[Senate Hearing 118-537]
[From the U.S. Government Publishing Office]
S. Hrg. 118-537
PROTECTING CONSUMERS FROM JUNK FEES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND DATA SECURITY
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2023
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available online: http://www.govinfo.gov
_______
U.S. GOVERNMENT PUBLISHING OFFICE
58-145 PDF WASHINGTON : 2025
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
MARIA CANTWELL, Washington, Chair
AMY KLOBUCHAR, Minnesota TED CRUZ, Texas, Ranking
BRIAN SCHATZ, Hawaii JOHN THUNE, South Dakota
EDWARD MARKEY, Massachusetts ROGER WICKER, Mississippi
GARY PETERS, Michigan DEB FISCHER, Nebraska
TAMMY BALDWIN, Wisconsin JERRY MORAN, Kansas
TAMMY DUCKWORTH, Illinois DAN SULLIVAN, Alaska
JON TESTER, Montana MARSHA BLACKBURN, Tennessee
KYRSTEN SINEMA, Arizona TODD YOUNG, Indiana
JACKY ROSEN, Nevada TED BUDD, North Carolina
BEN RAY LUJAN, New Mexico ERIC SCHMITT, Missouri
JOHN HICKENLOOPER, Colorado J. D. VANCE, Ohio
RAPHAEL WARNOCK, Georgia SHELLEY MOORE CAPITO, West
PETER WELCH, Vermont Virginia
CYNTHIA LUMMIS, Wyoming
Lila Harper Helms, Staff Director
Melissa Porter, Deputy Staff Director
Jonathan Hale, General Counsel
Brad Grantz, Republican Staff Director
Nicole Christus, Republican Deputy Staff Director
Liam McKenna, General Counsel
------
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY,
AND DATA SECURITY
JOHN HICKENLOOPER, Colorado, Chair MARSHA BLACKBURN, Tennessee,
AMY KLOBUCHAR, Minnesota Ranking
BRIAN SCHATZ, Hawaii DEB FISCHER, Nebraska
EDWARD MARKEY, Massachusetts JERRY MORAN, Kansas
TAMMY BALDWIN, Wisconsin DAN SULLIVAN, Alaska
TAMMY DUCKWORTH, Illinois TODD YOUNG, Indiana
BEN RAY LUJAN, New Mexico TED BUDD, North Carolina
PETER WELCH, Vermont CYNTHIA LUMMIS, Wyoming
C O N T E N T S
----------
Page
Hearing held on June 8, 2023..................................... 1
Statement of Senator Hickenlooper................................ 1
Statement of Senator Blackburn................................... 3
Statement of Senator Cantwell.................................... 21
Statement of Senator Klobuchar................................... 26
Statement of Senator Markey...................................... 28
Statement of Senator Welch....................................... 30
Statement of Senator Sullivan.................................... 31
Witnesses
Vicki G. Morwitz, Bruce Greenwald Professor of Business and
Professor of Marketing, Columbia Business School, Columbia
University..................................................... 4
Prepared statement........................................... 6
Professor Todd Zywicki, George Mason University Foundation
Professor of Law, Antonin Scalia Law School, Research Fellow,
Law & Economics Center......................................... 8
Prepared statement........................................... 10
Sally Greenberg, Chief Executive Officer, National Consumers
League......................................................... 14
Prepared statement........................................... 16
Appendix
Hon. Ted Cruz, U.S. Senator from Texas, prepared statement....... 39
Letter dated June 8, 2023 to Hon. John Hickenlooper and Hon.
Marsha Blackburn from The Asset Building Policy Network:
NALCAB; National CAPACD--National Coalition for Asian Pacific
American Community Development; National Urban League;
Prosperity Now; The Leadership Conference on Civil and Human
Rights; and UnidosUS........................................... 40
Letter dated June 8, 2023 to Hon. John Hickenlooper and Hon.
Marsha Blackburn from William C. Miller, Jr., American Gaming
Association.................................................... 43
Letter dated June 8, 2023 to Hon. John Hickenlooper and Hon.
Marsha Blackburn from Chuck Bell, Programs Director and
Jonathan Schwantes, Senior Policy Counsel, Manager of Special
Projects, Consumer Reports..................................... 49
Response to written question submitted to Vicki G. Morwitz by:
Hon. Amy Klobuchar........................................... 53
Hon. Ben Ray Lujan........................................... 53
Response to written questions submitted to Professor Todd Zywicki
by:
Hon. Maria Cantwell.......................................... 54
Response to written questions submitted to Sally Greenberg by:
Hon. Ben Ray Lujan........................................... 55
PROTECTING CONSUMERS FROM JUNK FEES
----------
THURSDAY, JUNE 8, 2023
U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, and Data Security,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
room SR-253, Russell Senate Office Building, Hon. John
Hickenlooper, Chairman of the Subcommittee, presiding.
Present: Senators Cantwell, Hickenlooper [presiding],
Klobuchar, Markey, Lujan, Welch, Blackburn, Fischer, Sullivan,
and Young.
OPENING STATEMENT OF HON. JOHN HICKENLOOPER,
U.S. SENATOR FROM COLORADO
Senator Hickenlooper. I call this hearing to order.
Welcome. This is our first hearing this Congress of the
Subcommittee on Consumer Protection, Product Safety, and Data
Security. Delighted to be here doing this work and for the
opportunity to work closely with Ranking Member Blackburn. I
would like to wish her a happy birthday week.
It was a couple of days ago, but we celebrate, in our
family, the whole week as your birthday week. I look forward to
working with Senator Blackburn and make sure that this is a
bipartisan effort to make progress on issues that are within
the jurisdiction of this subcommittee, ranging from strong
privacy protections for all Americans, strengthening our data
security of connected devices that we depend on every day,
identifying safe guardrails for emerging uses of artificial
intelligence.
I think that will get a lot of attention. And obviously so
much more. With every step we take, we are always going to try
to keep hardworking Americans doing their--living their lives,
make sure that as consumers, they are first in our mind.
Today, we are going to discuss increasing price
transparency for consumers within the marketplace, broadly--all
the marketplaces. We all know that junk fees can be frustrating
for consumers when they shop for products and for services.
They raise costs and in many cases they create confusion.
But what does a junk fee look like? How does it feel?
Simply put, these are fees that are disclosed to a consumer
midway, through, or at the end of a transaction, or they are
fees that serve no tangible purpose for a consumer like, you
know, a processing fee, and that they are mandatory or
unavoidable.
The Council of Economic Advisors, the CEA, has found that
junk fees limit the ability of consumers to comparison shop
between service providers and reduce competition between
merchants. Companies need to give consumers the transparency
they deserve when they shop for goods or services. Price
transparency allows for consumers to see the total price for a
product or service from the get-go, so they don't feel
deceived.
Allows for the consumer to see additional service charges
that add to the overall price upfront, so they are not midway
or at the end of a transaction when they find out about it.
Behind me we have a common example of purchasing a ticket for
an event. On the first row, the ticket price displayed is $140
plus fees.
No way to see or understand what the fees are until you go
through the checkout process. Oh, I ripped the wrong paper.
Anyway, here we see almost their transparency of--or example of
how upfront and all-in transparency looks. All the fees are
listed below the actual ticket price, compared with the first
example.
Imagine trying to buy tickets for a family of six and the
total cost ends up being almost $200 more than advertised. Here
is an example--it is not really ripping--of total upfront
pricing where you will pay at checkout, whereas displayed
before you even select the ticket. This way consumers are
informed with the crystal clear price that they will pay for
the product or service at checkout and not a penny more.
Last month, we had the pleasure of discussing methods to
increase price transparency for consumers with the Director of
the National Economic Council, Dr. Lael Brainard. Today, we are
going to continue that conversation by hearing from our
witnesses panel, and I hope and believe this will continue that
effort. By working together, we can fairly promote the upfront,
all-in pricing across all sectors.
Already, bipartisan legislation has been introduced to
increase price transparency for consumers in certain sectors.
Surely more legislation is on the horizon. Senators are going
to have the chance to discuss those efforts today. As a former
small business owner, I experienced firsthand the many
obstacles one encounters in opening a new brewpub, a new
restaurant, or literally any small business.
Small businesses up and down Main Street live and breathe
unfair competition in order to keep the lights on and in order
to serve their customers, deliver what their customers desire.
Today, large companies use their market advantage to force
customers into paying fees that were not expected or simply
unavoidable.
Consumers' pockets and small businesses suffer as a result.
Businesses need to play by the same rules to create a level
playing field that gives everyone an equal chance to compete
fairly. I think consumers will always be the major
beneficiaries of such a system. As our economy continues to
recover from the pandemic, we need do--we need to ensure
American consumers have the information to make every dollar
count.
Let's be clear about what this hearing is not about. It is
not about setting price caps for products or services. It is
not about telling private companies how they should operate
their business.
I would like to operate, or I would like to operate--I
would like to welcome each of our witnesses who are joining us
today, Sally Greenberg, the CEO for the National Consumers
League, Todd Zywicki, Professor of Law, George Mason
University, Antonin Scalia Law School, and on Zoom, Vicki
Morwitz, Professor of Business, Columbia Business School.
I now recognize Ranking Member Blackburn for her opening
remarks.
STATEMENT OF HON. MARSHA BLACKBURN,
U.S. SENATOR FROM TENNESSEE
Senator Blackburn. Thank you, Mr. Chairman. And I am so
pleased that we are having our first hearing, and I really do
look forward to working with you on issues where we have so
much agreement, Kids Online Safety Act, data privacy, data
security, artificial intelligence, and preventing the sale of
dangerous and counterfeit products online.
As we had discussed previously, I was really a bit
surprised by the Administration and now this committee's focus
on so-called junk fees. When I am in Tennessee, the economy is
what is at the top of the list that things that people are
talking about. They aren't talking about junk fees.
What they are talking about is the price at the gas pump,
the grocery store, how high these electric bills are going, and
they are concerned about skyrocketing inflation on the basket
of goods that they purchase and use every single day. And they
are worried about the out-of-control spending.
The debt deal was very unpopular in Tennessee because it
doesn't rein in what this Government and this Administration is
spending. And American families, Tennessee families want
answers to those problems, and they really don't want to hear
bureaucrats in Washington or legislators discussing resort fees
and food delivery fees for DoorDash or Uber Eats.
So, this is another--the way I look at this issue, and the
way many Tennesseans look at it, is this is another way for the
FTC, the CFPB, DOT, and all these regulators to clamp down on
businesses and try to micromanage businesses. Now, are these
fees annoying? Absolutely, they are. Should companies be more
transparent in how they bring the fees forward? And absolutely,
they should do that.
And consumers themselves should be more willing to walk
away and use only businesses that are operating on the up and
up, that are going to disclose these fees. But we have to
remember this, these are not monopolies. These are hotels and
airlines and banks and online retailers, and competition
matters to these companies.
And we see that competition making an impact on the
marketplace every single day. So, thank you to our witnesses. I
am looking forward to a good, frank discussion today.
Appreciate your getting your testimony in, in a timely manner.
Thank you, Mr. Chairman.
Senator Hickenlooper. Great. Thank you, Senator Blackburn.
Now, we can look forward to--we will let each of our witnesses
do their introductory remarks.
Why don't we start with Vicky Morwitz, who is Professor of
Business at Columbia Business School. You are on.
STATEMENT OF VICKI G. MORWITZ, BRUCE GREENWALD
PROFESSOR OF BUSINESS AND PROFESSOR OF MARKETING, COLUMBIA
BUSINESS SCHOOL, COLUMBIA UNIVERSITY
Ms. Morwitz. Thank you very much. Good morning. My name is
Vicki Morwitz. I am the Bruce Greenwald, Professor of Business
and Professor of Marketing at Columbia Business School at
Columbia University.
Thank you for inviting me to testify on the issue of
protecting consumers from junk fees. I am a consumer
psychologist with expertise in how consumers process additional
fees and surcharges, a topic I have studied for over 25 years.
I have discussed this research in my classes, and I have
given research seminars on this topic at universities around
the world. In my testimony, I will discuss two pricing
practices that I have studied in depth that are central to the
discussions taking place today, partition pricing and drip
pricing.
The academic research on both partition and drip pricing
makes clear that consumers make better informed decisions when
firms use all-inclusive pricing. My co-authors and I define
partition pricing as a strategy where firms decide to divide a
product's price into two or more mandatory parts, a base price
for the main product, and one or more mandatory surcharges,
rather than charging a single, all-inclusive price.
For example, many hotels have a mandatory fee on top of the
daily room rate. These are sometimes called resort fees or
facility fees or destination fees and can range from $20 to
over $50 a night. And many rental car agencies assess several
mandatory fees on top of the daily rental rate, such as
concession recovery fees, customer facility fees, energy
recovery fees, and vehicle licensing fees.
In general, what research on partition pricing has shown is
that when firms separate out mandatory surcharges, consumers
tend to underestimate the total price they will have to pay,
and they are often more likely to complete the purchase.
While these effects happen, even when the surcharges are
fully disclosed, the detrimental effects are even larger when
the surcharges are hidden in the small print and when they are
made more difficult for consumers to process, such as when they
are framed as a percent of the base price versus as a flat
dollar amount.
My coauthors and I have also studied a related pricing
strategy called drip pricing. With drip pricing, firms
advertise only part of a product's price upfront and reveal
other charges later when shoppers go through the buying
process.
Drip fees can be mandatory or can be for optional items,
but for today's testimony, I will focus on the dripping of
mandatory surcharges. Drip pricing is commonly used in
industries like the cable TV and the ticketing industries. When
a consumer shops for a TV Internet bundle from a cable
television provider, they may first see an attractive base
price offer for the bundle, but later learn there are also
broadcast TV fees, set top box fees, regional sports fees, and
TV connection fees that raise the price considerably.
And a consumer shopping for a ticket for a live event like
a concert, a play, or a baseball game typically first sees the
price for different seats in the venue. After selecting a seat,
as the consumer clicks through more web pages, they may come to
learn there is also a mandatory booking fee, ticketing fee,
venue fee, and delivery fee, even when the tickets are
delivered electronically.
Eventually they see a total price that may be much higher
than the first price they saw, and they may be under time
pressure to complete the purchase, as there might be a
countdown clock that indicates they have to complete their
purchase in just a few minutes, or they may be told there is
only two seats left at that price.
But research has shown is that when surcharges are dripped,
consumers end up being more likely to buy a product that
appears cheaper upfront based only on the base price, but that
is more expensive in total given the drip fees. Consumers also
tend to buy more expensive products than they otherwise would--
with drip, such as a seat closer to the stage for a live event.
Notably, these effects happen even when consumers are
provided with a total price at the final stage of the
transaction before they complete their purchase. While in
theory, they can cancel the purchase when they see that the
total is more expensive than they first thought, they often
don't because they tend to overestimate the cost of restarting
search and underestimate the benefits of doing so.
Because of this, it is not enough to show the total price
to avoid the detrimental effects of drip pricing. Research has
also shown that these effects don't go away with purchase
experience. For example, repeat ticket buyers are still
affected by drip pricing, similar to first time buyers. That is
not because consumers are stupid or even careless that they are
affected by the separation and dripping of mandatory
surcharges.
In general, consumers try to make good decisions for
themselves and their families. But pricing practices like drip
and partition pricing take advantage of the fact that we
consumers have a lot going on in our lives. We are busy and can
be distracted.
And because of that, we may not notice or appropriately
consider all information important to that purchase decision,
especially when that information is hidden in the small print,
is presented in obscure language, or is dripped late in the
shopping process.
Academic research has shown that partitioned and drip
pricing leads consumers to spend more money than they intended
to or needed to make choices that don't reflect their true
desires or preferences. What the research on these pricing
practices also makes clear is that consumers benefit when all
inclusive, upfront pricing is used, rather than when fees are
dripped later in the shopping process or disclosed in multiple
parts.
As a scholar who has studied these pricing practices for
decades and who knows well how their use can be detrimental to
consumers and to honest businesses, I strongly advocate that
policy be promoted that addresses the partitioning and dripping
of surcharges like we commonly see in so many industries.
These policies will benefit consumers if they require that
upfront stated prices must be all inclusive. In other words,
that all mandatory fees must be included in the total price and
that the total price should be seen upfront.
This is what academic research suggests will be most
beneficial to consumers. Thank you for the opportunity to
appear today at this hearing. I am happy to answer any
questions that you might have.
[The prepared statement of Ms. Morwitz follows:]
Prepared Statement of Vicki G. Morwitz, Bruce Greenwald Professor of
Business and Professor of Marketing, Columbia Business School,
Columbia University
Good morning. My name is Vicki Morwitz. I'm the Bruce Greenwald
Professor of Business and Professor of Marketing at Columbia Business
School at Columbia University.
Thank you for inviting me to testify today on the issue of
``Protecting Consumers from Junk Fees.'' I am a consumer psychologist
with expertise in how consumers process additional fees and surcharges,
a topic I have studied for over 25 years. I have discussed this
research in my classes, and I have given research seminars on this
topic at universities around the world.
