Joe Biden harped on junk fees during the State of the Union. While I do not think it is the problem of our time, I take things in the reference class of resort fees, or fees to have adjacent seats on an airplane, and other such unbundling (and bundling) surprisingly seriously. I am putting up my thoughts here so I have a reference to fall back upon.
Matt Yglesias has a post defending Biden’s particular choices as smart economics in addition to smart politics.
I frame the core issues differently. I’d start with: The general principle of ‘no hidden charges’ becomes important when people are making online choices on the basis of headline costs, in ways that are structured to provide little extra information. The advantage of having a lower headline price is huge, and reputational effects aren’t powerful enough to fix this.
More price transparency in these spots is a strictly better equilibrium. Even the companies charging junk fees would often prefer everyone not be allowed to do this. Given others are doing it, they can’t afford to be left behind.
Matt talks a bunch about ‘unbundling.’ You used to get your meal and checked bags free with your flight. Now they cost money.
Which way is better, and is there a bias pushing us too far in one direction? How are different situations different?
Bundling Versus Unbundling
There are at least four advantages to unbundling.
An illusion: Fooling the customer into thinking your product is cheap.
Efficiency: Not having to provide things people don’t value. If it costs $5 for the airline to provide an extra meal, and you charge $0 for it, some people who value the meal at $1 (or $-2) will accept it, and perhaps only eat one little thing. Also, if there is a limited supply of a complementary asset like the overhead baggage compartment, the only efficient way to allocate that space is with a fee.
Obligation: Not making people feel obligated to use things they don’t value. The flip side of the same coin. If you provide something for free, people often feel obligated to use it, either out of avoiding waste, politeness or not being a chump. If people see this as them being forced to buy the ‘free’ thing, this can also cause them to feel like they’re being cheated or getting a bad deal, the way I find it annoying when I can’t get a burger without it including French fries.
Price discrimination: You can charge far more than marginal cost for the extra feature, because this maximizes revenue while letting others in on the cheap. The problem is this means that a bunch of people then miss out on value that would have been worth providing, as the cost of enabling this.
We have the bias of ‘make the headline price look low’ and especially ‘rank first on a sorted-by-price list of options’ pushing us towards too much unbundling. We also have price discrimination pushing towards too much unbundling. If you charge too much for a feature in order to milk revenue, that can be as or more destructive than not charging enough.
There are also at least four advantages to bundling.
Free feels great. People love free, and hate not free. They hate feeling tricked or taken advantage of, and it ruins experiences.
People hate fees and additional costs, even when they represent real additional costs. This reaction is a real cost, as Amazon knows well, see meme below.
Choices are bad. People hate having to make choices, and feel especially bad when they have to spend more money in a way that feels like a choice, especially on something that feels selfish (with obvious exceptions, of course).
Sometimes people won’t spend money on something without experiencing it, since they don’t know its value, but will appreciate it once provided. Or they would not enjoy something like the chocolate on their pillow if they spent money on it, but would enjoy it if it was free. A nice touch.
I support this meme, except completely unironically.
Some general principles here.
If algorithms are sorting or customers are choosing largely via headline price, it is good for everyone to make that headline price reflect true cost.
Ceteris paribus, the closer marginal price is to marginal cost, the better.
Keep it simple, choices are bad, people hate fees and love free and love easy.
If supply of the complement is inherently limited, fees are good.
Price discrimination at its best charges a lot more for the tweaks that make something the very best, while giving most of the value away for the lower price or for free, because most things that are valuable are very very valuable to those who value them most.
Regulatory Response
Where is the role of regulation here? Would bans be useful?
Certainly they are with the ‘resort fee’ style fees that are pure fraud. You pretend to charge me X, then tack on mandatory charge Y after I’ve locked in my choice. This should clearly not be allowed. I do not even understand why one needs a law here at all. To me this should be illegal as fraud, pure and simple, although I know it does not work that way.
