Fees and Loathing

A "sucker punch" is an act of violence where the one being punched is either caught completely off guard by a landed fist, or a punch which is thrown to disable another in a place which is not normally a target in a "fair fight”…. Although it is commonly known to be embarrassing and painful to be upon the receiving end of the punch, the act often belies the character of the one throwing the punch, which is often attributed as a cowardly act. (Wikipedia.org)

Hidden fees are the economic equivalent of the unfair and cowardly sucker punch. Unfair, because they comprise important information that is either withheld or obscured from the buyer’s consideration set. Cowardly, because they imply that a seller does not feel confident that his product or service can simultaneously satisfy the conditions of competition (meaning a buyer will choose it over other alternatives), and profitability (meaning it is in the seller’s interest to offer that product at that price).

I’m working hard here to resist the urge to editorialize and rail against hidden fees for their sheer perniciousness. I am a consumer, and any act that leaves me feeling manipulated and injured is of course going to inspire anger. Anger is a natural response that helps motivate a person to avoid future injury.

But anger is only helpful when avoiding the injury is a possibility. Undisclosed administrative fees, “paper ticket fees,” or even “minibar restocking fees” (because the $5 Snickers bar does not cover its own overhead) are often charged after the consumer has already checked in to the hotel or booked their flight. Also, we live in a world where the hidden fee is becoming more and more widespread. This is not a case of a few shady sellers, but rather a culture of manipulation that is based on behavioral economics, the psychology of what consumers “are likely to do.”

People are busy, and most of us do not have an infinite amount of time to research every economic decision we’re going to make. We depend on heuristics, short cuts, and even on basic gut reactions. This is why brands are important, because brands are the ideas and associations that wrap around the products we buy. Brands take on human characteristics such as traditional, trustworthy, or cool. So we may choose a Volvo in part because we’ve done some research, but also because we believe that “Volvos are safe and dependable cars.” Trusting a belief about Volvo’s general dependability saves time that would otherwise need to be spent gathering and analyzing the facts.

How does this relate to the issue of hidden fees? Hidden fees are an act of deception that threatens trust. Mistrust negates the value of brands, and forces the buyer back into the odious task of having to look at all the minutia of the choice. The buyer is hardly going to thank the seller for this additional responsibility.

Unfortunately, there’s no easy market solution for this one. In their Quarterly Journal of Economics article this past May, David Laibson of Harvard and Xavier Gabaix of M.I.T. argue that there is no incentive for another seller to blow the whistle on their competitor’s hidden fees.

Think about it. Let’s say this alternative seller runs an ad that says, “Hey, we don’t have hidden fees like those other guys. We charge you the fair rate for the product instead of sneaking in all those other charges in order to make a profit.”

According to Laibson and Gabaix it’s unlikely that this message will attract new customers to the alternative seller’s product. Instead, the message is more likely to educate potential buyers to still choose his lower-cost/higher fee competitor, but to be much more savvy about how to avoid the fees.

So sellers decide if you can’t beat ‘em, join ‘em. Thus every seller gets in on the fee game and we consumers lose in terms of both trust and choice.

This is one of the reasons I think we have so much consumer anger in our society. We feel abused by the sellers and powerless to select an alternative, so we go on a sort of passive aggressive rampage.

We do everything from stripping anything that’s not nailed down out of our hotel room to fighting tooth and nail to get the entire can of soda (not just the 4 oz. glass) from the flight attendant. And when even these tiny battlegrounds are denied us, it is the desk clerks, customer service reps, and floor managers who must suffer our wrath.

I don’t know if hidden fees will ever go away. So far we consumers have demonstrated time and time again that we love a bargain – even if it’s just the illusion of a bargain. At present the only alternative is to do your homework ahead of time, or be prepared to make a fuss and try to get some of the fees removed.

Or savor the small victories in that extra bag of peanuts and handful of shampoo bottles.