In my testimony today, I will discuss two pricing practices that I
have studied in depth that are central to the discussions taking place
in the Senate Commerce committee regarding junk fees: partitioned
pricing and drip pricing. The academic research on both partitioned and
drip pricing makes clear that consumers make better informed decisions
when firms use all-inclusive pricing.
My co-authors and I coined the phrase and defined partitioned
pricing as a strategy where firms decide to divide a product's price
into two or more mandatory parts, a base price for the main product and
one or more mandatory surcharges, rather than deciding to charge a
single, all-inclusive price.\1\ For example, many hotels these days
assess a mandatory fee on top of the daily room rate--these are
sometimes called resort fees or facility fees or destination fees and
range from $20 to over $50 a night on top of the daily room rate. And
many rental car agencies assess several mandatory fees on top of the
daily rental rate such as concession recovery fees, customer facility
fees, energy recovery fees, and vehicle licensing fees. And many
ticketing agencies assess a variety of mandatory fees on top of the
base ticket price--for example processing fees, booking fees, ticketing
fees, venue fees, and delivery fees, even with the tickets will be
delivered electronically.
---------------------------------------------------------------------------
\1\ Morwitz, Vicki G., Eric Greenleaf, and Eric Johnson (1998),
``Divide and Prosper: Consumers' Reactions to Partitioned Prices,''
Journal of Marketing Research, 35 (4), 453-463.
---------------------------------------------------------------------------
In general, what research on partitioned pricing has shown is that
when firms separate out mandatory surcharges versus assessing one all-
inclusive price, consumers tend to underestimate the total price they
will have to pay, and are often more likely to complete the
purchase.\2\ While these effects happen even when the surcharges are
fully disclosed, the detrimental effects are even larger when the
surcharges are hidden in the small print \3\ and when they are made
more difficult for consumers to process such as when they are framed as
a percent of the base price versus as a flat dollar amount \4\.
---------------------------------------------------------------------------
\2\ Greenleaf, Eric A., Eric J. Johnson, Vicki G. Morwitz, and
Edith Shalev (2016), ``The Price does not Include Additional Taxes,
Fees, and Surcharges: A Review of Research on Partitioned Pricing,''
Journal of Consumer Psychology, 26 (1), 105-124; Kim, Hyeong Min
(2006),''The Effect of Salience on Mental Accounting: How Segregation
Versus Integration Of Payment Influences Purchase Decisions,'' Journal
of Behavioral Decision Making, 19(4), 381-391; Lee, Yih Hwi and Cheng
Yuen Han (2002), ''Partitioned Pricing in Advertising: Effects on Brand
And Retailer Attitudes,'' Marketing Letters, 13(1), 27-40; Morwitz,
Vicki G., Eric Greenleaf, and Eric Johnson (1998), ``Divide and
Prosper: Consumers' Reactions to Partitioned Prices,'' Journal of
Marketing Research, 35 (4), 453-463.
\3\ Sheng, Shibin, Yeqing Bao, and Yue Pan (2007) ``Partitioning or
Bundling? Perceived Fairness of the Surcharge makes a Difference,''
Psychology & Marketing, 24 (12), 1025-1041; Xia, Lan, Kent B. Monroe,
and Jennifer L. Cox (2004), ``The Price is Unfair! A Conceptual
Framework of Price Fairness Perceptions,'' Journal of Marketing, 68(4),
1-15.
\4\ Kim, Hyeong Min (2006),''The Effect of Salience on Mental
Accounting: How Segregation Versus Integration Of Payment Influences
Purchase Decisions,'' Journal of Behavioral Decision Making, 19(4),
381-391; Morwitz, Vicki G., Eric Greenleaf, and Eric Johnson (1998),
``Divide and Prosper: Consumers' Reactions to Partitioned Prices,''
Journal of Marketing Research, 35 (4), 453-463; Xia, Lan, Kent B.
Monroe, and Jennifer L. Cox (2004), ``The Price is Unfair! A Conceptual
Framework of Price Fairness Perceptions,'' Journal of Marketing, 68(4),
1-15.
---------------------------------------------------------------------------
My co-authors and I have also studied a related pricing strategy
called drip pricing \5\. Drip pricing is a pricing technique in which
firms advertise only part of a product's price up front and reveal
other charges later as shoppers go through the buying process.\6\
Dripped fees can be mandatory or can be for optional items, but for
today's testimony, I will focus on the dripping of mandatory
surcharges.
---------------------------------------------------------------------------
\5\ Santana, Shelle, Steven Dallas, and Vicki G. Morwitz (2020),
``Consumers' Reactions to Drip Pricing,'' Marketing Science, 39 (1),
188-210.
\6\ https://www.ftc.gov/news-events/events/2012/05/economics-drip-
pricing
---------------------------------------------------------------------------
Drip pricing is commonly used in industries like the ticketing
industry. A consumer shopping for a ticket for a live event like a
concert, a play, or a baseball game, typically first sees the price for
different seats in the venue. After selecting a seat, as the consumer
clicks through more web pages, they may come to learn about all the
additional fees that I mentioned earlier. Eventually they see a total
price that may be 30 or even 50 percent higher than the first price
they saw--and when they see that total price, there may be under time
pressure to complete the purchase as they may be shown a countdown
clock that indicates they have to complete their purchase in just a few
minutes, or they may be told there are only two seats left at that
price. Other industries like the telecommunications industry, might
first show the monthly plan rate, but then drip other mandatory fees
such as universal connectivity charges, administrative service fees,
access recovery fees, franchise fees, and more.\7\ And when a consumer
shops for a TV/internet bundle from a cable television provider, they
may first see an attractive base price offer for the bundle, but later
learn there are also broadcast TV fees, set top box fees, regional
sports fees, and TV connection fees that raise the price
considerably.\8\
---------------------------------------------------------------------------
\7\ https://www.nojitter.com/monitoring-management-and-security/
managing-telecom-expenses-dont-forget-fees, accessed on June 5, 2023.
\8\ https://www.techhive.com/article/579177/cable-bill-
transparency-laws-havent-killed-sneaky-fees.html
---------------------------------------------------------------------------
What research has shown is that when surcharges are dripped,
consumers end up being more likely to buy a product that appears
cheaper up front based only on the base price, but that is more
expensive in total given the dripped mandatory fees. This happens
because drip pricing makes the search process more difficult for
consumers. Consumers also tend to buy more expensive products than they
otherwise would have, such as a seat closer to the stage for a live
event, when surcharges are dripped.\9\
---------------------------------------------------------------------------
\9\ Blake, Tom, Sarah Moshary, Kane Sweeney, and Steve Tadelis
(2021) ``Price Salience and Product Choice,'' Marketing Science, 40
(4), 619-636; Santana, Shelle, Steven Dallas, and Vicki G. Morwitz
(2020), ``Consumers' Reactions to Drip Pricing,'' Marketing Science, 39
(1), 188-210.
---------------------------------------------------------------------------
Notably, these effects happen even when consumers are provided with
a total price at the final stage of the transaction, before they
complete their purchase. While in theory, they can cancel the purchase
when they see that the total that is more expensive than they first
thought, they often do not, because they tend to overestimate the costs
of restarting search and underestimate the benefits of doing so, for
example because they assume that the other providers also assess these
same fees.\10\ Because of this, it is not enough to show the total
price to avoid the detrimental effects of drip pricing. Research has
also shown that these effects do not go away with purchase experience--
for example, repeat ticket buyers are still affected by drip pricing,
similar to first time buyers.\11\
---------------------------------------------------------------------------
\10\ Santana, Shelle, Steven Dallas, and Vicki G. Morwitz (2020),
``Consumers' Reactions to Drip Pricing,'' Marketing Science, 39 (1),
188-210.
\11\ Blake, Tom, Sarah Moshary, Kane Sweeney, and Steve Tadelis
(2021) ``Price Salience and Product Choice,'' Marketing Science, 40
(4), 619-636.
---------------------------------------------------------------------------
It is not because consumers are stupid or even careless that they
are affected by the separation and dripping of mandatory surcharges. In
general, consumers try their best to make good decisions for themselves
and their families. But pricing practices like drip and partitioned
pricing take advantage of the fact that we consumers have a lot going
on in our lives--we are busy and can be distracted, and because of that
we may not notice or appropriately consider all information important
to that purchase decision, especially when that information is hidden
in the small print, is presented in obscure language, or dripped late
in the shopping process, and when we are put under time pressure with
countdown clocks or receive scarcity cues such as that there are only a
few items left at that price.
When firms use drip and partitioned pricing, it leads consumers to
make decisions that differ from what they intended and that are against
their own interest. Academic research has shown that partitioned and
drip pricing leads consumers to spend more money than they intended to
or needed to, and to make choices that do not reflect their true
desires or preferences. These practices also put well-intentioned
competitors who use all-in pricing at a competitive disadvantage as it
makes their prices look more expensive than their competitors who use
these pricing techniques, even when their prices are actually cheaper
in total.\12\ What the research on these pricing practices also makes
clear is that consumers and well-intentioned firms benefit when all-
inclusive upfront pricing is used, rather than when fees are dripped
later in the shopping process or disclosed in multiple parts.
---------------------------------------------------------------------------
\12\ Santana, Shelle, Steven Dallas, and Vicki G. Morwitz (2020),
``Consumers' Reactions to Drip Pricing,'' Marketing Science, 39 (1),
188-210.
---------------------------------------------------------------------------
As a scholar who has studied these pricing strategies for decades
and who knows well how their use can be detrimental to consumers and to
honest organizations, I strongly advocate that policy be promoted that
addresses the partitioning and dripping of surcharges, like we commonly
see in the ticketing, the telecommunication, the cable, the hotel, and
the rental car industries, among others. These policies will benefit
consumers if they require that upfront stated prices must be all
inclusive--in other words that all mandatory fees must be included in
the total price and that the total price should be seen upfront. This
is what academic research suggests will be most beneficial to
consumers.
Thank you for the opportunity to appear today at this hearing. I am
happy to answer any questions that you may have.
Senator Hickenlooper. Thank you, Ms. Morwitz. I appreciate
you taking the time to be with us. Next, let's turn to Todd
Zywicki. He is a Professor of Law at George Mason University
Law School.
STATEMENT OF PROFESSOR TODD ZYWICKI,
GEORGE MASON UNIVERSITY FOUNDATION PROFESSOR
OF LAW, ANTONIN SCALIA LAW SCHOOL, RESEARCH FELLOW,
LAW & ECONOMICS CENTER
Mr. Zywicki. Mr. Chairman, Ranking Member Blackburn, it is
a pleasure to be here with you today. I have run into junk fees
myself. I know what the instinct is. I got tricked into one of
these on vacation in Florida a little while back, and so I
understand exactly what is going on here.
But I think the most important thing here is to keep in
mind the situations under which this can be a problem and
situations where it is not. And I want to just briefly make
three points, which is the first thing is to talk about the
situations in which this can occur and be a market failure.
Second, talk about the more important, more generalizable
situation in which multi-part pricing is efficient and prevents
cross consumer subsidies and inefficiencies in pricing. And
third, I want to talk about situations in which regulation
itself is the cause of a proliferation of fees, and can end up
harming consumers, is some examples that are going on.
So, let's talk first about when there can be a market
value, when this can happen. We just heard from Professor
Morwitz of these problems of drip pricing and the like, but
this primarily happens in particular context, which is where we
have non-repeat consumers who don't learn over time, and
situations where they don't really have an alternative to.
An obvious example is mandatory fees, like the mandatory
resort fees we heard about. That is what happened to me, which
is I booked online, I showed up at the hotel. At the last page,
at some point among the list of cost was a $30 resort fee. I
had to whip up my credit card when I got there and I thought I
had prepaid, right.
If there is a mandatory fee, it should be at least strongly
presumptively part of the overall price, not something that is
broken out. Ticket fees, I agree completely. Mr. Chairman,
those sorts of things where you have to click--where, even
though you know there is going to be a fee on the back end, you
have got to click through six, eight screens in order to find
out what the heck the fee is going to be. I don't see if it is
going to be mandatory.
I think presumptively it should be part of the overall
price. But on the other hand, we see situations where it is
also predatory. So, take this growing practice of credit card
surcharging which has been allowed. Merchants can give cash
discounts. Cash discounts, the option of getting cash discounts
is pro-consumer.
The option of a merchant imposing a credit card surcharge
at the end of a transaction is one of most anti-consumer
policies I have ever seen. And the reason is they impose it in
situations where you really don't have an alternative to using
a credit card, whether it is online, whether it is in a
vacation area. Basically, the same places like resort fees.
And so, we used to have credit card surcharging was
outlawed, cash discounting has always been allowed. And I think
that is really something that should be explored, and I think
it is very disappointing that a lot of consumer activist groups
actually are lobbying in favor and support this idea of credit
card surcharging, which is a really pernicious practice.
Those are the situations where this can happen. In general,
though, fees, multi-part pricing prevents cross consumer
subsidies and pays--requires consumers to pay for things they
get. Additional toppings on pizza, for example. I don't think
anybody has objection to that. Paying for first class and the
like. Paying late fees--at least traditionally, people
understood that paying late fees for people who pay late on
credit cards would be an appropriate way of pricing risk,
although apparently that is in question now.
It is often the case that we can have efficient
combinations of prices. So, in the airline market, for example,
everybody knows bags fly free on Southwest. Everybody knows
bags don't fly free on the legacy airlines. Everybody knows
there is going to be a fee for bags on the other airlines and
the like.
Maybe there is ways you can disclose it, but nobody is
fooled at this point. And so, that is obviously pricing for
certain services. So, I talk about it in my testimony. There
are aspects of that that are driven by the way taxes are
assessed and that sort of thing. But most of what we see in
markets is an alignment of prices with what--with the cost the
consumers impose.
Well, I think it is particularly problematic is the third
category, which is where we get on bundling as a result of
regulation. The Durbin amendment to Dodd-Frank is a good
example of this. By imposing price controls on interchange
fees, we took away free checking. We took away free, simple
free checking bank accounts for millions of Americans,
particularly low income Americans.
Now we get multi-part pricing with high monthly fees, an
elimination of annual fees, and other prices that are adjusted
as a result of that. The Credit Card Act did the same thing by
controlling the ability to price risk, risk got repriced. The
RESPA rule that I talk about in my testimony that forces on
bundling and the like and ends up driving up cost. And so, a
lot of the proposals on the table right now, such as the CFPB's
late fees rule, would be harmful to consumers by interfering
with this risk based pricing.
The proposal to extend the Durbin amendment to credit card
would be disastrous for consumers and take away free credit
cards from consumers. I see I am over my time. I look forward
to taking any questions you have. Thank you.
[The prepared statement of Mr. Zywicki follows:]
Prepared Statement of Professor Todd Zywicki, George Mason University
Foundation Professor of Law, Antonin Scalia Law School, Research
Fellow, Law & Economics Center
Chairman Hickenlooper, Ranking Member Blackburn, and Members of the
Committee:
I am Todd Zywicki and it is a pleasure to appear before you today
to testify on the topic of ``Protecting Consumers from Junk Fees.'' I
am George Mason University Foundation Professor at Antonin Scalia Law
School and Research Fellow of the Law & Economics Center. From 2020-
2021 I served as the Chair of the CFPB's Taskforce on Consumer
Financial Law and from 2003-2004 I served as the Director of the Office
of Policy Planning at the Federal Trade Commission. I am also co-author
of Consumer Credit and the American Economy (Oxford 2014) and have
written and spoken extensively on issues of consumer protection
generally and consumer financial protection specifically. I appear
voluntarily today in my personal capacity and do not speak on behalf or
represent any other party.
I share the frustration that many consumers hold today regarding
the proliferation of seemingly ubiquitous add-on fees that we
experience constantly, from surcharges for using our credit cards at a
merchant, to hotel ``resort fees,'' and others. And earlier this year I
experienced exactly this frustration when I checked into a hotel on
vacation and was assessed a mandatory $30 a day ``resort fee'' that was
only disclosed in fine print on the last screen of a multi-page
checkout process at an Internet hotel booking website. Buying a ticket
to concert has in fact become a tedious process of searching for a
concert or sports ticket and then having to spend 10 minutes clicking
through multiple pages before you can discover the real price and
decide whether to go to the show.
So I also say, ``Enough.''
But it is also important to stress that not all of these fees are
``junk'' fees. Many of these multi-part pricing schemes are
economically efficient, in that they better match consumers with the
product terms and attributes they value. Others are appropriate as
means to protect some consumers from being forced to subsidize others'
choices or the higher costs that some consumers impose relative to
others. For example, requiring upper-income jet-setters to pay foreign
currency transaction fees hardly seems unfair to those who don't travel
abroad and presumably nobody has an issue with requiring payment of
``add on'' fees for additional toppings on a pizza. Requiring every
vacation resort to be all-inclusive would force those who don't drink
alcohol to subsidize those who do. While some use of multi-part pricing
today is likely welfare-reducing, multi-part pricing has become more
frequent is because paying for the services you actually use over the
long run can be more fair and efficient for other consumers, even if
foreign travelers, partiers, and those who pay late on their credit
cards might disagree.
