The Price Isn’t Right: How Junk Fees Cost Consumers and Undermine Competition

Junk fees are fees that are mandatory but not transparently disclosed to consumers.[1] Consumers are lured in with the promise of a low price, but when they get to the register, they discover that price was never really available.[2] Junk fees harm consumers and actively undermine competition by making it impractical for consumers to compare prices, a linchpin of our economic system.

Promoting competition is a core part of the Biden-Harris Administration’s economic agenda, and combatting hidden and deceptive fees has been a priority of the Administration from the beginning. As part of this agenda, agencies across the executive branch have proposed and implemented rules to crack down on junk fees in areas they regulate, and recently the Federal Trade Commission (FTC) announced a proposal to ban them many other places.[3] The Administration’s action to crack down on junk fees are already yielding billions of dollars in savings for Americans, and going forward the Consumer Financial Protection Bureau’s (CFPB) actions alone will likely save Americans roughly $19.5 billion annually, with other rulemakings likely saving billions more.

This issue brief updates CEA’s previous work in two ways. First, it looks at the economic theory behind these fees and the related literature. Second, it examines more cases of such fees and documents that their combined scale and scope indicates that the costs to consumers are much larger than previously understood. CEA estimates that ten specific kinds of junk fees amount to $90 billion per year in the United States, or more than $650 per household per year on average. That’s high enough to deserve a line item in family budgets, equal to about a fifth of the average household’s entertainment spending, per the most recent estimates by the Bureau of Labor Statistics. These fees are likely not only harming consumers and competition in the short run but give firms an incentive to divert resources away from productive investments and toward non-productive obfuscation, and toward products that carry junk fees and away from products that do not. Thus, they create the potential for inefficient allocation of resources and perverse incentives for investment.

Economic Theory

In theory, it is not obvious that hiding fees should work: after all, a “perfectly rational” person (the kind economists are sometimes accused of making up) would react the same way to a price increase no matter when or how it is disclosed. It is exactly because humans are not perfectly rational and exhibit behavioral biases that such fees can be very effective at making people spend more money than they initially planned. As a result, businesses have widely adopted them and economic research documents their impacts. For example, in online ticket sales, customers subjected to hidden fees spend up to 21 percent more than those shown the true price upfront, with variation coming from both the quantity and quality of tickets selected in each group (Blake et al. 2018).[4] Thus, these fees distort both the quantity and quality of products purchased away from efficient levels.

In addition to the direct effects, these fees also make it more difficult for consumers to shop for the best price. By preventing consumers from making price comparisons, firms can reduce or eliminate competition on price, in turn allowing them to extract rents from consumers.[5] In economics, this friction is known as a search cost (Stigler 1961). Consumers who value their own time and effort may make the choice to just go with the option they have already selected rather than putting more work into identifying which goods are offered at truly lower prices (Ellison and Wolitzky 2012). Of course, this is not an accident: firms strategically impose such fees in order to deter comparison shopping, and any unnecessary time and energy consumers spend searching is a deadweight loss to society.[6]

By impeding competition on price, firms are able to increase their market power. A particularly acute example of this is auto dealerships who rarely, if ever, commit to a final price until consumers are hours into negotiation. A new proposed rule by the FTC – The Combating Auto Retail Scams Rule – seeks to change that by requiring prices to be disclosed up front. Analysis by agency economists concludes that this will save consumers over 70 million hours each year, a benefit they calculate is equivalent to $1.75 billion per year in consumer savings.[7]

Once one firm in an industry moves to a junk fee business model, competition can perversely push other firms to do so as well. Firms that do not impose such fees are left at a disadvantage as their products appear more expensive in advertisements, even if their true prices are the same or less than their competitors. A major ticketing platform, for example, once prominently advertised that it had no hidden fees, but was forced to alter its business model in the face of competitors who did. This kind of dynamic can also inhibit the entry of new firms, which would otherwise tend to happen in the face of price increases.

