With a heavy hand, federal regulators are yet again taking aim at a broad swath of the American economy. This time, they are needlessly meddling in a pocketbook issue that market forces are well under way in addressing. The biggest culprit in this latest regulatory overreach scheme is the Federal Trade Commission.
Through its new rulemaking, the FTC is attempting to squelch so-called “junk fees.” According to the Commission, it is doing this to “prohibit unfair or deceptive practices relating to fees for goods or services,” which, apparently, amount to “misrepresenting the nature and purpose of fees.” The FTC received a staggering 51,587 public comments on this proposed rule. That’s not surprising, however, given the White House’s boasting that the rule’s scope applies “to industries across the economy.”
Now, I don’t know anyone who likes to be hit with an unexpected fee that does not have a purpose. As an economist, I am particularly ruffled when one creeps onto my final bill. But the administration is missing a key point here: not all supposed junk fees are created equal.
On one hand, you have wireless carriers’ “surge charges,” rental car companies that charge an additional fee for returning a vehicle early, and the practices of concert ticket operators, a la Taylor Swift’s Eras Tour. On the other hand, for example, you have fees charged by app-based delivery providers. These fees are transparent to each customer and go directly toward supporting essential business services.
As such, the FTC’s blanket ban on these fees will result in numerous, harmful effects across the economy as a whole. Importantly, this moratorium will also upset consumers.
If you’ve taken courses in economics, you might recall hearing the term “value-added.” This concept is used to measure the additional value provided by a goods or services provider. Having lectured on this topic countless times, I’ve extrapolated a similar application with regard to these fees. Fees that account for an additional service requested by a consumer are not junk fees. In this light, it is important to note that there is a delicate balance between price transparency (i.e., consumers know what they are paying for) and price simplicity (i.e., consumers don’t know what additional charges are for without receiving additional services).
Many companies in the FTC’s crosshairs are leading the way in creating new consumer choice environments by providing consumers with more options. Consumers will decide what price levels meet their specific demands. In fact, former senior staff members at the FTC have even noted that an “overly-broad regulatory crackdown … could undermine the market discovery process that maximizes consumer access.” With this trade regulation rule, the FTC would be wise to focus only on bad actors defrauding their customers instead of sweeping all companies under the same rug.
When I teach students in my MBA classes, we discuss how businesses respond to market forces. A dynamic we often discover is that businesses are exceedingly good at responding in kind when their customers are upset or don’t want to pay for a service. When it comes to junk fees, consumers are rightfully upset when they receive a surprise fee without getting additional services, compared to a fee they are knowingly paying for to receive additional services.
A team from Applied Marketing Science published a study in Harvard Business Review explaining that “as consumers turn to a wider array of channels for help and expect faster responses … customer service that shows empathy can drive a lot of value.” In today’s economy, goods and services providers are best-in-class on this speed-empathy continuum. But this proposed across-the-board prohibition on these fees will actually make consumers even more upset. Why? It would cause the revenues of goods and services providers not engaged in hiding their fees to drop significantly. This in turn would eliminate service providers or force higher core prices on the consumer to make up for these losses. That pizza delivery would become more expensive, not less, thanks to the FTC.
Again, market participants are organically providing solutions to consumer unhappiness with these fees. At the end of the day, customer satisfaction and retention are paramount. An overarching ban as proposed by the FTC would only disrupt this progress. More importantly, as a Cato Institute briefing paper highlights, “The key economic insight remains: banning [junk] fees would primarily raise basic prices, providing no significant windfall for customers.”
Before it’s too late, the FTC should either shelve or significantly amend this rule to account for the diverse parts of our economy impacted by it. If not, innovation will be stifled, small businesses will fail, and workers will have fewer opportunities. And then all of us will soon pay higher prices when we order the food we love.
Dr. Nam D. Pham is managing partner at ndp | analytics, an economic and communication research firm, and an adjunct professor at The George Washington University School of Business.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.