As Howard Beales and I wrote recently:
The term ``junk fees'' defies easy definition. But it is
imperative to distinguish `junk fees' that are designed to
extract rents and consumer surplus from consumers from
efficient behavior-based fees. Welfare-reducing ``junk'' fees
are most likely to emerge only under a relatively narrow set of
market conditions--particularly those markets with few repeat
customers where consumers are less likely to learn of the
hidden fees, where consumers are effectively locked-in and
unable to avoid paying the fee when it is imposed, or where
such fees may be atypical and thus consumers are not alert to
them.\1\
---------------------------------------------------------------------------
\1\ Howard Beales and Todd Zywicki, Junkyard Dogs: The Law and
Economics of ``Junk'' Fees, Competition Policy International (Apr. 28,
2023), available in https://www.competition
policyinternational.com/junkyard-dogs-the-law-and-economics-of-junk-
fees/.
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``Junk Fees'' are Theoretically Possible But Likely Arise in Only
Limited Contexts
One example of what might be classified as a ``junk fee'' is the
growing practice of merchants imposing credit card ``surcharge'' fees
on consumer retail transactions.\2\ Rarely, if ever, are consumers
informed up-front of the presence of a surcharge--I was recently on
business travel at an out-of-town conference and after lunch was
presented with the bill--which I happened to notice that a surcharge
would be applied if I chose to pay with a credit card. Notably,
businesses are guaranteed the right under Federal law to offer cash
discounts to consumers, but this one chose to impose a surcharge that I
did not discover until after the meal. Such situations--non-repeat
customers visiting a tourist area, not carrying a large amount of cash,
and eating a moderately expensive sit-down restaurant--present prime
opportunities for the potential for exploitative ``junk fees.'' \3\
Hotel ``resort fees,'' which are typically imposed by hotels in similar
contexts--namely, tourist areas with minimal repeat business--provide a
similar example.
---------------------------------------------------------------------------
\2\ See Todd J. Zywicki, Geoffrey A. Manne, and Kristian Stout,
Behavioral Economics Goes to Court: The Fundamental Flaws in the
Behavioral Law & Economics Arguments Against No-Surcharge Laws, 82
Missouri L. Rev. 769 (2017).
\3\ Ironically, the CFPB and self-identified consumer advocates not
only have never criticized abusive credit card surcharging practices by
merchants, they have actually supported the right of merchants to
impose such fees.
---------------------------------------------------------------------------
Fees such as credit card surcharges or hotel ``resort fees,'' in
which the various elements of the price are not revealed until later in
the transaction but which the consumer cannot reasonably avoid (such as
a mandatory surcharge when paying with a credit card), are often
referred to as ``drip pricing.'' Concert and sports tickets provide a
variation on the theme. While most consumers today are aware that
transaction and ticketing fees will be assessed on a ticket purchase,
typically it is difficult or impossible to discover the size of those
fees until one has invested a substantial degree of time picking seats
and clicking through multiple screens to finally discover the ``real''
price. Moreover, these fees typically are mandatory and effectively
unavoidable. A strong case can be made that fees of this sort should be
disclosed as part of the price of the ticket, much like airlines are
required to disclose all applicable taxes and fees as part of their
quoted up-front price.
Although mandatory ``resort fees'' illustrate the theoretical
potential for market failure, this example remains the exception to the
general rule that markets tend to deliver consumers the collection of
services and prices they desire. Only approximately 6-7 percent of U.S.
hotels charge such fees and those that do are mainly limited to resort
hotels in certain markets, such as Orlando or Las Vegas, just as the
theory predicts.\4\ Moreover, those hotels that do charge ``resort
fees'' often do claim to offer more amenities than those that do not
and of those hotels that charge resort fees, those with more amenities
appear to charge higher fees than those with more Spartan offerings.\5\
Thus, even in a case such as resort fees, although a case might be made
for requiring better pricing disclosure of these fees up-front to
facilitate consumer shopping, it is questionable whether they should be
entirely dismissed as nothing more than ``junk fees.''
---------------------------------------------------------------------------
\4\ See John O'Neill and Donna Quadri-Felitti, Resort Fees and
Service Fees in the U.S. Hotel Industry: Context and Concepts Related
to Partitioned Pricing, 2 ICHRIE Research Reports (2017). A more recent
survey estimates the figure at about 6 percent of hotels, predominantly
in tourist destinations. See Sally French and Sam Kemmis, How to Avoid
Hotel Resort Fees (and Which Brands are the Worst), NerdWallet.com
(Mar. 1, 2023), available in https://www.nerd
wallet.com/article/travel/hotel-resort-
fees#: :text=According%20to%20the%20American%20Hotel
,you%20can%20find%20some%20gems.
\5\ See French and Kemmis, supra.
---------------------------------------------------------------------------
In Most Instances Market Competition Delivers the Collection of Prices
and Services that Consumers Desire
In contrast to these rare contexts in which market failure is
possible, in most situations competitive markets tend to produce
pricing terms that better align the incidence of payment for certain
services with the cost of providing those services, such as charging
more for additional pizza toppings or for first-class airline seats.
Regulatory interference with prices in this context can lead to less
efficient pricing, higher overall costs for consumers, and unfair and
regressive subsidization and redistribution of costs among consumers.
For example, consider the CFPB's recent proposal to impose an
effective $8 price control on credit card late fees.\6\ Prior economic
research has demonstrated that size of late fees is correlated with
consumer risk and that when late fees are regulated, consumers overall
are forced to pay higher interest rates to compensate for
chargeoffs.\7\ A recent study has also demonstrated that when the size
of late fees is reduced, the frequency of late payment increases.\8\
Moreover, these findings are generalizable--limits on the pricing of
behavior-based and risk-based pricing fees have been demonstrated to
lead to offsetting adjustments in other costs, such as higher interest
rates and higher prices for other fees (such as cash advance fees and
penalty interest rates). In addition, limiting the ability to price
risk efficiently leads to a reduction in credit accessibility and the
size of credit lines, particularly for lower income and higher risk
borrowers.\9\ It is not clear why forcing those who pay their credit
card bills on time, especially lower-income Americans, to subsidize
those who pay late is considered to be a ``pro-consumer'' policy.
---------------------------------------------------------------------------
\6\ See Todd Zywicki, A Close Look at the Consumer Financial
Protection Bureau's Credit Card Late Fees Proposal, Consumer Finance
Monitor Podcast (Mar. 9, 2023), available in https://
www.ballardspahr.com/insights/blogs/2023/03/podcast-the-consumer-
financial-protection-bur
eaus-credit-card-late-fees-proposal-guest-todd-zywicki.
\7\ Nadia Massoud, Anthony Saunders, and Barry Scholnick, the Cost
of Being Late? The Case of Credit Card Penalty Fees, 7 J. of Fin.
Stability 49 (2011).
\8\ Daniel Grodzicki, et al., Consumer Demand for Credit Card
Services, 63(3) J. of Fin. Servs. Res. 273 (June 2023).
\9\ See Consumer Financial Protection Bureau, 1 Taskforce on
Consumer Financial Protection Law Report 596-604 (2021) (summarizing
studies); See Thomas A. Durkin, Gregory Elliehausen, & Todd J. Zywicki,
An Assessment of Behavioral Law and Economics Contentions and What We
Know Empirically About Credit Card Use by Consumers, 22 Sup. Ct. Econ.
Rev. 1 (2014) (same).
---------------------------------------------------------------------------
Inefficient regulation of bank overdraft protection services also
raise the danger of curtailing access to this service and forcing those
who do not overdraft to pay for those who do.\10\ To date, the CFPB has
been relatively restrained in its regulation of overdraft pricing and
access. And several banks have adopted changes to their overdraft
services. But economic analysis has shown that when access to overdraft
protection is curtailed by regulation or the permissible among of
overdraft fees is regulated, consumers are more likely to bounce checks
(and incur NSF fees) and have attempted payments declined. A study by
Dlugosz, Melzer, and Morgan found that when price controls on the
permissible size of overdraft fees were relaxed following preemption,
the minimum balance necessary to be eligible for interest checking
declined by 28 percent-40 percent (approximately $376-$538), and
checking account ownership by low-income households rose by 4
percentage points (which corresponds to a 10 percent increase in the
probability that a low-income household would have a bank account).\11\
Low-income households were also more likely to persist in account
ownership and less likely to have their accounts closed. By contrast,
they found that lifting these restrictions had no affect on bank
account ownership by higher-income consumers, implying that the price
controls adversely affected primarily lower-income households. It has
also been suggested the restrictions on access to overdraft protection
led to a reduction in access to free checking. Moreover, because
overdraft protection and payday loans are viewed as relatively close
substitute products by consumers, reducing access to overdraft
protection can be expected to lead to an increase in the use of payday
lending by consumers.
---------------------------------------------------------------------------
\10\ See Testimony of Todd Zywicki, ``The End of Overdraft Fees?
Examining the Movement to Eliminate the Fees Costing Consumers
Billions,'' Testimony Presented to The House of Representatives
Committee on Financial Services Subcommittee on Consumer Protection and
Financial Institutions (Mar. 31, 2022).
\11\ Jennifer L. Dlugosz, Brian T. Melzer, and Donald P. Morgan,
Who Pays the Price? Overdraft Fee Ceilings and the Unbanked, working
paper (Apr. 15, 2021).
---------------------------------------------------------------------------
Experience with the Durbin Amendment to Dodd-Frank, which imposed
price controls on debit card interchange fees has similarly had the
effect of leading to higher required monthly minimum balances to be
eligible for free checking, reduced access to free checking (especially
among lower-income consumers who were unable to meet the steep
increases in minimum balance requirements that followed in the wake of
the Durbin Amendment's imposition), higher monthly maintenance and
other fees for those no longer eligible for free checking, and
elimination of rewards on debit cards.\12\ According to one estimate,
some 1 million low-income consumers might have lost access to bank
accounts as a result of the cost increases that resulted from
imposition of the Durbin Amendment as part of Dodd-Frank. Even more
ironic in light of the topic of today's hearing, the imposition of the
Durbin Amendment actually produced a change in the majority of bank
accounts from a simple free-checking model to a new model with multiple
price points and greater pricing complexity. It would be difficult to
conjure a more telling example of the incoherence associated with some
prior efforts to regulate the pricing of consumer services.
---------------------------------------------------------------------------
\12\ See 1 CFPB Taskforce Report at 585-596 (summarizing studies).
---------------------------------------------------------------------------
In Some Instances, Multi-Part Pricing is the Result of Government
Regulations that Interfere with the Ability of Sellers to Offer
Simpler Prices Even if Desired by Consumers
In still other situations, the presence of multi-part pricing might
reflect government regulations that mandate or encourage the
fragmentation of costs into multiple parts even where doing so reduces
consumer welfare. For example, the endless list of fees you face when
you buy a home (such as appraisal, credit risk, flood insurance, and
other fees) results from interpretations of RESPA that effectively
prohibits lenders or other third-parties from offering a bundled suite
of those services for one guaranteed price.\13\ The Federal Trade
Commission's Motor Vehicle Dealers NPRM seems to follow the RESPA
approach of imposing a convoluted multi-stage price revelation
structure for consumer auto transactions and new limits on the sale of
add-on products that is likely to simply make the process of buying a
car more complicated and time-consuming with no demonstrable benefit to
consumers.\14\
---------------------------------------------------------------------------
\13\ See Howard Beales and Todd Zywicki, Junk Fees or Junk Policy?,
TheHill.com (Mar. 21, 2022), available in https://thehill.com/blogs/
congress-blog/politics/599085-junk-fees-or-junk-
policy/; see also Consumer Financial Protection Bureau, 2 Taskforce on
Consumer Financial Protection Law Report 16-17 (2021).
\14\ Federal Trade Commission, Notice of Proposed Rulemaking, Motor
Vehicle Dealers Trade Regulation Rule, 87 F.R. 42012, 16 CFR 463 (July
13, 2022).
---------------------------------------------------------------------------
Another example of regulation-induced multi-part pricing is the use
of a variety of fees by airlines, such as baggage fees, ticket change
fees, paying for food and snacks, etc. One explanation for the growing
propensity and size of these fees is that airline tickets are subject
to a hefty 7.5 percent excise tax on each ticket (in addition to other
ticketing and travel taxes and fees), whereas these partitioned fees
are not.\15\ Moreover, because bundling the cost of these services into
the overall cost of the trip will increase ticket costs, this will also
increase the amount of taxes consumers have to pay, which can be
avoided by purchasing untaxed services instead.\16\
---------------------------------------------------------------------------
\15\ See Davide Scotti and Martin Dresner, The Impact of Baggage
Fees on Passenger Demand on U.S. Air Routes, 41 Transport Pol'y 4
(2015).
\16\ Id.
---------------------------------------------------------------------------
As noted above, the elimination of simple free checking for bank
accounts and the spread of a variety of new fees, especially for lower-
income consumers, in the past decade is primarily the result of the
operation of the Durbin Amendment, Dodd-Frank generally, and
restrictions imposed by the Federal Reserve on the operation of bank
overdraft programs.
The Efficient Pricing Scheme for Consumers will Vary By Market and Will
Change Over Time And Regulators Should be Cautious About
Arresting this Evolution
But more to the point, is there anyone who ever travels on a plane
today who is unaware that most airlines today charge for baggage or
doesn't know that ``Bags Fly Free'' on Southwest Airlines? Or that
unlike other airlines, there are no change or other ``junk'' fees on
Southwest? According to one report, when Southwest chose not to follow
the other airlines and impose new fees, the company opted to forego
approximately $500 million per year in new revenues. But that was
offset by the fact that Southwest increased its market share by two
percentage points, increased passenger loads by 10 percent, and brought
in an additional $2 billion per year in incremental revenues.\17\ On
the other hand, Southwest fares are also slightly higher ceteris
paribus than those that charge for baggage and other fees.\18\
---------------------------------------------------------------------------
\17\ David Whelan, All Grown Up, Forbes (Jun. 29, 2011), available
at http://www.forbes.com/forbes/2011/0718/features-southwest-airlines-
gary-kelly-midway-grown-up.html; see also Manne and Zywicki, supra
note.
\18\ See Scotti and Dresner, supra note.
---------------------------------------------------------------------------
As the airline industry example illustrates, it is also quite
common to see a blend of different strategies in certain markets. For
example, some hotels offer all-inclusive experiences and others engage
in partitioned pricing. A family of six going to Disney for a week is
obviously going to prefer a different set of fees and services than a
business person flying to New York for an overnight business meeting.
High-end hotels often charge for services such as parking and breakfast
that many budget hotels include in their price. It is hard to argue
that the reason why the Ritz-Carlton or Four Seasons charges for
services that Motel 6 does not is because those who stay at luxury
hotels are less sophisticated or attentive than consumers who opt for
budget hotels that offer free parking and breakfast.
Moreover, the optimal pricing scheme for any product or service
tends to evolve over time. For example, cable television traditionally
offered a large package of dozens of channels of programming in a
limited number of ``package'' offerings and prices. Over time consumers
balked at being asked to pay for a large number of channels they did
not watch, notably expensive sports programming. So in response to
consumer demand, program offerings have become unbundled, as a variety
of specialty streaming channels have emerged that offers a smaller and
more targeted set of viewing options at a lower price than the
traditional multi-channel cable package. Others have continued to stick
with the cable companies' bundled channel offerings.
Other markets have evolved in the opposite direction. For example,
when cell phones were first introduced, pricing was very complex, with
separate prices for incoming calls, outgoing calls, text messages,
different data plans, and the like. ``Competitive pressure to attract
consumers who found such plans confusing, along with changes in
technology, led to the much simpler pricing plans that prevail today.''
\19\ General-purpose prepaid cards have followed a similar evolutionary
trajectory from more complex a la carte pricing and per transaction
fees to greater pricing simplicity and convenience in response to
consumer demand and without regulatory prompt.\20\
---------------------------------------------------------------------------
\19\ Beales and Zywicki, Junkyard Dogs, supra.
\20\ See Todd J. Zywicki, The Economics and Regulation of Network
Branded Prepaid Cards, 65 Fla. L. Rev. 1477 (2013).
---------------------------------------------------------------------------
More fundamental, determining whether regulatory intervention might
be justified requires making a threshold determination as to whether
there is a market failure in any given context and whether there is
some feasible government response that can improve the situation once
all intended and unintended consequences are considered. Attaching the
conclusory, pejorative term ``junk fees'' to these various different
fees not only obscures the analytical differences between these
different types of fees but if implemented recklessly will actually
harm consumers and the economy. In particular, where these fees do
serve the purpose of aligning consumer costs with pricing (such as use,
higher costs, or risk-based pricing), interfering with their efficient
operation will force those costs to be subsidized by other consumers.
Imposing price controls on credit card late fees or other terms and
conditions, for example, likely will lead to higher interest rates and
reduced credit access for most consumers (as well as an increase in the
number of late payments), but particularly lower-income and higher risk
consumers who pay their bills on time. It is hard to see how this
predictable result is beneficial to consumers overall.
Conclusion
As Beales and I concluded in our recent article:
The notion of junk fees is a fine piece of rhetoric, but
useless as an analytical tool. Both the structure of pricing,
and the level of prices, should be determined by competition in
the marketplace. As we observe, the result is detailed fee
structures for some products and services, and bundled pricing
for others. But marketplace competition over pricing structures
is far more likely to satisfy consumer preferences than an
inevitably overbroad set of regulatory requirements.\21\
---------------------------------------------------------------------------
\21\ Beales and Zywicki, Junkyard Dogs, supra.