Finally, the problems caused by junk fees are not limited to the industries that use them. Money spent on junk fees is not available to be spent elsewhere, nor can it be saved or invested. It is true that in the absence of these fees, businesses would likely raise their advertised prices to some degree, but research suggests that it is unlikely that the junk fee would be fully added to the cost. But because junk fees—by design—limit competition among firms, some portion of the extra money that firms are able to extract from consumers should be competed away and returned to consumers. This is consistent with the evidence: the literature is clear that junk fees allow firms to substantially raise their prices above the level that would otherwise prevail in the market, leading to billions of dollars in consumer harm. CFPB estimates suggest their rules and guidance on credit card late fees, overdraft fees, and non-sufficient funds (NSF) fees will save Americans approximately $19.5 billion annually. Other rulemakings not included in this calculation will likely save Americans billions more.

At $90 billion per year, the level of these fees meaningfully alters what consumers buy, in turn also harming sectors of the economy that do not use them. As a result, more sectors of the economy have started to add junk fees, and others have added optional tips outside of traditional service industries – a practice which is not identical but uses similar ideas. All of this results in inefficient allocations in the short run, and distorted investment in the long run.

New Research

Assessing the amount of junk fees in the U.S. economy is not straightforward. Measuring the extent of these fees requires searching through online sales platforms and combining the discovered fees with public data on market share and size, and in many cases the requisite data are simply not available. Because of this, in previous work the White House estimated the prevalence of just a few common junk fees in the U.S. economy. This analysis found that in recent years, five readily-measurable fees led to consumers spending $65 billion per year.

CEA has identified new data that allows the inclusion of four additional markets in our analysis: food delivery apps, restaurant service fees, apartment applications, and event tickets. On top of this, the FTC has recently released its own estimate of auto dealer junk fees. While there are likely many other junk fees across the U.S. economy, measurement challenges mean that these are the only ones feasible to estimate for now.

Table 1. Selected Junk Fee Totals by Industry

	Fees	Year	Source
Credit card late payment fees	$14.5 billion	2022	CFPB estimate
Bank overdraft and non-sufficient funds fees	$9.1 billion	2022	CFPB estimates
Hotel resort fees	$3.3 billion	2022	American Hotel and Lodging Association, Nerdwallet [8]
Airline baggage and change fees	$8.3 billion	2023[9]	Bureau of Transportation Statistics
Cable fees	$28 billion	2019	Consumer Reports estimate
Food delivery service fees	$5 billion	2021	CEA Estimate
Restaurant service fees	$10.8 billion	2023	CEA Estimate
Auto dealer fees	$3.4 billion	Expected	FTC estimate
Apartment application fees	$276 million	2023	CEA estimate
Event ticket fees	$7.14 billion	2023	CEA estimate

Food delivery apps are notorious for obfuscating delivery and service fees. A recent survey showed one company’s hidden fee burden is about 15 percent of transaction volume.[10] This company received 288 million orders in 2021 in the U.S. and had an average sale of about $31. Putting these numbers together, in 2021, this company collected about $1.3 billion from consumers in junk fees.[11]  Using the most conservative assumptions, a similar calculation for a competitor—which in the same survey had a hidden fee rate of 7.5 percent—produces $1.5 billion in junk fees.[12] In addition, the leading grocery delivery service had about $25 billion in transaction volume in 2021 in the United States and Canada, with about 8% being junk fees. These figures imply about $1.7 billion in junk fees. Similar data on U.S. order volume is not available for all competitors in the meal delivery industry, but based on the best publicly available information, junk fees in food delivery are an estimated $5 billion annually across the country.[13]

In recent years, sit-down and counter-service restaurants have begun instituting more severe drip pricing. At sit-down restaurants, customers are used to tipping, but increasingly common mandatory service fees can surprise and mislead people. About 15 percent of restaurants now use service fees, which can be up to 20 percent of the pre-tax bill. Assuming that these fees average 10 percent at full-service restaurants and 5 percent elsewhere, junk fees make up about 1 percent of total restaurant revenue. In 2023, restaurants across the U.S. totaled about $965 billion in sales, meaning these junk fees could add up to $10.8 billion.