So I would pass a law to make it effectively work that way. I would propose this law: There can be no mandatory additional fees charged, ever, for anything, not included in the quoted up front price. All quoted prices must be inclusive of all mandatory charges.
There would need to be some technical language after that to determine what counts as mandatory (e.g. to stop things like ‘you can get that fee waived if you fill out forms X513 through X571, and deposit them in triplicate in the basement with no working lights past the sign saying beware of the leopard’ or ‘your car does not need breaks, it would stop on its own eventually.’) Probably a ‘reasonable person’ standard.
One interesting case to think about is printers and ink. The model is typically to get consumers to buy the printer, then make your money on the ink, while intentionally crippling compatibility so they have to buy your expensive ink.
When you go to buy a printer, the default behavior is not to factor in how much ink it comes with, or how efficiently it uses it, or how much they are going to hold you up for additional ink. This pushes us towards the equilibrium of the printer itself being almost free, or even less than free. It would perhaps be good to say that listings have to include typical cost of use in some way, at least for products from large firms.
The question is then what we do about regular relatively non-fraudulent unbundling, like charging for families to sit together on planes.1
In that particular case, there is a strong policy argument that we should not be price discriminating against families with young children in particular.
What is more interesting is the general case where that special logic does not apply. What then? How much such price discrimination, and how much presenting of a bare bones package, should be allowed?
There are a few possibilities.
Require listing the price inclusive of a set of standard features, with or without an exception for explicit labeling that one or more is missing on a case by case basis.
Require listing at a price that at least a large percentage of users actually pay, or the median or mean, in addition to the headline price, in as large or larger print, and require sorting that way be the default.
Require aggregation sites and services to list prices and have default sort options based on true cost or similar offerings, and perhaps impose similar rules on advertising, while letting the companies do what they want on their own sites. Stores that sell competing third party devices are an interesting question here.
Do nothing, to avoid stifling innovation and competition.
My instinct is to lean towards primarily using something similar to approach three to limit unbundling pressures while avoiding being too heavy handed and tying the hands of future innovation.
The Other Side of the Coin
Calls for intervention often oscillate between demands for bundling and demands for unbundling, including calling perfectly normal helpful things monopolistic behavior.
Cable companies are forcing you to pay for channels you don’t want. Cable companies are using unbundling to mislead customers and charge extra for basic channels everyone should have. Pick today’s version.2
Something I realized writing this is that this is not as much a contradiction as it seems. Many of the complaints are the same, only framed differently.
You can’t buy a ticket on United and then seat selection from Delta. You have a bundle, where if you buy Acme’s X you now only Acme can supply you with Y, except also you have an unbundle where they hide that X requires or very much wants Y and that they’ve jacked up the price of Y.
If you bundle your printer with its ink, that might be predatory behavior. If you bundle your printer with its ink and then unbundle them to hide that you are doing it, that is worse.
Thus, I think we should relatively aggressive about reasonableness and deception when someone is both bundling and then unbundling in these ways. If they are doing one but not the other, that seems a lot more friendly.
The other other side of the coin is that there is a strong prior that, however much the market might naturally botch something, we should be super cautious about saying ‘market failure!’ and thinking that in practice we can impose rules and make things better. What you actually get will be so much worse than you expect, and lead to other things so much worse than one would expect. I am very sympathetic to this warning, which would suggest clarifying what counts as fraud to be more inclusive and otherwise staying out.
I still think that this is probably a place worth an intervention. I think the costs in lived experiences of such failures are high, and the risk of intervention is relatively low. Modern life is full of such confusopoly situations and the forcing of ordinary people to do a bunch of research and thinking and calculating to avoid being taken advantage of during the ordinary course of life. We need to fight back.
I have been told one can usually sit together for free by asking nicely, but many families can ill afford to take that risk, and this inability to risk it or lack of knowledge that you can ask or how to ask is exactly what is being taxed here. Not cool.
In this case I favor more bundling, since the marginal cost is zero and juggling the options results in a lot of time wasted and people using their time in inferior ways. I’d like to see a form of ‘everyone watches whatever they want from wherever they want and then revenue is divided based on what they actually watch.’