As the examples given above indicate, consumer pricing is often a
complex, dynamic process that undoubtedly can sometimes suggest a need
for regulation. But even then, it is necessary to accurately identify
the nature of the market failure and the efficacy of the proposed
response.\22\
---------------------------------------------------------------------------
\22\ For example, Beales and I note that the FTC's example of fees
for automotive add-ons for arguably worthless products such as
nitrogen-filled tires provides an example. But in that example the
problem is in the claim that filling one's tires with nitrogen does
something useful for consumers rather than the fact that the additional
fee is charged separately rather than it being included in a higher up-
front cost for all consumers. See Beales and Zywicki, Junkyard Dogs,
supra.
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Thank you for your time and the opportunity to appear before you
today and I am happy to take any questions you may have.
Senator Hickenlooper. Great. Thank you, Mr. Zywicki. Now we
go to Sally Greenberg, is with us, as the CEO of National
Consumers League.
STATEMENT OF SALLY GREENBERG, CHIEF EXECUTIVE OFFICER, NATIONAL
CONSUMERS LEAGUE
Ms. Greenberg. Good morning, Chairman Hickenlooper, and
Ranking Member Blackburn, and members of the Subcommittee. My
name is Sally Greenberg, and I am the CEO of the National
Consumers League.
We were founded in 1899. We are America's pioneering
consumer and worker advocacy organization, and my organization
has worked for many years to try to raise awareness about the
impact of hidden fees and junk fees and promote transparency in
the marketplace. American companies are, in a word, addicted to
junk fees.
Junk fees come in many forms, encompassing a wide range of
unfair or deceptive charges. They are, by definition, often
unnecessary, unavoidable, or surprising charges that inflate
costs, while adding little or no value to a product or service.
They include fees that a reasonable consumer assumes are
included in the overall advertised price. Mandatory hotel
resort fees that Professor Zywicki just mentioned, are one such
fee that comes to mind. Americans, be they Republican or
Democrat, hate junk fees.
A 2019 survey by Consumer Reports found that at least 85
percent of Americans have encountered an unexpected or hidden
fee for a service they used in the past 2 years. And a recent
Morning Council poll found that 80 percent of Democrats, 71
percent of Independents, and 73 percent of Republicans support
Congressional action to rein in abuse of junk fees in
industries like live ticketing and cellphone, cable TV, and
Internet services.
So, if consumers hate junk fees so much, why do companies,
large and small, increasingly impose them? The answer is
unsurprisingly, because they are a substantial profit center.
The marketplace is inundated with junk fees, from hotels to car
rentals, to utilities to apartments, to investments to auto and
home lending. The list of industries that impose junk fees is
virtually endless.
The Wall Street Journal recently found one hotel in Las
Vegas that even charged a $3.50 cent fee for so-called craft
ice. That said, a few industries stand out as serial abusers.
Let's start with banks. Late payment fees charged by banks and
credit cards cost American families an estimated $12 billion
annually.
These fees, which can be as much as $41 for each late fee
payment, far exceed the cost to the issuer for processing and
do little to deter future delinquent payments. Airlines are
also poster children for junk fees.
Globally, revenue from junk fees, ancillary fees in airline
speak, brought in $102.8 billion in 2022. To put this in
perspective, junk fees last year made up 15 percent of global
airline revenues, compared to 6 percent only 10 years ago. And
anyone who buys tickets to a concert or sporting event is well
acquainted with the myriad fees that are added at the end of
the ticket buying process.
We had the example that you showed Senator Hickenlooper.
Primary and secondary market ticketing companies charge service
fees, order processing fees, delivery fees, and other charges
that increase ticket prices on average 27 percent for the
primary market and 31 percent for the secondary market.
Junk fees cause significant economic harm, and in
particular they cause harm to those of modest means. Renters,
for example, tend to have lower incomes than those who own
their homes. These consumers are also some of the most preyed
upon by abusive junk fees. A 2022 survey conducted by consumer
and housing advocates found that 89 percent of landlords impose
rental application fees.
Nearly as many renters paid excessive late fees. And they
also get hit with utility, administrative, convenience,
insurance, and notice fees. Competition has not and will not
make junk fees go away. This is because junk fees themselves
are anti-competitive. They make comparing prices more
difficult, distorting well-functioning marketplaces.
Honest entrepreneurs who invest in their businesses
innovate and strive to create better value for their customers,
lose business. Action to address the consumer and competitive
harm created by junk fees is urgently needed.
First, we would urge you to support S. 916 it is the Junk
Fee Prevention Act, which would require some of the worst
abusers of junk fees to display the full price of services
upfront, and it would bar excessive fees and ensure
transparency. Second, we ask that Congress restore the FTC's
ability to obtain strong financial penalties from wrongdoers.
The Supreme Court in 2021 overturned the AMG Capital
Management v. FTC, wiping out a critical enforcement tool for
the Commission S. 4145, which is the Consumer Protection
Remedies Act, would restore that ability to impose monetary
relief to the Commission.
And finally, Congress must not allow businesses to trap
consumers with unfair and deceptive fees to escape
accountability through fine print in their contracts. To that
end, we are proud to support S. 1376, the Forced Arbitration
Injustice Repeal Act, which would prohibit pre-dispute
arbitration agreements from being enforceable if they require
arbitration in employment, consumer antitrust, or civil rights
disputes.
Chairman Hickenlooper and Ranking Member Blackburn, Senator
Cantwell, Senator Lujan. Senator, Senator Welch, thank you so
much for inviting the National Consumers League and the
consumer perspective into this discussion. We appreciate your
holding the hearing, and we look forward to answering your
questions.
[The prepared statement of Ms. Greenberg follows:]
Prepared Statement of Sally Greenberg, Chief Executive Officer,
National Consumers League
Executive Summary
American companies are addicted to junk fees. These unfair and
deceptive charges add little or no value for consumers who reasonably
assume that such costs will already be included within the advertised
price of a good or service. Junk fees cause significant economic harm,
in particular, to historically marginalized and economically vulnerable
populations. Additionally, the proliferation of junk fees harms honest
businesses and precludes the ability of market competition to correct
anticompetitive behavior.
At least 85 percent of Americans have encountered an unexpected or
hidden fee in the past two years. Two-thirds of consumers say they were
paying more in surprise charges than they did in the previous five
years ago. Unsurprisingly, nearly all the respondents--96 percent--were
angry and frustrated about these surprise charges.
To address the harms of junk fees on the American economy, the
National Consumers League urges Congress to act. Specifically, Congress
should pass the Junk Fee Prevention Act, restore the Federal Trade
Commission's ability to seek monetary relief under its Section 13(b)
authority, and protect consumers' ability to hold abusive companies
accountable by passing the Forced Arbitration Injustice Repeal Act
(FAIR Act).
Introduction
The National Consumers League appreciates the opportunity to
provide the subcommittee with our views on how junk fees harm consumers
and competition and how the Senate can take action to rein in this
abusive and widespread practice.
Founded in 1899, the National Consumers League (``NCL'') is
America's pioneering consumer and worker advocacy organization. Our
non-profit mission is to advocate on behalf of consumers and workers in
the United States and abroad.\1\ NCL has long partnered with consumers,
industry, and policymakers to raise awareness about the impact of
hidden fees and promote policies that allow consumers to know the total
price of products and services at the beginning of a buying decision.
For example, NCL recently worked with pro-consumer legislators in New
York State to enact first-in-the-nation legislation to ban hidden fees
and require all-in pricing of tickets for concerts, sports events, and
theater performances.\2\
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\1\ For more information, visit www.nclnet.org.
\2\ Eggertsen, Chris. ``Hidden Concert Ticket Fees Officially
Banned in New York,'' Billboard. (June 30, 2022) Online: https://
www.billboard.com/pro/concert-tickets-hidden-fees-banned-new-york/
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I. Junk Fees are a Growing Threat to Consumers' Pocketbooks
American companies are addicted to junk fees, and it is no wonder.
Just like mosquitoes that plague our summer barbecues, junk fees are
often small and seemingly harmless charges, but they can and do
irritate and harm consumers. Mosquitoes are known for their ability to
extract blood and cause discomfort, but they can also be lethal.
Similarly, junk fees may appear as minor expenses, but they can
accumulate and have a devastating and negative effect on consumers'
financial well-being.
Junk fees are often difficult to detect and swat away due to their
small size and stealthy nature. They can be hidden within complex
pricing structures, buried in the fine print of contracts, and are
often presented as mandatory charges. Consumers may not notice them
until they receive their bills or experience unexpected deductions from
their accounts.
The term ``junk fee'' as defined by the Federal Trade Commission
(``FTC'') encompasses a wide range of unfair or deceptive fees that add
little or no value to the consumers. They include fees that a
reasonable consumer would assume to be included in the overall
advertised price for a good or service, such as mandatory hotel resort
fees. The term also includes ``hidden fees,'' which are fees that are
only disclosed at a later stage in a consumer's purchasing process, if
at all.\3\ Service fees added on to concert tickets as the consumer
gets close to buying the ticket are an example of hidden fees.
---------------------------------------------------------------------------
\3\ Federal Trade Commission. ``Unfair or Deceptive Fees Trade
Regulation Rule Commission Matter No. R207011.'' (November 8, 2022)
Online: https://www.regulations.gov/document/FTC-2022-0069-0001
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Americans hate junk fees. A 2019 report by Consumer Reports found
that at least 85 percent of Americans have encountered an unexpected or
hidden fee for a service they had used in the past two year. Two-thirds
of respondents said they were paying more in surprise charges than they
did in the previous five years ago. Unsurprisingly, nearly all the
respondents--96 percent--were angry and frustrated about these surprise
charges.\4\
---------------------------------------------------------------------------
\4\ Wang, Penelope. ``Protect Yourself From Hidden Fees.'' Consumer
Reports. (May 29, 2019) Online: https://www.consumerreports.org/money/
fees-billing/protect-yourself-from-hidden-fees-a
1096754265/
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So, if consumers hate junk fees so much, why do companies large and
small increasingly use them? The answer, unsurprisingly, is because
they are a substantial profit center for the companies that charge
them.
Banks are serial abusers of junk fees. Late payment fees on credit
cards cost American families an estimated $12 billion annually. These
fees, which can be as much as $41 for each late payment, far exceed the
cost to the card issuer for processing and may do little to deter
future delinquent payments. The Consumer Financial Protection Bureau
(``CFPB'') estimates that the income generated by the largest credit
card issuers from late fees is approximately five times greater than
the collection costs that the companies incur for past due payment
violations.\5\
---------------------------------------------------------------------------
\5\ Consumer Financial Protection Bureau. ``CFPB Proposes Rule to
Rein in Excessive Credit Card Late Fees.'' Press Release. (February 1,
2023) Online: https://www.consumerfinance.gov/
about-us/newsroom/cfpb-proposes-rule-to-rein-in-excessive-credit-card-
late-fees/
---------------------------------------------------------------------------
Airlines are the poster children for junk fee abuse. Just eight
U.S. air carriers (Alaska, Allegiant, American, Delta, Frontier,
JetBlue, Spirit, and United) generated an estimated $4.2 billion in
seat reservation fees on the domestic networks in 2022.\6\ In 2022,
baggage fees netted airlines a record $6.8 billion in revenue, double
the $3.4 billion the airlines collected just 10 years ago.\7\ And while
many airlines did away with change fees during the pandemic, they
continued to net a $1 billion annually for the industry last year.\8\
---------------------------------------------------------------------------
\6\ IdeaWorksCompany. ``Assigned Seating Fees Are Big Business with
Estimated Revenue of $4.2 Billion for 8 U.S. Airlines.'' Press Release.
(May 23, 2023) Online: https://ideaworks
company.com/wp-content/uploads/2023/05/Press-Release-175-Assigned-
Seating-Revenue.pdf
\7\ Bureau of Transportation Statistics, Schedule P-1.2. Online:
https://www.bts.gov/baggage-fees
\8\ Bureau of Transportation Statistics. ``2022 Annual and 4th
Quarter U.S. Airline Financial Data.'' (May 1, 2023) Online: https://
www.bts.gov/newsroom/2022-annual-and-4th-quarter-us
-airline-financial-data
---------------------------------------------------------------------------
Globally, revenue from junk fees (``ancillary fees'' in airline-
speak) brought in $102.8 billion in 2022. To put this in perspective,
junk fees last year made up 15.0 percent of global airline revenues in
2022, compared to 6.0 percent ten years ago.\9\ It is clear the
airlines' addiction to junk fees is getting worse, not better, from
consumers' point of view.
---------------------------------------------------------------------------
\9\ IdeaWorksCompany. ``Airline Ancillary Revenue Nears Pre-
Pandemic Level with a 56 percent Increase to $102.8 Billion for 2022.''
Press release. (November 15, 2022) Online: https://
ideaworkscompany.com/wp-content/uploads/2022/11/Press-Release-169-
Global-Estimate-2022
.pdf
---------------------------------------------------------------------------
And these are just some of the more egregious cases. Junk fees have
infiltrated nearly every facet of the economy. From hotels to car
rentals, to utilities, to event tickets, to investments, to auto and
home lending, the list of industries that have embraced junk fees is
virtually endless. One hotel in Las Vegas is even charging a $3.50
``craft ice'' fee! \10\ These fees are a flimsy excuse to extract more
money out of consumers. This is not an issue the market can correct for
itself. Unless Congress and Federal consumer protection agencies rein
in these abusive fees, consumers will continue to be fleeced by
predatory junk fees. The reason is simple: There is just too much money
to be made off them.
---------------------------------------------------------------------------
\10\ Gilbertson, Dawn. ``Prepare to Be Annoyed by These Wild Travel
Fees,'' Wall Street Journal. (May 31, 2023) Online: https://
www.wsj.com/articles/travel-fees-airlines-hotels-rental-cars-e941
faaa
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II. Historically Marginalized and Vulnerable Populations are
Particularly Susceptible to Harms from Junk Fees
Hidden fees and surcharges have contributed to economic harm born
by the American middle class and the alarming rise in income
inequality.\11\ Credit card late fees disproportionately burden
consumers in low-income and majority-Black neighborhoods. Cardholders
in census tracts where a majority identified themselves as Black in
2010 paid more than $25 in total late fees for each account they held
with major issuers in 2019.\12\ Research by the Financial Health
Network found that overdraft fees are incurred by low-to moderate-
income households at nearly twice the rate of high-income households.
The same survey also found that Black and Latinx household were charged
overdraft fees at rates of 1.9 and 1.4 times, respectively, of white
households.\13\
---------------------------------------------------------------------------
\11\ Fergus, Devin. Land of the Fee: Hidden Costs and the Decline
of the American Middle Class. Oxford University Press, 2018.
\12\ Consumer Financial Protection Bureau. Credit card late fees.
(March 2022) Pg. 10. Online: https://files.consumerfinance.gov/f/
documents/cfpb_credit-card-late-fees_report_2022-03.pdf
\13\ Financial Health Network. ``Amid Resurgence of Interest in
Overdraft, New Data Reveal How Inequitable It Can Be.'' (September 3,
2021) Online: https://finhealthnetwork.org/amid-resurgence-of-interest-
in-overdraft-new-data-reveal-how-inequitable-it-can-be/
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Auto-lending is another area where junk fees disproportionately
harm communities of color. Car dealers push pricey add-on products such
as service contracts, guaranteed asset protection (GAP) insurance, and
window etching to increase their profit margins. Latino consumers are
charged higher mark-ups for these add-ons than non-Latino
consumers.\14\
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\14\ Comments of the National Consumer Law Center (on behalf of its
low-income clients) et al to the Consumer Financial Protection Bureau.
(May 2, 2022) Online: https://www.nclc.org/wp-content/uploads/2022/09/
NCLC-comments-on-CFPB-Junk-Fees-RFI-87-FR-5801-pubd-2-2-22-filed-5-2-
22.pdf
---------------------------------------------------------------------------
Renter-occupied households historically have lower household
incomes than owner-occupied households and may be more affected by
changes in household income and rental prices.\15\ Unfortunately, these
consumers are also some of the most preyed upon by abusive junk fees. A
2022 survey conducted by the National Consumer Law Center and the
National Housing Law Project found that (89 percent) of respondents
reported that landlords impose rental application fees. Nearly as many
(87 percent) stated that landlords charge excessive late fees. Well
over half of respondents observed utility-related fees (73 percent),
processing or administrative fees (68 percent), convenience fees (60
percent), insurance fees (59 percent), and notice fees (56
percent).\16\
---------------------------------------------------------------------------
\15\ Mateyka, Peter and Yoo, Jayne. ``Share of Income Needed to Pay
Rent Increased the Most for Low-Income Households From 2019 to 2021.''
