Excerpt of ‘The hidden economy’, by Christopher Shea, the Boston Globe , June 25, 2006: … We’re living today in the hidden-fee economy. Printers come with a particularly hefty and devious add-on fee in the form of those cartridges, but they’re just one of many products with a sneaky price structure. Cellphones, of course, have deadly “overage” charges lurking behind the attractive monthly rates, while credit card companies lure customers with low annual fees then hit them with late fees and higher interest rates if payment is even a day late. (In 2001, banks pulled in $7 billion in late fees according to one study.) Comically pricey phone calls and outlandish minibar tabs pad the balance sheets of hotels whose affordable basic room rates serve as a come-on. Low weekly fees for rental cars attract customers, but they get you on the insurance, car seats for the kids, and $6-per-gallon gas.
Getting nailed by a hidden fee is one of the great annoyances of modern life. But, if it’s any consolation, the fees have also raised fascinating questions for economists: Why, for example, don’t companies compete on all costs, including the ones in fine print? According to classical economic theory, it shouldn’t be possible to conceal price information that’s important to the consumer: Competing firms will educate consumers about the other guy’s high hidden prices in order to win business.
“We don’t think that’s right,” contends David Laibson, a professor of economics at Harvard and coauthor, with MIT’s Xavier Gabaix, of an article on hidden fees that appears in the latest issue of the Quarterly Journal of Economics. “We think there are robust market forces that serve to suppress that information, and keep it suppressed.”
Laibson and Gabaix aren’t conspiracy theorists. Their explanation for the persistence of hidden prices, laid out in “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,” describes a complex balancing act, in which companies must weigh the costs of educating consumers against the benefits of duping them. And their work relies on the insight, now common in what’s called behavioral economics, that many consumers are far less rational than economists used to think … (Read the whole article on the Boston Globe).