Senate Commerce hearing shows why some junk fees aren’t garbage

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In his State of the Union address this February, President Biden reiterated his intent to crack down on so-called junk fees. Biden discussed his administration’s efforts to regulate them and called on Congress to pass a Junk Fee Prevention Act to eliminate what he describes as a hidden, costly, and unfair business practice.

Hoping to make good on Biden’s request and spur legislative action on the issue, the Senate Commerce, Science, and Transportation Committee’s Subcommittee on Consumer Protection, Product Safety, chaired by Sen. John Hickenlooper (D-CO), held a hearing last Thursday titled Protecting Consumers from Junk Fees. The focus of the hearing was to explore how “undisclosed fees harm consumers and prevent a fair and transparent market” and to “examine potential legislative solutions.”

Witnesses included Sally Greenberg of the National Consumers League, Vicki Morwitz of Columbia Business School, and Todd J. Zywicki of George Mason University’s Antonin Scalia School of Law.

The hearing highlighted three key points about junk fees that legislators should consider:

1. Transparency is necessary, but generalizations are dangerous.

Each witness agreed that pricing should be transparent. Greenberg contended that America needs to better “promote transparency in the marketplace,” while Zywicki believes “all fees should be disclosed upfront.” They agree that by the end of a transaction consumers should be able to see the full price that they will have to ultimately pay and that all mandatory fees should be disclosed.

Disagreement arose when discussing bundled vs. unbundled pricing. Greenberg and Morwitz advocated for bundled pricing—a means through which fees are added up in the initial price for consumers. Although this is a seemingly good solution for transparency, Zywicki highlighted bundling’s caveat: that it does not provide a price breakdown for consumers. He explained that there are specific cases where unbundling (a breakdown of fees that add up to a total price) is more transparent than bundling, and vice versa. CEI senior economist Ryan Young details unbundling here, and explains that in some cases it can save consumers money.

Here’s Young:

Take airline baggage fees, which are on the administration’s target list.

If an airline were to charge a single price to all passengers, then people who don’t check luggage pay for that service anyway through a higher ticket price. They also subsidize other passengers who do check bags.

That isn’t fair. People understandably grouse at getting out their credit card twice instead of once, but in many cases unbundling saves people money.

Unbundling baggage fees means people only pay for the service if they use it. Moreover, people who do use the service pay for it in full.

The same principle applies to people who buy meals, drinks, or blankets on their flights. People can pay for them in a higher ticket price whether they use them or not, or they can save money by unbundling them from a lower ticket price and paying only if they use them.

In an op-ed for The Hill, Zywicki and Howard Beales of the George Washington University School of Business write “unbundled pricing is particularly attractive when only some consumers choose certain services, because unbundling allows those who want additional services to obtain them without shifting the costs to others who do not.”

During the hearing, Zywicki advised against generalizations that put bundled and unbundled pricing all into one policy regulation. If a bill were to be passed that requires all prices to be bundled, for example, then consumers would not be able to see the individual fees that are included in the total price they are paying. These “catch-all” type bills can prove to be problematic for specific pricing cases.

2. Many junk fees are necessary.

The term “junk fee” frames certain charges as unnecessary, or as upcharging consumers. In reality, the word “junk” is misleading as many of these fees are necessary.

Generally speaking, state price gouging laws and federal regulations related to UDAAP (Unfair, Deceptive, or Abusive Acts or Practices) prevent businesses from charging unnecessary fees. That being said, most of these laws and regulations are likely unnecessary considering the power of social norms and consumer behaviors in discouraging businesses from engaging in such practices in the marketplace.

Prices and fees posted in-store or online for most goods and services reflect factors like supply and demand, material costs, labor costs, profit margins, etc. Also factored into a price is the cost of government intervention. When taxes go up, businesses pass on some of the tax to consumers in the form of higher prices. Similarly, regulatory compliance costs tend to lead to higher consumer prices in the end. There is also inflation, which is largely the result of government spending and poor monetary policy.

In other instances, many so-called junk fees simply reflect the extra goods or services a consumer wants. Pizza is one such example of this.

Let’s say a medium cheese pizza costs $10 and each topping costs an additional 50 cents. If Abby wants to buy a medium pizza with pineapple, ham, and bacon it would cost her $11.50. By paying an extra $1.50, Abby can get the pizza she wants. However, if this practice were banned as a junk fee, the pizza shop would likely start charging more per medium pizza, say $11, to cover the costs of toppings. While Abby benefits by paying $11 instead of the original $11.50 she owed, Alyse suffers since she just wants a plain pizza but is now forced to cover the costs of Abby’s toppings.

This is an example of partitioned pricing, where a product’s price is broken down to reflect the components. It also illustrates the practice of unbundling and one of the junk fees that might be banned if a junk fee prevention act were to pass. As CEI senior fellow John Berlau contends, “‘junk fees’ is a subjective and paternalistic term used to describe fees that politicians simply do not like,” and their elimination would cause “all consumers to be charged more to subsidize the cost of a particular service.”

3. “Junk fee” is not a universal term.

Semantics are a big part of the junk fee debate. It has no common definition, which leads to confusion and cross-talk.

According to Sen. Hickenlooper, junk fees are charges disclosed to a consumer mid-way or at the end of the transaction. While Greenberg defines junk fees as “unfair or deceptive fees that add little or no value to the consumers,” Zywicki argues that the term is mere rhetoric. He pulls from both Hickenlooper and Greenberg’s interpretations to explain that this blanket term sweeps into it fees that many consider legitimate, like credit card late fees which help banks account for risk.

In short, there is no universal conception of junk fees, raising a critical question: how can policy be passed on a virtually meaningless term?

As a whole, the charges are not the problem. The problem is how they are framed as junk and how they are obscured from initial prices. If lawmakers were truly interested in helping consumers, they would be working to fight inflation and eliminate some of the red tape that amounts to a huge annual $14,500+ hidden regulatory tax on every American household.