U.S. Census Bureau. (March 2, 2023). Online: https://www.census.gov/
library/stories/2023/03/low-income-renters-spent-larger-share-of-
income-on-rent.html
\16\ Comments of the National Consumers Law Center (on behalf of
its low-income clients) and National Housing Law Project. (February 8,
2023) Online: https://www.nclc.org/wp-content/uploads/2023/02/Final-
NCLC-et-al.-Group-Comments-re-Rental-Housing-Junk-Fees-with-Addenda.pdf
---------------------------------------------------------------------------
Junk fees can also disproportionately harm consumers with
disabilities. The Department of Justice brought an action against
rideshare app Uber related to wait-time fees imposed on riders. Uber's
policy of imposing a wait-time fee if the driver waited for longer than
two minutes for the passenger to get to the vehicle had a
disproportionate impact on consumers with disabilities. Uber agreed to
credit the accounts of the eligible riders for double the amount of
wait-time fees they were charged, which could total potentially
hundreds of thousands or millions of dollars in compensation.\17\
---------------------------------------------------------------------------
\17\ Complaint, United States of America v. Uber Technologies Inc.
(N.D. Cal.) Nov. 10, 2021, available at https://www.justice.gov/crt/
case-document/file/1468361/download
---------------------------------------------------------------------------
Junk fees weigh heavily on the pocketbooks of the most vulnerable
members of our society. For example, incarcerated individuals and their
families are charged, on average, 20 percent of the principal in fees
for money transfer services, with some states charging fees of as much
as 37 percent. Compare this to services like Venmo, CashApp, PayPal,
and Zelle, which often provide free automated clearing house (``ACH'')
transfers from bank accounts and transfers from a credit or debit card
either for free or for a typical fee of 3 percent or less.\18\
---------------------------------------------------------------------------
\18\ National Consumer Law Center et al., ``Group Comments to FTC
Regarding Unfair or Deceptive Fees.'' (February 8, 2023) Online:
https://www.nclc.org/wp-content/uploads/2023/02/Unfair-or-Deceptive-
Fees-ANPR-R207011_NCLC-et-al.pdf
---------------------------------------------------------------------------
Phone calls from correctional facilities are another area in which
companies take advantage of inmates and their families, with exorbitant
fees generating $1.4 billion a year.\19\ Thankfully, Congress and
President Biden acted earlier this year to rein in this
exploitation.\20\
---------------------------------------------------------------------------
\19\ Insider. ``The high cost of phone calls in prisons generates
$1.4 billion a year, disproportionately driving women and people of
color into debt.'' (June 30, 2021) Online: https://
www.businessinsider.com/high-cost-prison-communications-driving-debt-
racial-wealth-gap-2021-6
\20\ Kim, Juliana. ``Biden signs a bill to fight expensive prison
phone call costs.'' National Public Radio. (January 6, 2023) Online:
https://www.npr.org/2023/01/01/1146370950/prison-phone-call-cost-
martha-wright-biden
---------------------------------------------------------------------------
III. Junk Fees Harm Competition and Honest Businesses
The proliferation of predatory junk fees in the economy will not be
solved by competition because junk fees themselves make competition
less effective. By preventing consumers from making direct price
comparison easily, junk fees distort well-functioning marketplaces.
Honest entrepreneurs who invest in their businesses, innovate, and
strive to create better value for their customers thus become another
casualty of the race to embrace junk fees.
To put this in perspective, many hotels currently charge mandatory
hotel resort fees that are not disclosed in the room rate. In these
situations, a hotel room that advertises a $100 per night room rate,
but tacks on a mandatory $25 ``resort fee'' at the end of the
transaction will appear cheaper to the consumer than a similar room
priced at $110 per night. A rational consumer would likely choose the
``cheaper'' $100 per night room, taking the sale from the hotel that is
actually cheaper.
While the Federal Trade Commission has repeatedly warned hotels
that such fees are likely unfair,\21\ they continue to proliferate. For
example, the Embassy Suites Georgetown, the Grand Hyatt Washington, and
the JW Marriott Washington respectively charge mandatory ``destination
fees'' of $28.74,\22\ $23.19,\23\ and $25 per night.\24\ Many state
attorneys general have sued and reached settlements with hotel chains
over their junk fee usage.\25\
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\21\ Federal Trade Commission. Economic Issues: Economic Analysis
of Hotel Resort Fees. (January 2017) Online: https://www.ftc.gov/
system/files/documents/reports/ economic-analysis-hotel-resort-fees/
p115503_hotel_resort_fees_economic_issues_paper.pdf
\22\ Online: https://www.resortfeechecker.com/18140-
resort_fee_embassy_suites_by_hilton_wash
ington_dc_georgetown.html
\23\ Online: https://www.resortfeechecker.com/26459-
resort_fee_grand_hyatt_washington.html
\24\ Online: https://www.resortfeechecker.com/1471-
resort_fee_jw_marriott_washington_dc.html
\25\ Office of the Attorney General for the District of Columbia.
''AG Racine Sues Marriott for Charging Deceptive Resort Fees and
Misleading Tens of Thousands of District Consumers.'' (July 9, 2019)
Online: https://oag.dc.gov/release/ag-racine-sues-marriott-charging-
deceptive-resort; Pennsylvania Attorney General Michelle A. Henry. ''AG
Shapiro's Action Requires Marriott to Disclose 'Resort Fees.' ''
(November 17, 2021) Online: https://www.attorneygeneral.gov/taking-
action/ag-shapiros-action-requires-marriott-to-disclose-resort-fees/
---------------------------------------------------------------------------
The harm to competition from junk fees happens countless times
every day as consumers' patronage is unfairly directed away from
businesses with the best price, quality, convenience, and honest
practices to the businesses with pricing that is higher, less
transparent, and more deceptive. The benefits to buyers, sellers,
consumers, and workers only flow if all the participants are playing by
a fair set of rules. The proliferation of junk fees, by contrast,
rewards businesses that engage in ``exploitative innovation;'' finding
clever ways to add unlisted fees, ``optional'' services, and other add-
on costs to the final price of what they are selling. Such practices
put the onus on consumers to dispute the unnecessary charges with the
seller, if they even know how to do so.
IV. Action to Rein in Junk Fees is Overdue
Junk fees are an unfair and deceptive practice that harms millions
of consumers and businesses. They have been allowed to inundate the
marketplace because of lax regulations that too often allow the short-
term interests of Wall Street investors to trump the imperatives for a
fair marketplace.
The Biden Administration and agencies like the CFPB, Department of
Transportation (``DOT'') and FTC have begun to take steps to address
the scourge of junk fees.\26\ Congress can and should do more to
support these initiatives.
---------------------------------------------------------------------------
\26\ White House. ``Guide for States: Cracking Down on Junk Fees to
Lower Costs for Consumers.'' (March 2023) Online: https://
www.whitehouse.gov/wp-content/uploads/2023/03/WH-Junk-Fees-Guide-for-
States.pdf
---------------------------------------------------------------------------
First, we urge you to support common-sense legislation to rein in
the worst offenders when it comes to junk fees. NCL, along with our
colleagues at Consumer Federation of America and Consumer Reports have
endorsed the Junk Fee Prevention Act, introduced earlier this year by
Senators Blumenthal and Whitehouse and Congressman Gallego in the
House.\27\
---------------------------------------------------------------------------
\27\ Office of Senator Sheldon Whitehouse.'' Blumenthal &
Whitehouse Introduce Junk Fee Prevention Act to End Unfair Surprise
Costs for Consumers.'' Press release. (March 22, 2023)
Online: https://www.whitehouse.senate.gov/news/release/blumenthal-and-
whitehouse-introduce-
junk-fee-prevention-act-to-end-unfair-surprise-costs-for-consumers
---------------------------------------------------------------------------
The bill would require the live event ticketing industry, airlines,
and cell phone providers to display the full price of services upfront,
bar excessive fees and ensure transparency. It would empower the FTC,
Federal Communication Commission, and DOT to issue new rules and
enforce violations.
Congress should also follow the lead of states that have acted to
address the proliferation of junk fees. New York recently enacted pro-
consumer legislation to require all-in pricing of live event
tickets.\28\ In California, the Consumer Legal Remedies Act, reported
out of committee in April, and would make it an unlawful business
practice to advertise, display, or offer a price for a good or service
that does not include all mandatory fees or charges other than taxes or
fees imposed by a government.\29\
---------------------------------------------------------------------------
\28\ Eggertsen, Chris. ``Hidden Concert Ticket Fees Officially
Banned in New York,'' Billboard. (June 30, 2022) Online: https://
www.billboard.com/pro/concert-tickets-hidden-fees-banned-new-york/
\29\ Office of California Senator Chris Dodd. ``Committee Approves
Sen. Dodd's `Junk Fees' Bill.'' Press release. (April 26, 2023) Online:
https://sd03.senate.ca.gov/news/20230426-committee-approves-sen-
dodd%E2%80%99s-%E2%80%98junk-fees%E2%80%99-bill
---------------------------------------------------------------------------
Second, Congress should restore the FTC's ability to obtain real
penalties from wrongdoers. The FTC has historically prioritized
consumer redress, mainly through its Section 13(b) authority. The
Supreme Court's decision in AMG Capital Management v. FTC wiped out
this critical enforcement tool, leaving dozens of pending cases with
billions of dollars in potential consumer refunds at stake.\30\
Ironically, the AMG case revolved around junk fees--in the form of
inflated finance fees--charged to borrowers by a payday lender.
Restoring the Commission`s 13(b) authority would allow it to continue
its successful record of securing billions of dollars in consumer
relief. A substantial number of FTC cases have resulted in rewards for
consumers who were the victims of deceptive and fraudulent junk
fees.\31\ The Consumer Protection Remedies Act, introduced last session
by Senators Cantwell, Klobuchar, Lujan, and Warnock, would fully
restore the FTC's ability to obtain monetary and other relief for
consumers under Section 13(b) of the FTC Act by going directly to
Federal court.\32\ The bill passed out of committee last session. We
would urge your support for this critical legislation.
---------------------------------------------------------------------------
\30\ See, ``Post-AMG Scorecard (Updated): FTC Claims for Monetary
Relief in 13(b) Actions Dwindle,'' JD Supra (Aug. 9, 2021) available at
https://www.jdsupra.com/legalnews/post-amg-
scorecard-updated-ftc-claims-6956073/
\31\ FTC Refunds to Consumers, last updated June 2, 2023, https://
public.tableau.com/app/profile/federal.trade.commission/viz/
Refunds_15797958402020/RefundsbyCase
\32\ U.S. Senate Committee on Commerce, Science, & Transportation.
``Cantwell-Led Bill Would Restore FTC Authority to Return Billions to
Consumers Ripped off by Scams, Fraud, Deception.'' Press release. (May
5, 2022) Online: https://www.commerce.senate.gov/2022/5/cantwell-led-
bill-would-restore-ftc-authority-to-return-billions-to-consumers-
ripped-off-by-scams-fraud-deception
---------------------------------------------------------------------------
Finally, Congress must not allow businesses that trap consumers
with unfair and deceptive junk fees to escape accountability in the
courts through fine print contracts. To that end, NCL is proud to
support Senator Blumenthal's Forced Arbitration Injustice Repeal Act
(FAIR Act). The bill, which currently has 39 co-sponsors in the Senate
and 91 for the House companion, would prohibit a pre-dispute
arbitration agreement from being valid or enforceable if it requires
arbitration of an employment, consumer, antitrust, or civil rights
dispute.\33\
---------------------------------------------------------------------------
\33\ S.1376--Forced Arbitration Injustice Repeal Act. Online:
https://www.congress.gov/bill/118th-congress/senate-bill/
1376?s=1&r=1&q=%7B%22search%22%3A%5B%22Forced+Arbitra-
tion+Injustice+Repeal+Act%22%5D%7D
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V. Conclusion
On behalf of the National Consumers League and consumers
nationwide, I appreciate your continuing work to protect consumers from
abusive junk fees and for holding this hearing. We welcome the
opportunity to answer any questions.
Senator Hickenlooper. Thank you, Ms. Greenberg. I
appreciate your being here as well. I am going to turn over for
the first set of questions to Senator Cantwell, who is the
Chair of the Commerce Committee. She has got a busier day than
I do.
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
The Chair. Thank you. Thank you, Chair Hickenlooper, I want
to thank you and Ranking Member Blackburn for convening this
important hearing. Like many of you, I am frustrated by what is
happening in the marketplace.
In my home state of Washington, exorbitant hidden fees
recently made news when the price of a home ticket to watch the
Seattle Kraken play the Dallas Stars in game three of the NHL
playoffs costs more than it would to just fly to Dallas. At the
time, KIRO 7 reported that the cheapest resale ticket available
was $294, or at least that is the price the platform would have
you think.
After a $61 ticket processing fee and a $3 order processing
fee, the real price of the ticket before tax was $358, an extra
22 percent on top of the advertised price. We have all
encountered these junk fees in one form or another, and these
are mandatory fees that are not included in the advertising
price, providing no recognizable value to the consumers.
And we were hearing obviously from our witnesses about this
today. The bottom line is we can't make comparison shopping
harder. We can't reduce competition, and we don't want to see
things that distort the market.
That is why Senator Cruz, and I introduced the TICKET Act,
which has been addressed here by some of our witnesses. The
price they say, really should be the price you pay, and that
can be added to, but it needs to be disclosed.
So, I wanted to, if I could--I think I know the answer
listening to some of the testimony here. But Professor Zywicki,
I didn't hear all of your testimony. Do you agree that the
principle of all mandatory fees for goods and services should
be disclosed in an upfront price?
Mr. Zywicki. As I said--first, I succeeded Senator Cruz as
the Director of the Office of Policy Planning at the Federal
Trade Commission, so it is likely we agree on a lot. And this
is one of which I think we agree, which is, as I said, I can't
see any reason why that wouldn't be disclosed up front. And so,
in general, I think that is the right approach and would
generally agree with that.
The Chair. So why--Ms. Greenberg, you were--I heard your
answer, yes. You can reiterate it if you want. But why do you
think this is so important, not just with ticket sellers, but
the true price overall and including mandatory fees?
Why do you think this is so important? What complexity does
that bring to the market when you have this level of
distortion?
Ms. Greenberg. Well, first off, consumers can't comparison
shop because they don't know what the end all--all-in price is
going to be. So, it distorts the market from that perspective.
But as Professor Morwitz described, it is a rabbit hole for
consumers. They go, and they click, and they click, and they
click on various price options, and they end up spending more
money than they would if there were an all-in price.
So there is some psychology involved, I think, in the
businesses that impose these prices. But consumers are angry
about it, and they feel like they get trapped into paying for
goods and services with these add on fees that they had not
expected.
But they end up doing it because it is easier for them to
just pay rather than balk it or look around for competition.
The Chair. Thank you. Mister--Professor Zywicki, Ms.
Greenberg mentioned the Supreme Court case that struck down
part of the FTC's authority. We had FTC members here, both
Democrat and Republican nominees. They all said we needed to
replace that. Do you think we need to replace that to give
consumers a fair deal?
Mr. Zywicki. I would have to--I am not prepared to give an
opinion on that today, thanks.
The Chair. OK. We can give you a question for the record
and you can give us an answer in writing.
Mr. Zywicki. Sure. I will think more about that.
The Chair. Yes. Thank you so much. Thank you, Mr. Chairman.
Senator Hickenlooper. Thank you, Madam Chair. Now, in full
faith to alternating between Republicans and Democrats, I will
yield my primary position of asking questions to Senator
Blackburn.
Senator Blackburn. Thank you, Mr. Chairman. Professor
Zywicki, I want to come to you. And thank you, all three of
you, each of you for your testimony. As I said in my opening, I
am not hearing from Tennesseans about junk fees. They are just
not talking about it. They are talking about real economic
harm.
And I think for some, it has been kind of perplexing that
we would focus on this issue. I even had one Tennesseans and
say, well, what exactly is a junk fee, and what are the
economic harms that come to people for fees for discretionary
services?
So why don't you take that question and just say, what is
the economic harm that comes? And why would this term of junk
fee be applied to fees with--that are for discretionary
services?
Mr. Zywicki. Thanks. I appreciate the question. Junk fees
is obviously a term of rhetoric. There is no--it is a
meaningless term. It is just a matter of rhetoric. And we have
concepts like Professor Morwitz said of drip pricing, multi-
part pricing, partition pricing. Those are actually real
concepts, right. Junk fees is just a conclusory label.
Senator Blackburn. I think that is why it is perplexing to
Tennesseans and to so many people why we would make this a
primary point of contention rather than looking at DOT and some
of the issues that exist with the airlines or looking at other
forms of services. If people pay their credit card late, they
expect to pay a late fee.
Mr. Zywicki. And that is the important point, is this
vaguely defined concept of junk fees sweeps a lot of things
into it, things that can be oppressive to consumers like
mandatory resort fees. But what it seems to reach is a lot more
other things now, the way this is done.
For example, as you mentioned, the credit card late fees. I
can't see any reason why people who pay their credit cards on
time should have to subsidize people who pay their credit cards
late. The evidence is clear on this from the Grodzicki study
that if you reduce late fees, more people pay late.
The Mesud study makes clear that if you reduce late fees,
everybody ends up paying higher interest rates. And lower
income and higher risk borrowers get less access to credit. So,
most of what we see in the market is efficient. It prevents
cross consumer subsidies, and a lot of these things that are
labeled as junk fees are actually just efficient multi-part
pricing.
