for any add-on classes and exams. Ultimately, drip pricing provides companies with the ability to charge higher prices without fear of losing many of their existing consumers—a breakdown in competition within the market.
The same authors also measure the value that consumers place on price transparency in the same setting (Seim, Vitorino and Muir 2017b). They examine how different sellers frame prices differently—sometimes as an all-in price, and sometimes by the components of the bundle—and find that consumers value the latter as it allows them to see what additional charges they may incur later on in the process. This implies that consumers understand that firms may want to take advantage of their captivity at a later point.
Bank Wire Transfer Fees
Bank fees have attracted the attention of various regulators, including the CFPB, which has launched a junk fees initiative to better understand the problem and potential policy actions. When selecting a bank, consumers frequently cite “low fees” as an important attribute of a bank. However, banks charge fees in many different situations, often detailed in the “fine print” when setting up an account, making it difficult to compare banks on the full schedule of fees they charge. For example, many banks charge consumers a fee if they receive an incoming wire transfer. Wire transfers are simply electronic transfers of money between two customers of different banks. Consumers are typically unaware of the cost that a bank incurs to process such a transaction, so when the fee is levied—often $15, $25, or more—consumers may not necessarily realize that this fee can far exceed the cost to the bank. A consumer is typically captive at the moment they need to send or receive a wire transfer and have no choice but to pay the fee, as it would be costly and time-intensive to move their banking relationship to another bank with lower fees.
This example illustrates the economics of these fees in more detail. Many major banks charge large fees for either sending or receiving these transfers. The actual transfer itself is almost surely processed by FedWire, a service of the Federal Reserve (the “Fed”) to all of its members with master accounts, which directly or indirectly effectively reaches all depository institutions in the United States. In 2022, FedWire processed an average of $4.2 trillion in transfers daily (more than 750,000 transfers). The Fed publishes the rates it charges the originator and receiver of FedWire transactions. These rates are variable, depending on the volume of transactions processed, but cannot exceed $0.92 per transaction, and can be as low as $0.036 per transaction. These fees are identical whether the bank is sending or receiving. An incoming wire transfer that may cost your bank less than $0.04 cents may lead the bank to charge you a fee of $15. Generously assuming an average cost of $0.50 to the bank, that fee would still be a markup of 3,000 percent. Why would a bank charge such a customer such a high fee? Partially, the simple answer is because it can: a customer is unlikely to leave their banking relationship and go through all of the work of setting up a new banking relationship over a fairly infrequent occurrence, and so the customer pays the fee even though it is far out of proportion from the cost to the bank and was likely only found in a footnote when setting up the account.
Table 3 shows the fees charged for incoming and outgoing domestic wire transfers for 14 of the largest banks in the U.S. ranked by consolidated assets as of fall 2022. There is large variation across banks in the fees they charge, with some banks offering free incoming and outgoing wire transfers while others charge as much as $35 for an outgoing domestic wire transfer. The existence of free wire transfers indicates that the cost of conducting a wire transfer for the bank is likely low.
Box 3: What is the Evidence on Shrouding Add-on Prices?
Even in competitive markets where one might assume that a firm may want to inform consumers about competitors’ use of such practices, Gabaix and Laibson (2006) illustrate how “shrouding” high add-on prices can be optimal for profit-maximizing firms. For example, the authors point to how banks will often highlight the benefits of their checking accounts while omitting information about related fees such as bounced check fees or minimum balance fees. Despite the fact that consumers would benefit from access to more detailed information about pricing including all related fees, firms can collectively benefit and earn higher profits by jointly enabling “information shrouding” of add-on prices, such as junk fees. The existence of wire transfer fees serves to further this theory.
Conclusion
Not all fees that consumers are charged are junk fees; some are legitimate fees for additional products or services that consumers value—things like paying for a room with an ocean view or adding bacon to your hamburger. However, sometimes these fees are excessive compared to the value they offer, hidden in the fine print, or added late in the purchase process, making it difficult for consumers to know what they are paying and what they are getting. Economic research shows that these types of fees–junk fees—are profitable for firms to employ at the expense of consumers. This post focused on a handful of fees to illustrate examples of where consumers may encounter them in their daily lives, how they can vary in different contexts, and to connect those experiences with the academic literature.
[1] These prices for resale tickets are set by the seller on the platform (individuals who have purchased tickets and looking to resell them to others). While the $87 advertised price was not the lowest price available, these tickets were chosen because $87 was the lowest common price across the platforms.
[2] This may be for contractual reasons, such as a “Most Favored Nation” (MFN) clause, which would restrict restaurants from listing lower prices on one platform compared to another. The issue of MFN clauses in this space has been the subject of litigation, which is explained in further detail later in the report.
[3] Food delivery service platforms also function in a two-sided market, meaning they connect buyers (consumers) and sellers (restaurants). Platforms operating in a two-sided market are often able to charge fees to both parties (Rochet and Tirole 2003). In the case of food delivery platforms, consumers face fees like service charges and delivery fees while restaurants pay commissions to the platform in order to be listed (Feldman, Franzelle, and Swinney 2022). Among the platforms reviewed by the CEA in Figure 1, each offered restaurants a similar three-tiered pricing structure where restaurants could pay higher fees in exchange for better marketing and visibility on the platform. On each, restaurants could choose between three different packages (e.g., a basic/lite, plus, and premier/premier plan) with commissions ranging between 15 percent on the low end and 30 percent on the high end. Generally, opting into the lower commission option limited the restaurant’s visibility on the platform (e.g., the restaurant would only show up if explicitly searched for) while paying higher commissions meant more marketing (e.g., the restaurant could appear on the platform’s browsing page or front page). A number of local jurisdictions have taken action to limit the fees that are charged to restaurants, such as in Seattle and New York City (15 percent maximum delivery fee). These fees illustrate that food delivery platforms generate revenue from both sides of the market—they charge service and delivery fees to both consumers and restaurants.