There are some innovations we like and other innovations we don’t. Innovation of how to trick customers into paying fees that they wouldn’t pay if they would be fully informed is an innovation that’s valuable to stop.
Laws that make customers more informed about the deals to which they agree on help with encouraging the innovation we want and improve competition.
This sounds like a good general principle but it’s not a solution because you have to decide what you mean by the terms that are involved.
If you take the example of an airplane ticket, what’s included? The meal that’s eaten at the airport? The fee for the toilet at the airport? For trans-country flights, is buying duty-free jewelry included?
It would be possible to write a detailed list into the law. As conditions change in the future, that detailed list could stifle innovation because it locks in the status quo.
Many companies don’t like price aggregation websites. If you write that into the law, they could simply not give the price aggregation sites the necessary data and the airplane companies could effectively destroy the price aggregation websites for airplane tickets.
I like the spirit of this, but want to mention GDPR as a counterpoint. One of the purposes of that law was to ensure that customers are better informed, and yet the mandatory cookie popups just made the experience of browsing websites much worse.
I think that GDPR actually made the average user better informed. Common knowledge is costly and it’s debatable whether the GDPR in particular balances the costs well, but it did provide more information.
As far as innovation goes GDPR did force companies to come up with a bunch of different innovations about protecting privacy that they otherwise wouldn’t have created. There are likely also innovations in ad-tech that are prevented through GDPR.
It was a relatively blunt instrument to get companies to innovate in privacy which they otherwise wouldn’t have. It had a cost of making other innovations harder.
The law could have been written better, but I don’t think there is a principle problem with the goal.
Some readers will already have this as assumed background, but I think many will benefit from reviewing the econ-101 (non-behavioral) story of bundling, which explores its economic effects on rational actors with no frictions to search or decision-making. I explain these briefly in (Naïve) microeconomics of bundling goods (just posted).
Excerpt from the conclusion:
I resonate a lot with this. I don’t want to play the whole credit cards airline points maximizing game, but if I don’t, I could be losing out on a lot.
I think this would be more acceptable if either everything was bundled or nothing was. But generally speaking companies bundle channels that few people want, to give the appearance of a really good deal, and unbundle the really popular channels (like sports channels) to profit. So you sign up for a TV package that has “hundreds of channels”, but you get lots of channels that you don’t care about and none of the channels you really want. You’re screwed both ways.
title: bundling not bunding
True. But on the other hand, people have a model of the world which tells them that they shouldn’t expect to be able to buy a ticket on United and seat selection from Delta—a model that they can reasonably be expected to have before comparing prices.
Furthermore, while everything airlines do is ultimately because of how much money they make, people are aware that the money airlines gain by not doing things that way would come from a source other than the consumers paying more.
These factors are why consumers are okay with bundling flight sold by X and seat sold by X.
I think you are confusing 2 issues.
For a lot of goods now, there is a hidden required fee. Restaurants adding a gratuity or “cost increase” fee to their listed prices. Airlines/hotels having many fees that you must pay to fly at all that are not necessarily listed online. The cable/phone company selling you service, then sending a bill with a required extra fee that was not disclosed. Or worse, making you sign to a 12 month contract, and then they add extra fees and raise the rates. (so breaking the contrast in their favor—something that their fine print that you were forced to agree to, or go to arbitration, no doubt allows) Car dealerships are the worst of all—disclosing one price, wasting a consumer’s time, then adding some or many fees after you have spent time at their dealership test driving the vehicle, traveling to the dealership, waiting on the “back office to crunch the numbers”. These delays are on purpose. They know if you have spent some of your irreplaceable time to try to buy a car, you’re more likely to agree to that extra $300 “window etching” charge they forgot to disclose.
Unbundling. I would say this is only relevant if the unbundled item is required to use the product at all. Such as printer ink. They should probably be forced to disclose the full cost to the end of the warranty period or something similar.