Senator Blackburn. In Tennessee, we are a fast growing
state. This weekend is CMA Fest in Nashville. We are going to
have a lot of people that are visiting there. The Great Smoky
Mountains are the most visited National Park in our national
park system. So, when you look at people choosing these
destinations, and then you look at a mandatory regulation on
hotel fees, and some of the resort fees. So, talk a little bit
about the risk of Government intervention of mandating certain
fees for some of these services and the impact that it will
have on tourism?
Mr. Zywicki. Yes, that is an important point, which is you
are going to--I am always cautious about mandating things, and
certainly cautious about mandating new disclosures because
people already have too many disclosures, right.
What we do know about resort fees and the like, it is only
about 6 to 7 percent of hotels that actually assess resort
fees. They are overwhelmingly in places like Las Vegas or
Orlando. And they fit this particular, the thing that I am
talking about, which is that they are generally not repeat
purchasers. And so, consumers don't learn from it and that sort
of thing.
And so, they can raise the cost of price comparison. To the
extent though that they are mandatory, that everybody has to
pay them, then it seems to me that they are largely part of the
price. I think one thing we could also think about is
incentives to provide discounts rather than surcharging.
And I will go back to the example, which is merchants want
to surcharge credit cards now because it is clear they want to
extract wealth from consumers, and give them a low upfront
price, and then slap them with a credit card on the back end.
They charge credit card surcharges in the same context in which
hotels charge resort fees.
A cash discount is a totally different story, which is if
you charge a higher price and then give somebody a cash
discount, if they don't use the service or if they don't use a
credit card or something like that, that then allows them
comparison pricing, but then also allows consumers to opt-out.
You have to make that obviously easy enough for them to do
it. So mandating certain things that can be done in different
ways as well.
Senator Blackburn. OK. So, in other words, you would say
provide more choice and options, rather than mandating
everything be rolled into one price?
Mr. Zywicki. Yes. And I think that these prices tend to
evolve over time. So, for example, cellphones used to have a
lot of disparate pricing. And now just because consumers
demanded it, it has become all when pricing.
Prepaid cards had the same effect. And so, they tend to
vary over time. But there is nothing inconsistent with having
United and Southwest both offering different services and
different packages. And the empirical evidence indicates
Southwest charges a little bit more per ticket than United
because they have decided to forego these fees.
I love Southwest. I always fly Southwest, right. But people
pay a little bit more for a ticket on Southwest than they do in
the United when you unbundle it. And so, allowing that option
is generally, I think, is efficient.
Senator Blackburn. Thank you. Thank you, Mr. Chairman.
Senator Hickenlooper. Thank you. Just following that,
Professor Zywicki, so that when you were talking about what
appears almost like a surcharge, if someone has to pay more
when they use their credit card, isn't what we are really
talking about here transparency? In other words, as long as the
consumer knows up ahead of time whether they are going to a
hotel in Las Vegas or a hotel in Denver, they should have some
sense if there are going to be added costs. Is that fair to
say?
Mr. Zywicki. Yes. If there is going to be--yes, if there
will be added costs.
Senator Hickenlooper. I mean, transparency, I think is the
one connecting thing. I look at it--I think junk fees sometimes
is the wrong term because it does sound pejorative. Maybe
surprise fees are another way of looking at it, but either way,
I think most people find it very objectionable.
Mr. Zywicki. That is right. And, you know, the logic here
is we want to try to bundle up--we want to have all in pricing,
right, rather than here is the price, and now here is the
additional price if you use a credit card, right.
And so, to be coherent about this, I think we want to think
about sort of when we want to have all-in pricing and when
unbundling is appropriate. Transparency is just a means to an
end, I think, of consumers finding the right mix of goods,
services, and prices that they are looking for.
Senator Hickenlooper. Right. And let me ask each of you a
question. Just kind of get it on the record that, you know,
some services are offered to consumers as an option, additional
costs, an optional additional cost.
But obviously certain fees are generally of an
administrative sort, are mandatory for consumers in order to
purchase a product or service. So, if you can just a simple yes
or no, should all mandatory fees be included in the initial
advertised price? Start----
Ms. Greenberg. Yes, certainly.
Mr. Zywicki. I think generally, yes.
Senator Hickenlooper. Professor Morwitz.
Ms. Morwitz. I agree. Yes.
Senator Hickenlooper. Yes. Yes, because I think that is,
again, part of this--the central question here is what--how
transparent is the transaction from the beginning? Professor
Morwitz, small businesses are the backbone of our country and
the backbone of our economy.
They drive that--they prioritize serving their customers
and drive economic growth in rural and urban areas alike. If
every company displayed all in, upfront pricing to consumers,
small and large businesses would have a more level playing
field on which to compete. I look at this again as the cost of
hidden prices.
It is not only that they mislead consumers, but they also
put small businesses at a disadvantage against larger
competitors. So, Dr. Morwitz, would you describe how hidden
junk fees hurt small businesses when you are in the process of
competing for customers?
Ms. Morwitz. Yes, I would be happy to. When a larger firm,
or really any firm, uses hidden fees or surcharges, it doesn't
only hurt consumers, but it hurts well-intentioned, honest
competitors like many of our country's small businesses that
you are talking about.
So when a larger firm makes salient a lower base price and
only puts in small print or only reveals at the end of the
shopping process that there are additional mandatory fees,
their product offerings may appear, at least at first, to be
cheaper than those of, say, a small business, an honest
competitor who uses all-inclusive prices, whose prices at least
at first then will appear more expensive, even if they are
actually cheaper in total when the hidden fees of the large
firm are added in.
Now, research shows this is going to lead consumers to be
more likely to even first consider the products and services of
the larger firms who use this hidden surcharge because their
products seem cheaper. In other words, their supposedly low
prices draw consumers in. But then having first considered
their products, consumers will also be more likely to stick
with that firm and ultimately purchase their products even when
they are more expensive in total with the fees.
So, these hidden fees, they don't only hurt consumers by
leading them to make purchases that are against their own self-
interest, but it also hurts honest competitors who are using
transparent pricing practices. They also make it difficult for
a firm maybe who is currently using hidden fees, but realizes
it is wrong and wants to stop, to move away from doing so.
Because if they move to all-inclusive pricing but their
competitors don't, they will lose market share. So, all of this
ultimately hurts honest, small businesses who compete for
customers against a larger firm that has kind of perfected and
capitalized on the use of hidden fees.
Senator Hickenlooper. Great. Thank you very much. And Ms.
Greenberg, certain sectors, as we have heard, such as aviation,
already display upfront pricing, excludes additional fees like
baggage fees, but people are aware of that, and they are
informed of that prior to purchase or in the process of
purchase.
In other sectors, companies have started displaying all-in
upfront pricing and consumers, but companies have adopted this
unevenly, let's say. We are, I think, all agree that customers
benefit from transparent upfront pricing.
How could Federal legislation encourage upfront pricing to
consumers evenly and fairly across all sectors?
Ms. Greenberg. Well, first of all, we are talking about
posting mandatory fees all in pricing on the final cost of the
service or product. Second, there are legislative fixes that--
the junk fees bill that was introduced would be--would go a
long way toward addressing the excessive imposition of junk
fees on consumers.
Third, consumers would benefit from the Congress acting on
the recent decision by the Supreme Court to overturn the FTC's
ability to impose monetary penalties for unfair and deceptive
practices.
So those are three steps that you could take. There are
other pieces of legislation that we support that are before
this committee. We think it would go a long way to righting the
wrongs against consumers.
Senator Hickenlooper. Great. Thank you. I want to turn now
to Senator Klobuchar, our ace eagle on transparency.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. [Technical problems]--and especially
that description, Senator Hickenlooper. As you are all aware,
we held a major hearing in the Judiciary committee, and I am
also pleased that the Commerce Committee is obviously, has
jurisdiction as well and involved in this. We have seen, as has
been pointed out, increased costs on everything from cell phone
bills to airplane and concert tickets.
And one area of this high excess of fees is ticketing. We
had the hearing earlier this year with the President of Live
Nation, Ticketmaster, and other witnesses. And as you are
aware, the facts are quite startling. It is being reviewed by
the Justice Department, including 90 percent monopoly on
ticketing for major NFL, NHL events.
Eighty percent for major arena events, and 70 percent
monopoly when it comes to all ticketing. In addition to that,
Ticketmaster now owns a number of venues and also locks in the
number of other venues that they don't own with their services
for in excess of 7 years, which is the subject of a bill that
Senator Blumenthal and I have introduced because of this
locking in, that makes for even less competition.
And then finally, Live Nation promotes the act. So, it is
like a three-cornered monopoly. So, the Justice Department is
investigating, and then we go from there when it comes to other
consumer bills that are being considered. In 2018, the GAO
found that on average, concert ticket fees cost 27 percent of
the tickets face value. But there have also been reports
recently of fees totaling 75 percent of the face value of
tickets.
Ms. Morwitz, in your testimony, you discuss how drip
pricing is commonly used in the ticketing industry for live
events and concerts. Could you talk about that and how that
misrepresents the true cost of buying a ticket?
Ms. Morwitz. Yes. Thank you for the question. So, when fees
are presented at the end of the shopping process, it makes the
initial price look cheaper. So, the customer starts, they see a
seat for--they see the price for a particular seat they would
like for the event, the play, the baseball game, and it appears
cheaper than it really is.
As they click through the pages, they learn that there is a
series of fees that they have to pay, and at the end the price
is much more expensive, as you mentioned. 20 percent, 50
percent, maybe 75 percent.
They see the total, and in theory, they could back out at
that point. But it becomes very difficult for consumers to do
so. The tendency is to stick with the price, even though it is
more expensive than they thought it was initially. And there is
a variety of reasons why that happens. Often they overestimate
how much time it would take to start over.
They underestimate how much money they could save by
starting over. They have to notice the fees in the first place.
They might not even notice the fees. And also, we don't like to
feel bad as consumers, so we might sort of have a self-
motivated component where we want to feel like we made a good
decision.
So, for all these reasons, consumers tend not to start over
again. Also, the ticketing--the firms, they also put pressure
on the consumer to complete the deal. So, there might be a
countdown clock, and if we are under time pressure, we feel
like we need to make the decision quickly.
Senator Klobuchar. Right. Good point.
Ms. Morwitz. There might be messages of scarcity, that
there are two tickets left at that price and we feel like if I
restart, I might lose these two seats.
Senator Klobuchar. OK. Thank you. Very good. Ms. Greenberg,
could you talk about how increased transparency of showing fans
the full ticket price upfront could help create a more
functional market? I know Mr. Zywicki agrees that it is
important to show the fees upfront. Could you talk about that?
Ms. Greenberg. Yes, it is important. And we saw this coming
when the merger of Live Nation and Ticketmaster happened on the
Justice Department----
Senator Klobuchar. Yes, you did.
Ms. Greenberg. We were, this is going to create an
impossible monopolistic situation and it is exactly what has
happened for consumers. All-in pricing is so important because
when you look for a ticket online, you can't tell until you get
to the very end of the transaction how much that ticket is
going to cost you.
And different, you know, different secondary markets,
primary markets have different charges. You can't compare and
contrast. And as Professor Morwitz said, you know, most
consumers are going to go, well, I spent 20 minutes getting
this ticket, I am just going to finish up, what is $5, what is
$10.
So, all-in pricing is critical so that you can compare and
contrast. I also want to mention that this is not just about
middle class--junk fees, not just about middle class consumers,
poor people, people of very modest means, are facing punishing
fees in so many areas. Renters, for example, have six, seven
different fees that are imposed on the--they have to pay a fee
to even get a rental application in.
They can least afford it. And I know Senator Blackburn was
saying, consumers are concerned about this, they are concerned
about basic goods and services. Well, that affects people of
low income harder than any of the rest of us.
So, I think it is important that we recognize that we are
talking about middle class consumers, consumers of more modest
means. These fees are hitting all of us across the board, and
they are out of control right now.
Senator Klobuchar. Very good. Thank you. And I will ask on
the record some of the App Store issues of you, Ms. Morwitz,
because I am out of time. Another legislation, piece of
legislation that Senator Blackburn and Blumenthal and I have.
And there is a lot of work to be done, and I am very glad
this is a priority of this committee. And I thank Senator
Hickenlooper for his leadership. Thank you.
Senator Hickenlooper. Thank you, Senator Klobuchar. Now
turn to Senator Markey.
STATEMENT OF HON. EDWARD MARKEY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Markey. Thank you, Mr. Chairman. Our Denver
Nugget----
[Laughter.]
Senator Hickenlooper. The glorious night it was last night.
Senator Markey. The game last night. Airline fees are out
of control and some of them are simply unconscionable. It is
absolutely infuriating that many airlines force consumers to
pay extra just to sit with their young children.
We have got to put a stop to this outrageous practice. I
was thrilled to hear President Biden call on Congress to ban
family seating fees during his State of the Union address
because I have been calling for that policy for years.
Ms. Greenberg, do you agree that airlines should never
force parents to pay to sit with their children?
Ms. Greenberg. Absolutely. We are fully supportive of the
Fair Fees Act, which covers that practice. And no, of course,
families shouldn't be required to be separated from their loved
ones or pay extra fees.
But your bill does address many of the problems with
transparency in the airline industry, and we are very
supportive of that legislation.
Senator Markey. Thank you so much. And I obviously agree
with that. That is why yesterday Senator Vance, and I sent a
letter to Chair Cantwell and Ranking Member Cruz with proposed
language to be included in the FAA reauthorization bill to ban
family seating fees.
A parent's right to sit next to their child is not a
partisan issue. And would you support that language, Ms.
Greenberg, being included in the FAA legislation?
Ms. Greenberg. Yes, certainly we would.
Senator Markey. Thank you. Family seating fees may be the
poster child for outrageous junk fees, but the airlines, nickel
and dime consumers in so many other ways, baggage fees,
boarding fees, seat selection fees, the list goes on and on. If
it used to be a basic service on an airline, it probably costs
money today. Ms. Greenberg, should Congress protect consumers
from these never ending fees?
Ms. Greenberg. We think Congress has an important role to
play. Competition has not worked to diminish the fees. We did
see the airlines back away from cancellation fees and we are
grateful for that.
That was during COVID. And of course, the COVID crisis
really pushed that decision forward. And so, though we
appreciate that there are so many fees related to flying, I
want to make the point that, you know, yes, you know that you
are--you have a baggage fee, but there are many people who are
older, who have disabilities, who may have children with them.
They may not be carrying their bags onto the airplane. So,
they are forced to eat the cost of a $35 fee, something that
used to be free before, and it has jammed our airplanes full of
luggage up top, creating hazards for flight attendants as well.
Senator Markey. And that is why we need to pass the Fair
Fees Act, which would prohibit airlines from charging fees that
are not reasonable and proportional to the cost of the services
provided.
And I want to turn to one other topic related to aviation.
Consumer protection, airport service workers, The Good Jobs for
Good Airports Act, which I have introduced with Senator
Blumenthal and Senator Schumer, would increase the wages and
benefits for airport service workers like baggage handlers and
wheelchair attendants.
And we are fighting for this bill because it won't only
repay the sacrifices that these workers made during the
pandemic. It will also help consumers. Higher wages and
benefits for airport service workers means lower turnover and
better airport security and higher service quality.
Ms. Greenberg, do you agree that the Good Jobs for Good
Airports Act is ultimately a good pro-consumer bill?
Ms. Greenberg. Yes, we certainly support the Good Jobs for
Good Airports Act. And I think many consumers had no idea that
a lot of these workers were not making minimum wage were
relying on tips. And many people who use the wheelchairs and
baggage--use the baggage, the curbside baggage services did not
know the people were living on tip wages, and many people don't
tip as we--as some of us who have been tipped workers know,
tipping is very up and down and certainly not a reliable source
of income. So, yes, we very much appreciate that legislation
and it is long overdue.
Senator Markey. And again, that would come as all new
information to most people who fly, that these people are
actually supposed to be tipped for all the services that they
are providing.
No one actually knows that, which is why we have to ensure
legally that they get paid what they deserve. And that is why
we are going to continue to fight to include that legislation
in the FAA reauthorization. Thank you, Ms. Greenberg. Thank
you, Mr. Chairman.
Senator Hickenlooper. Thank you, Senator. I will turn it
over to Senator Welch.
STATEMENT OF HON. PETER WELCH,
U.S. SENATOR FROM VERMONT
Senator Welch. Thank you very much, Mr. Chairman. You know,
the computer has been mastered by, in this case, the airlines,
but a lot of people selling things, to be able with their
algorithms to put a lot of pressure on people who are making a
decision, let's say, to fly. That is a big deal for a family.
Let's say there is a funeral, or there is a wedding.
They want to fly, or they are making a decision about
whether to go to a place or even take a vacation, and they
start to look at what the price is. And the question really is
if you get the upfront price, that that family can make a
decision based on their budget before they get totally
emotionally committed to doing it. And a lot of people will
say, oh, I can afford this, and then we will get into it.
And then as the fees pile up, they suddenly find themselves
in a different place with a lot of anxiety. You know, there is
a question here not just about transparency, but the time of
transparency. When does the person be told very concretely and
specifically what the total cost will be?