When Americans apply to rent apartments, they often face unexpected fees from landlords or brokers. These fees are ostensibly to offset the cost of a credit or background check, but in many cases exceed those direct costs. Some states, such as Massachusetts, Minnesota, and New York, limit or ban charges for rental applications, but most states allow them. Combining data from the Census, Zillow, and other sources, CEA estimates that after accounting for the cost of the background checks that they fund, the excess burden of these fees is about $276 million annually.

Event ticketing is rife with hidden fees, as the customer is initially shown a ticket’s face value and then presented with a large additional charge at checkout. The largest publicly-traded ticket broker relies on this practice in all states except the three in which it is illegal: New York, Connecticut, and Tennessee. CEA tabulation estimates that this company charges an average hidden fee of 22 percent. Given that they sold approximately 329 million fee-bearing tickets worldwide and received upwards of 80 percent of their web traffic from the United States, in 2023 this company likely charged around $4.8 billion in hidden fees to U.S. customers.[14] Other major ticket brokers are not publicly traded and thus release less information, but market share data and CEA investigation of competitors’ hidden fee practices suggests that the industry junk fee total is around $7.14 billion. For Taylor Swift’s Eras Tour and Beyonce’s Renaissance Tour alone, Americans may have paid over $250 million in junk fees.

All told, CEA’s estimate of junk fees in the U.S. economy is approximately $90 billion per year. And, given that there are many classes of fees not covered here, and that only one of these estimates incorporates the time and effort consumers waste trying to navigate them, this is almost certainly an underestimate. By cracking down on these fees, the Biden-Harris Administration is pushing for greater transparency in pricing, which will leave American consumers better off not only by avoiding such fees, but because they will be buying goods and services through more competitive markets.

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[1] Not all fees are junk fees. Optional fees for additional services do not fit this definition, nor do fees that are incorporated into the advertised price.

[2] In that way, these fees are an evolution of bait-and-switch schemes, see Lazear 1995, Ellison and Ellison 2009, Rosato 2016.  

[4] Research points to a variety of different psychological effects for this outcome, including self-justification and inaccurate beliefs (Santana, Dallas, and Morwitz 2020).

[3] The FTC’s proposed rule also targets fees which misrepresent their natures or purposes, for example, suggesting that they are due to a government-imposed tax when in fact no such tax exists. Such misrepresentations can be similarly harmful to competition by falsely implying that consumers will face them at any competing establishment, but are not the focus of this piece.

[5] In this context, “rents” refers to extra profits sellers extract due to non-transparent pricing.

[6] Many fees, even if they are not strictly mandatory, may also have similar economic effects. For example, not all airline customers need to change their tickets, and ticket change fees may have an important role in dissuading consumers from changing their tickets in ways that are expensive for airlines to accommodate. But complex fee schedules also make it more difficult for consumers to comparison shop, and future events are likely less salient to consumers than the current price of a ticket. For these reasons, firms have an incentive to rachet up these fees.

[7] See page 314 of the FTC’s proposed rule for the calculations underlying this figure.

[8] CEA calculates $3.4 billion by combining AHLA’s figures of 6% of hotels using resort fees and 1.3 billion room-nights booked in 2022 with NerdWallet’s tabulation of $42 in average resort fees.

[10] This survey found that “hidden fees” this company charged were about 35 percent of order volume on average, including optional tips. If we assume (conservatively) that people leave 20 percent tips, the junk fee percentage becomes 15 percent.

[9] For the 12-month period from 2022:Q4 through 2023:Q3

[11] Delivery and service fees may be essential to delivery apps’ operations; we term them “junk fees” because they are obfuscated until after the customer is far into the ordering process.

[12] Assuming 50 percent of this company’s $42 billion in gross order volume was from customers in the U.S. without premium membership who were exposed to junk fees.

[13] The two meal delivery companies mentioned here had a cumulative market share of about 80 percent in the meal delivery market in 2021. Extrapolating their junk fee rates to the rest of the meal delivery market yields about $500 million of additional junk fees, leading to $5 billion total across meal and grocery delivery.

[14] An average ticket price is necessary to calculate this figure. This company has not publicly released such a figure, CEA took the midpoint between the cutoff for “low-price” tickets on their website ($40) and the average ticket price for the top 100 U.S. concert tours in 2023 ($136).