Which is really kind of a policy question, but on my sense
from talking to consumers is they would like to know that
sooner rather than later. I will ask both of you to comment on
that. That--and I am thinking about that time-frame where
people have that clock ticking and they have got to push
``buy'' or the whole thing goes away.
Is there anything that we should be doing about that
element of this? Ms. Greenberg, I will ask you, and then
Professor Zywicki.
Ms. Greenberg. Yes, I think right upfront information,
including you are going to have to pay for baggage, you are
going to have to pay to sit together if you are family. If you
want to sit closer to the front, maybe have disability issues,
or you have a stroller, or you have--a baby is with you, you
should know----
Senator Welch. There are two different areas too. Then
there is a question of knowing upfront and then there is a
question of what is reasonable and what is not. It is not
reasonable, in my view, to make people pay to have a family sit
together.
I totally agree with Senator Markey. The baggage fee is
different. I hate it. But if that is upfront, you can calculate
that into the cost. Professor Zywicki, any suggestions on how
Congress should approach this?
Mr. Zywicki. Yes, I will say two things, which is first I
will amplify that point--whenever possible I fly Southwest
simply because it is easier, right. I know I can worry about my
bags later. If my plans change, I can change my plan.
So, there is some competition there. And as I said, I think
people understand what is going on with bags. And there could
be people who are affected more or less. One thing I will say,
I have not looked at the cost of this so I am speaking a little
bit out of order, but the idea of having 24 hours to cancel an
airline ticket after you book it, I think that might be
something that is worth exploring in this context.
Which is, that if you have a transaction that has a back-
end fee, you have 24 hours to cancel without penalty, for
example. Because sometimes it won't be until I get the
confirmation e-mail, for example, that I will see something I
missed when I was booking it, or if I feel like I was rushed
into something, if there is some way in which people could
have, say 24 hours, like you can with an airplane ticket, to be
able to cancel the transaction, I don't know what the cost of
that would be.
I don't know how feasible that is. But that strikes me as
one way of maybe getting it done.
Senator Welch. Thank you. Do we know when somebody is
booking an airline and you are trying to get to the pricing, it
says two left at this price. Is that true?
Mr. Zywicki. Well, what I can say is I have booked and then
decided--there are situations where I have booked and then had
to rebook like, oh, because like, I had a credit in my account,
right. And what I found is after I booked the last ticket at
that price, when I went back in, to try to book it again, was a
higher price. So, I don't know whether it is true or not, but
at least sometimes it seems to be true.
Senator Welch. So, should there be an obligation on the
part of the seller, an airline, to make certain that that is in
fact true?
Ms. Greenberg. I would certainly agree. From a consumer
perspective, you want to know if that is true, if that
statement is based on fact. You see a lot of those in the
ancillary services, you know, the Expedias, the Travelocitys
will do it. You have got only two tickets remaining at this
price. I certainly wouldn't trust it as based in fact, and I
think it is false advertising, and should----
Mr. Zywicki. That seems like an unfair trade practice to me
instinctively.
Senator Welch. Thank you. I yield back.
Senator Hickenlooper. Thank you, Senator. Senator Sullivan.
STATEMENT OF HON. DAN SULLIVAN,
U.S. SENATOR FROM ALASKA
Senator Sullivan. Thank you, Mr. Chairman. I appreciate the
witnesses being here. It is an important topic. Thank you for
sharing this. I guess, for both of the witnesses at the table
here. One of the issues that I think--that we are all
struggling, not struggling with, but trying to nail down better
is how you define junk fees.
And it is not easily definable. So, Professor Zywicki, is
that right? Can you take a crack at that? What I want to make
sure is that the ones that are junk fees, we go after. The ones
that are fees, I think the key on other kind of fees is
transparency.
But maybe the two of you can help us with regarding junk
fees and then the definition. And then I have kind of a follow
up on what you think economically their impact is, which I
think is also an important issue. You want to take a crack at
that, professor?
Mr. Zywicki. Sure. Junk fees is a meaningless term, but it
is worse than meaningless, it is actually pernicious, which is
that by sort of using this blanket conclusory label, it
obscures the complexity of this, the difference between drip
pricing, risk-based pricing, multi-part pricing, partition
pricing, and that sort of thing.
And it kind of sweeps into one bucket. Things that are
legitimate, things that are aren't, things that might be
partially legitimate. And now it has even got more confusing
because you look at the FTC rule, for example, on auto dealers,
they take things like nitrogen filled tires, did they charge
more money for a claim that is a junk fee?
The problem with that is not that it is a separate price
for nitrogen filled tires. The problem, if there is a problem,
is that nitrogen filled tires are garbage, right. There is
nothing there. It doesn't matter whether it is disclosed
separately or bundled in the price, if it is a worthless
product.
And so, when we talk about junk fees, we can end up
confusing ourselves, lumping in things because we want to just
apply this label to it. Whereas I think it would be much better
to understand risk-based pricing.
What are things where either you are pricing for something
that you get no value from? What are the things where they are
pricing things simply to extract well from consumers and the
like?
Senator Sullivan. So, would you like to try to--how would
you define something that falls into each of those different
categories with different labels?
Mr. Zywicki. Me?
Senator Sullivan. Yes.
Mr. Zywicki. Well, what I am trying to say is that when we
look at the context in which these arise--so, for example,
mandatory fees. And mandatory fees should be presumptively,
strongly, presumptively disclosed upfront. There may be
scenarios of that I can't think of, or that may be the case.
That is the only reason I am hedging. Things that are near
mandatory may be like that, right. Like a credit card
surcharging might be an example. So, I would start with that. I
would also think about what exactly is the market failure,
which is, you know, if, is it the problem that is disclosed too
late in the process?
Is the problem that this fee is for a worthless service,
right. Or is it something that seems to be doing some work in
terms of allocating the cost of using a product or service to
the person that is actually using it, like a late fee does, for
example, on credit cards.
Senator Sullivan. Ms. Greenberg, do you have a view on
that, the question that I asked?
Ms. Greenberg. Yes. Sure, Senator Sullivan. I think and we
think that a good working definition of junk fees is
unnecessary, unavoidable, or surprising charges.
Senator Sullivan. So, to Mister--Professor Zywicki's point,
mandatory, do you think that is a good one? I mean----
Ms. Greenberg. The example that--I used in my testimony as
a mandatory resort fee that you are presented with when you
check out of a hotel. It is often a daily fee. It could be $35.
I have seen them as high as $75 for services that you didn't
use or Internet service. In some cases, the swimming pool, the
fitness center. They are required.
And I am one of those consumers who always asks the hotel
to take it off my bill, but they consider them mandatory, and
you have no choice. So, no, they are not disclosed upfront, and
so you can't comparison shop when you are looking for a hotel
room.
Senator Sullivan. OK, good. Let me ask, you know, the White
House has been talking about this. We want to make sure we get
it right as well. They often tout the junk fee issue as--in the
context of fighting inflation.
Look, my view is they have a whole host of other areas
where they can really fight inflation, right. Like, maybe not
driving up energy costs on American families. And the Federal
Reserve blew the inflation issue a long time ago.
But they do add certain costs, like the example you just
gave. Is this really like more of a transparency issue, or do
you think that kind of trying to bring this into fighting
inflation is a stretch that seems, you know, like a little bit
of junk fee, false advertising from the White House, maybe.
What--I would like both of your views on that as well.
Professor.
Mr. Zywicki. Well, this obviously has nothing to do with
inflation. It has nothing to do with inflation. The cost is the
cost, right. Colloquially, I even said it earlier, we say bags
fly free on Southwest.
Bags don't fly free on Southwest, right. There is a cost
for bags. The bags--the bag fee is either separated out and
paid by people who use the bags, or the cost is bundled into
the ticket. There is empirical evidence that shows, as I said
earlier, that the price of a ticket on Southwest is higher
because you are paying for your free bags and your free
cancellations and everything else.
So, the cost is the cost, whatever the cost is. It has
nothing to do with inflation. And so, what it has to do with
is, what is the right level of transparency, and really what is
the scheme of pricing that will help consumers in the end find
the products they want at the lowest prices?
And sometimes that means unbundling the prices, sometimes
that means bundling the prices, sometimes that means you get
bundled prices, like in Southwest together with unbundled
prices with United, and you get different consumers using
different things and that sort of thing.
And so that is really what this is about. The bottom line
is, what we should care about is, are consumers getting the
lowest price for what they are actually using. And that is--and
everything, in my view, should be allocated toward that end.
Transparency is not an end in itself. This has nothing to do
with inflation.
Senator Sullivan. Professor Greenberg, does this have
anything to do with inflation?
Ms. Greenberg. I think certainly it does, because when
consumers are asked to pay additional prices for mandatory
fees, let's say in a hotel, but this also hits lower income
consumers. The junk fees on consumers--we will go with that
term because I think it is very descriptive. Very punishing.
And what it means is if you have to--if you are renting a
property or you are applying to rent properties, you are paying
a cost on each one of those rental applications. That is money
that doesn't go for groceries, that doesn't go for childcare,
it doesn't go for utility bills or gas.
So, this does have an inflationary effect in our view. And
you asked about the effect on the economy. Well, $12 billion in
credit card junk fees is what the credit card companies and
banks are making off late payments by families. And the airline
industry collects--collected $102.8 billion in ancillary fees--
they call them ancillary fees--in 2022. So, it has a big effect
on the economy.
Senator Sullivan. Thank you. Thank you, Mr. Chairman.
Appreciate it.
Senator Hickenlooper. Yes. Thank you, Senator. I have got a
couple more questions. So, I will maybe call a second round.
Somebody walks in, we will ask more. Ms. Greenberg, I don't
know if you have polling or--I mean, how widespread do you feel
is this aggravation people feel from surprise fees, junk fees,
or however you want to call them?
Ms. Greenberg. Well, you know, I quoted from a Consumer
Reports article. They said 89 percent of consumers who were
polled said that they have encountered junk fees. They are
pervasive.
They are across industries. We talk, you know, about banks
and airlines, and to some extent rental car companies, although
I will say with rental car companies, they have begun an all-in
pricing model. Which, we used to sit with them and complain.
You know, I don't know what I am getting charged for.
What are all these convenience fees and delivery fees. And
now they have gone in, and you can actually price compare when
you rent a car, and I very much appreciate that. But the scope
of these fees are massive and growing, and it is a huge profit
center for industries.
And they have not lost--that has not been lost on so many
of the industries. And so, we are seeing them proliferate.
Senator Hickenlooper. Yes, certainly the oftentimes many
industries, in anticipation of legislation, move to be in
compliance before the legislation is passed. It doesn't mean
you don't need still need that legislation because then they
will backslide.
You know, I was in the restaurant business for almost 20
years and there used to be a restaurant called Soapy Smith's,
which was named after an early settler of Denver, Colorado, who
would sell soap.
And these little packages of soap, which were half, again,
more expensive than other soap. But in a crowd as he was
selling the soap, someone would open, one of his friends would
open a container of soap and there would be a dollar bill in
there. And you go, oh my gosh, look at me, I have--this soap is
amazing. And all of a sudden there would be a run. That is the
opposite of a surprise fee.
So, surprise, delight. And I think in many ways, you know,
as a small businessperson, we were always trying to figure out
how to create, and not with surprise fees, but create more
delight or some--more positive experience, some level of joy so
that we could charge more money and the people would feel good
in the transaction.
And I think that is part of what you guys have all been
talking about, is the businesses providing these services and
products will do better in the long run with more transparency.
And sometimes one does have to legislate.
You know, things like seatbelts don't naturally come--those
kinds of change aren't always embraced at the very beginning,
but in the end they increase more sales. Dr. Morwitz, I wanted
to ask you a little bit on--you talked somewhat about the way
consumers perceive that sudden increase in price, and that they
think if they go back through the whole process again, they
don't recognize--I think you said they don't recognize how much
savings they would actually have and that they wouldn't--they
feel that they would end up--somehow come out on the short end
of the stick.
Can you go into that a little more and talk about some of
the other issues around consumers in there. Just as Ms.
Greenberg said earlier, in the business of their lives, how
they get shortchanged in having to deal with these late stage
price increases.
Ms. Greenberg. Sure. Absolutely. And I also just wanted to
comment on a previous question. I do think inflation plays a
role here because I think the firms are under pressure to raise
their prices.
Consumers don't want to see the prices rise, so they use
hidden fees as an implicit price increase to deal with
inflation. But to your question, my research has identified
several reasons why consumers in this kind of situation
complete the purchase instead of restarting. First, sometimes
the fees are obscured in such a way that consumers don't even
notice them or realize they have been assessed.
So, this might happen if they are in the small print or not
presented at all and just show up maybe later in a bill or it
is embedded in a total in your credit card statement and maybe
you don't even notice.
Second, even when consumers do notice these fees and they
see that the total is more than they initially thought, once
hidden fees are revealed and thinking about whether to restart
search, the consumers think about the costs and benefits of
restarting. And my research has shown that consumers think the
cost, the time of starting search all over again is longer than
it really is.
They also think that the benefits, how much money they
could save, is less than it really is. And one of the reasons
they think there is few benefits to restarting search is
because they often believe that if the current firm uses hidden
fees, well, then most likely all the other competitors do too.
But that is not always the case. And even when the
competitors to assess similar hidden fees, the fees may be
different, they may go by different names, they may be
different amounts, and all this makes search difficult and
confusing for consumers. There are other reasons, too.
Sometimes the fees are presented in a way that makes them
look like a tax. Sometimes they are even grouped together with
taxes, giving the impression there is no way to avoid them. For
many websites, consumers actually can click on an arrow to open
up an option labeled something like taxes and fees to see the
details. And then even when they open them, the label may sound
like a tax.
For example, your cell phone bill may include a Federal or
State universal service charge, which sounds like a tax, but
really represents the cost the cell phone company must pay to
support universal access. But then they pass it on to
customers, in a way, making it sound like a tax.
Or a rental car company may group with taxes an airport
concession recovery fee, which represents their cost to operate
out of an airport, but they pass it on to customers, making it
sound like a tax customers have to pay to rent a car from an
airport. And then finally, as I mentioned before, consumers are
sometimes put under pressure by the firm that uses hidden fees
to complete the purchase with these countdown clocks and the
scarcity cues that we talked about before.
So, consumers might then be reluctant to restart search,
believing that those tickets may be gone if they decide to look
a little more and then they might be gone at the end if they
say they still want them. So those are some of the many reasons
why consumers often stick with an offering, even after it can
feel fees in a more expensive total are later revealed.
Senator Hickenlooper. You know, the thing I would add to
that, that we have had from--heard from roundtables, especially
with older consumers when they are working online, there is a
level of frustration where they get to a certain point and they
are faced with higher prices and they really are reticent to
going back through the whole process because they find it so
frustrating and many times consuming.
We heard that from a number of people. My last question,
Professor Zywicki, and I welcome you to come be a visiting
professor at the University of Colorado, right. So, make sure
we get that out on the record. Yes, go buffs.
Mr. Zywicki. Professor Prime, you can call me.
[Laughter.]
Senator Hickenlooper. The new football coach is Coach
Prime, Deion Sanders. Just want to make sure everyone is
aware--the allusion. Professor Zywicki, what are the examples
of sectors where the upfront pricing of products and services
is most effective in terms of informing customer choice?
Mr. Zywicki. Where it is most effective?
Senator Hickenlooper. Yes. Where the upfront pricing of
products is, yes, most effective, most successful.
Mr. Zywicki. Yes, I will just take a brief second to
elaborate on something Professor Morwitz said, which I think it
may dovetail with Senator Klobuchar's concern about markets and
market power, which is that she talked about people don't
restart searches.
And I think that--I would be surprised if that was
especially a problem in markets, say, like Ticketmaster, right,
where you essentially have market power. What is the point of
restarting the search if there are no other firms really out
there competing?
And there is some evidence that this can be a bigger
problem in more concentrated markets, and so--so, I think there
is a dovetailing there. And I think she also mentioned on the
inflation point, just to clarify, I think she is right that
inflation does create pressure to do this, and part of that has
to do with taxes, for example, which is, as I mentioned, my
testimony, there is 7.5 percent excise tax on an airplane
ticket, but there is no tax on a bag fee.
So, if ticket prices rise simply because of inflation,
tickets rise an additional 7.5 percent for every dollar on an
airplane ticket, which puts more pressure to try to adjust
untaxed things. And that is a whole sort of separate question.
With respect to your question, my general observation is,
is that industries and firms tend to give consumers what they
want. I mean, the classic example is Amazon Prime, right. If
you want a classic example of essentially all in pricing, $129
for prime and you get all this stuff, whether you use it or
not, right. But things vary over time. It used to be you got a
whole bunch of cable packages and people got tired of paying
for cable channels they don't want, so now we are seeing
unbundling.
My guess is we will probably see bundling. It is a process
that goes back and forth because bundling is convenient for
people. Upfront pricing is convenient for people. But sometimes
people say, well, I don't pay--I don't really use that. I don't
pay for that.
So, then you start getting these tendencies toward
unbundling. So generalizing is something I am very squeamish
about doing in these markets as opposed to looking at the
combination of prices in terms and trying to figure out whether
they make sense in particular context.
Senator Hickenlooper. Absolutely. Well, I appreciate all of
your time and all of your work. You have each been working on
this for years and years and years, and it is funny how there
are cycles, whether it is bundling and unbundling or just
people paying attention to these surprise fees, or just
accepting them blindly.
But I think we are coming to that point where we are going
to go into a new period where I think we will get to pretty
much everything being transparent and that the customers will
have a better--feel more confident that they are getting a fair
opportunity to get what they want at the price of what they
expect. Any final statements that anybody--have I overruled
somebody's thoughts as it was coming up?
Mr. Zywicki. I might just have one last thought, which is I
do think the Internet has made this more of a problem, which is
this desire of Internet merchants to make their costs look
cheap upfront, right, on the Google search or whatever, and
then hit you with fees on the back. And I think that does
create a particular dynamic here.
And I think it is particularly a problem for small
businesses because that is, I think, a process that the larger
businesses probably can figure out how to game a little bit
better. So, I think that is an issue.
Senator Hickenlooper. Well, and you are not even talking
about the context of AI, and it is--that is going to be a
separate hearing, but that is coming. Anybody else on that last
statement?
Ms. Greenberg. I would just say that all in pricing is good
for competition, and helps consumers, and helps honest
businesses who are trying to provide the kinds of services you
were talking about, Senator. And that is why it is so important
that the legislation that we have talked about here get close
to passage.
As you said, sometimes those pressures inspire changes
among industry players. But thank you for holding a hearing on
something that is increasingly a problem for consumers. And I
look forward to questions on the record.
Senator Hickenlooper. You bet. Dr. Morwitz, last comment?
Ms. Morwitz. Yes, I agree. I think all in pricing is
something that benefits consumers no matter their party. It
benefits honest businesses, no matter their leanings. It helps
competition, it helps small businesses. I think this is a very
straightforward issue.
Senator Hickenlooper. Great. Thank you very much. I thank
all of you. Appreciate you spending the time. This is going to
conclude our hearing for today. I want to thank my colleagues,
both who were here and were online. Obviously our witnesses, I
will thank you again and again and again.
The hearing record will remain open for questions for two
weeks until June 22, 2023. Any Senator who would like to submit
questions for the record may do so until then. We ask the
witnesses to submit their responses to those questions by July
6, 2023. With that, the Committee is adjourned.
[Whereupon, at 11:26 a.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Ted Cruz, U.S. Senator from Texas
In October 2022, President Biden stood on a stage flanked by the
heads of the Federal Trade Commission and the Consumer Financial
Protection Bureau announcing that his Administration would target
companies and financial institutions charging consumers so-called
``junk fees'' to help fight inflation.
Imagine that! After trillions of dollars of reckless government
spending by Democrats that sent inflation soaring, the President's
solution is to target ``junk fees.'' That's like offering a Band-Aid
for a broken arm. It's missing the larger problem.
Unfortunately, this is not simply an inability to diagnose our
economic problems, but a clear effort by President Biden to avoid
accountability and avoid admitting that we are on a reckless financial
trajectory.
No one here should be fooled by the White House's argument that
targeting ``junk fees'' is the solution to fighting the sky-high Biden
inflation that is harming ordinary Americans every day from the grocery
store to the gas pump.
Setting that context, let's turn now to today's conversation about
``junk fees.'' No American, myself included, likes paying hidden or
extra fees for any product or service. It's frustrating and confusing.
But I think we need to first take a step back and distinguish how
this White House's regulatory approach is flawed. Rather than gathering
evidence and ensuring consumers are equipped with clear information,
the Administration is instead engaging in one-size-fits all regulation
that would harm Americans through what I can only define as rate
regulation or price controls rather than accounting for how our markets
actually work.
Not all fees are ``junk fees.'' Some fees actually serve an
economic purpose. For example, most Americans understand that paying
``add on'' fees for additional toppings on a pizza makes sense. If you
want more product, you pay a little extra. And we know that credit card
late fees or overdraft charges are meant to deter certain behavior
that, if not kept in check, could cause some Americans to subsidize the
behavior of others. These are not ``junk fees'' but serve a larger
function within our markets and pricing schemes.
Competitive markets, in fact, do produce lower prices for goods and
services. In those markets where consumers are confused by pricing or
prices are misrepresented, I would argue that rather than resorting to
government price controls, which will create higher costs for
Americans, we should instead consider price transparency and
disclosure. Transparency and disclosure provide consumers the
information they need to make informed decisions in the marketplace,
which instills more market competition.
The market for event tickets, like sports games and concerts, is
one example where Americans would benefit from additional transparency
and disclosure. Every sports fan and concertgoer--myself included--can
recall a time buying a ticket online expecting to pay an advertised
price only to learn at checkout that the total cost was substantially
higher because of additional fees that were not disclosed upfront.
A 2018 GAO report found that ticket fees, which are often not
disclosed to Americans early in the ticket buying process, averaged 27
percent of the ticket's costs with some fees totaling 58 percent of the
total ticket cost. Tacking on fees at the end of a transaction is
frustrating and confusing for consumers who expect that the price
listed for a ticket is the actual price they will pay.
That's why Chairwoman Cantwell and I have introduced the TICKET Act
(S. 1303). Similar to how airlines have to advertise the full ticket
price upfront, the TICKET Act works the same way for tickets to
concerts, sports, and large gatherings. The TICKET Act's transparency
requirements would promote competition for the benefit of all American
ticket buyers.
Rather than resorting to one-size-fits-all government price
regulations, I believe the TICKET Act is a reasonable, bipartisan
response that identifies a known problem and provides a targeted
solution that would benefit all Americans. I am pleased to report that
multiple stakeholders in the event ticket industry have expressed their
support for the TICKET Act, including StubHub.
I look forward to moving this bipartisan legislation through the
Committee and Congress soon.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
Response to Written Question Submitted by Hon. Amy Klobuchar to
Vicki G. Morwitz
App Store Purchase Fees
My bipartisan bill with Senator Grassley, the American Innovation
and Choice Online Act, addresses abuses of gatekeeper power by dominant
tech companies, including those operating app stores for mobile
devices. App stores charge fees of typically 30 percent to app
developers, which are often passed on to consumers making in-app
purchases or buying subscriptions. This practice hurts small companies
and independent creators that develop apps by holding back their
ability to scale their businesses, and hurts consumers who have to pay
a higher price.
Question. How do App Store fee policies limit competition and
ultimately raise prices for consumers?
Answer. Consumers are often unaware that when they purchase a
subscription or make an in-app purchase through an app store they may
be paying a higher price than if they made the purchase directly from
the small business (if possible), and this is because the small
companies that develop the apps pass on the fees they are charged by
the large tech companies who host the platforms to consumers. This
practice also hurts small businesses and competition. Because the large
tech companies who host these platforms have significant market power,
they are able to assess these significant fees onto small businesses
and require them to offer purchase/subscription options through the
app, where the fees will be assessed versus allowing them to offer
these in some other way to avoid the app and be able to offer lower
prices to customers. While the large tech companies do offer small
businesses a platform where small businesses can distribute their apps,
they are abusing their market power, and hurting competition and
consumers, by collecting extremely high fees.
______
Response to Written Questions Submitted by Hon. Ben Ray Lujan to
Vicki G. Morwitz
Question 1. What effect do early termination and cancellation fees,
particularly in the telecom industry, have on consumer behavior?
Answer. These fees are often not made salient to consumers when
they are shopping for telecom plans and thus they tend not to be able
to easily consider them when making their initial decisions. In
contrast, if customers sign a contract for long time service, what is
salient is the substantial discounts customers are offered. Thus these
deal appear more appealing to customers than they really are if the
early termination and cancellation fees were made salient enough to
take into consideration. In general, firms create many obstacles that
make it difficult for their customers to defect from services, for
example having to call to cancel a plan versus being able to do so on
the website using customer portals or on apps. When customers finally
do reach a stage where they can cancel, they may be presented with
these fees, which prevent a further obstacle. Thus, it leads to
stickiness in markets where customers tend to stick with their current
providers, even when they are not fully satisfied.
Question 2. Do companies use tactics such as drip pricing because
they know it confuses and misleads customers?
Answer. I suspect so, but have not been privy to internal firm
discussions when these tactics are put in place. What I can say is that
their presence does make shopping more confusing and difficult for
customers in a way that benefits firms that use these tactics. It also
leads to consumer perceptions (e.g., that a total price is lower than
it actually is) and behavior (e.g., an increased likelihood to buy)
that benefit firms.
So, while I cannot say for certain that this is why firms use these
tactics, use of these tactics certainly benefits firms at the expense
of consumers.
Question 3. Will a confused, misled, or frustrated customer likely
spend more money than they originally intended?
Answer. Yes, my research and research of other scholars studying
drip pricing has shown that it leads consumers to spend more money than
they needed to and more money than they would spend if upfront pricing
was instead used.
Question 4. How do hidden fees make air travel less accessible for
both low-income and inexperienced travelers?
Answer. I'm not sure I can answer that. What I can say is that they
lead consumers to be more likely to purchase a ticket that they thought
was cheaper than it really was and to pay more than they expected.
While it has not been directly studied, there is good reason to believe
that these adverse effects are larger for more disadvantaged consumers.
Question 5. How do these fees hurt economies that depend upon
tourism such as New Mexico?
Answer. These fees hurt economies because they stifle competition.
Well intentioned firms who want to honestly and fairly present their
prices to consumers lose market share to firms who use these deceptive
pricing tactics. When firms compete on pricing tricks rather than on
product quality, businesses, consumers, and industries, like the New
Mexico tourism industry, suffer.
Question 6. What is your response to those who argue that these
fees actually benefit the consumer? Aren't cost-conscious and savvy
consumers able to save money by opting out of these add-ons?
Answer. People who make those arguments are conflating two things.
There is nothing wrong with add-on pricing models where consumers chose
the options they want and save money by not paying for options they do
not want. For example, some consumers prefer a cheaper, plain cheese
pizza, while others prefer a pizza loaded with many toppings, that is
more expensive. But these are options, not mandatory fees. What is
important in cases that involve fees for optional add ons, like
toppings for pizzas, or a a travel plan for a cell phone service, is
that the prices for the add-ons be fully disclosed upfront so that
consumer can make fully informed decisions.
In contrast, imagine if a pizzeria charged $10 for the pizza and an
additional $2 for cooking the pizza, and only let consumers know about
the $2 fee late in the decision making process. That type of pricing
would be misleading just as is separating out mandatory resort fees
with hotels. If a fee must be paid no matter what, then the total price
is the same to the consumer if the firm decides to partition the price
or if they decide to use all inclusive pricing. There is no benefit to
the consumer of partitioned pricing, but there is harm--this tactic
leads consumers to underestimate total costs.
Now some firms may claim that they use partitioned pricing to
transparently communicate different aspects of their pricing model. For
example, a ticketing agency might want to communicate how much of what
consumers pay for tickets goes to the venue, how much to the artist,
and how much to the ticketing agency. That is fine, but there is no
reason a ticketing agency cannot first give the total price, and then
explain how that price breaks down.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
Professor Todd Zywicki
My answers are below. Please note that these responses are
tentative and answers depend greatly on the details of various
proposals.
Section 13(b). In AMG Capital Management, LLC v. Federal Trade
Commission, the Supreme Court ruled that the Federal Trade Commission
(``FTC'') lacks statutory authority to seek monetary relief when the
FTC brings an action under Section 13(b) of the Federal Trade
Commission Act (``Section 13(b)'').
Question 1. Do you believe that the FTC, when bringing a case under
Section 13(b), should have the authority to ask the Court to award
monetary relief for consumers who have been harmed by unfair or
deceptive business practices? Why or why not?
Answer. Under certain circumstances, subject to due process
protections, and calibrated appropriately, the authority of the FTC to
seek and courts to award monetary remedies on an emergency basis to
prevention dissipation of assets. However, such authority must be used
in appropriate cases, with proper due process protections, and
appropriate in amount.
Question 2. How does the FTC's inability to seek consumer redress
and disgorgement under Section 13(b) impact consumers and honest
businesses?
Answer. I am not aware of any evidence as to how the FTC's
inability to seek consumer redress and disgorgement under Section 13(b)
impacts consumers and business. As the FTC's use of Section 13(b)
evolved over time, however, its use expanded beyond the narrow
situation for which it was originally designed to aid in remediation of
consumer fraud and to be used in other cases such as antitrust cases
and more traditional consumer protection cases.
Question 3. Do you support legislation that would authorize the FTC
to seek, under Section 13(b), monetary relief for consumers who have
been harmed by unfair or deceptive business practices? Why or why not?
Answer. It would depend on the details of the legislation,
including the circumstances, types of cases under which such relief
might be made available, method of calculation of monetary relief, and
due process protections.
Question 4. Do you support legislation that would authorize the FTC
to seek disgorgement of unlawful gains under Section 13(b)? Why or why
not?
Answer. It depends on the factors previously stated.
______
Response to Written Questions Submitted by Hon. Ben Ray Lujan to
Sally Greenberg
Question 1. How do Junk fees harm the most vulnerable and price-
sensitive consumers, such as families on a fixed income?
Answer. Data from the Board of Governors of the Federal Reserve
System found that in 2022, 18 percent of U.S. adults indicated the
largest emergency expense they could cover was less than $100.\1\
Another 14 percent said the largest expense they could cover was
between $100 and $499. With one-third of Americans unable to cover an
unexpected expense of more than $500, junk fees can quickly eat into
vulnerable consumers' savings as they are unable to accurately budget
for such charges.
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\1\ Board of Governors of the Federal Reserve System. ``Economic
Well-Being of U.S. Households in 2022.'' (May 2023). Online: https://
www.federalreserve.gov/publications/files/2022-report-economic-well-
being-us-households-202305.pdf
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Credit card late fees disproportionately burden consumers in low-
income and majority-Black neighborhoods. Cardholders in census tracts
where a majority identified themselves as Black in 2010 paid more than
$25 in total late fees for each account they held with major issuers in
2019.\2\
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\2\ Consumer Financial Protection Bureau. ``Credit card late
fees.'' (March 2022) Pg. 10. Online: https://files.consumerfinance.gov/
f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf
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Lastly, Research by the Financial Health Network found that
overdraft fees are incurred by low-to moderate-income households at
nearly twice the rate of high-income households. The same survey also
found that Black and Latinx household were charged overdraft fees at
rates of 1.9 and 1.4 times, respectively, of white households.\3\
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\3\ Financial Health Network. ``Amid Resurgence of Interest in
Overdraft, New Data Reveal How Inequitable It Can Be.'' (September 3,
2021) Online: https://finhealthnetwork.org/amid-resurgence-of-interest-
in-overdraft-new-data-reveal-how-inequitable-it-can-be/
Question 2. Would true pricing transparency encourage competition
and improve customer access when it comes to telecom services such as
high-speed broadband?
Answer. Yes, pricing transparency is the foundation for marketplace
competition. For telecommunication services such as high-speed
broadband, the Federal Communications Commission's (``FCC'') broadband
consumer labels \4\ will transform the industry by implementing
industry-wide pricing transparency.
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\4\ Federal Communications Commission. ``Broadband Consumer
Labels.'' Online: https://www.fcc.gov/broadbandlabels
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Research conducted by Consumer Reports found that information
displays and industry practices regarding Internet bills make it
extremely difficult to accurately comparison shop for a better Internet
service provider.\5\ Internet service providers frequently use junk
fees, alongside bundled packages, introductory discounts, data cap
charges, and speed limitations, to obscure the true value of their
product.
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\5\ Schwantes, Jonathan. ``Broadband Pricing: What Consumer Reports
Learned From 22,000 Internet Bills.'' Consumer Reports. (November 17,
2022). Online: https://advocacy.consumer
reports.org/wp-content/uploads/2022/11/FINAL.report-broadband.november-
17-2022-2.pdf
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The FCC's broadband consumer label addresses this problem directly
by standardizing pricing disclosures. To facilitate comparison
shopping, the FCC will require broadband providers to break out their
monthly price, itemized fees, discounts and bundles, and information
regarding connection speeds within one label.
While the FCC's broadband consumer label is a critical step toward
eliminating anticompetitive behavior in the telecommunications
industry, other barriers to universal access remain. Additional and
continued funding for the Affordable Connectivity Program \6\ as well
as ensuring that all regions are serviced by at least two \7\ Internet
service providers are necessary to removing these barriers and
achieving consumer-friendly universal broadband adoption.
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\6\ The Leadership Conference. ``The Leadership Conference's Letter
in Support of the Affordable Connectivity Program.'' (May 10, 2023).
Online: https://civilrights.org/resource/the-leadership-conferences-
letter-in-support-of-the-affordable-connectivity-program/. NCL is one
of the signatories to the letter, alongside more than 160
organizations.
\7\ Federal Communications Commission. ``2020 Communications
Marketplace Report.'' (December 31, 2020) Pages 86-87. Online: https://
docs.fcc.gov/public/attachments/FCC-20-188A1.pdf. The report shows that
over 25 percent of U.S. residents have zero or one provider of 25/3
mbps broadband. The number of providers continues to decrease for
higher connection speeds.
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[all]