Junk Fees, Post-Covid phenomenon & here to stay

       The Price Isn’t Right: How Junk Fees Cost Consumers and Undermine Competition

 Junk fees are fees that are mandatory but not transparently disclosed to consumers. Consumers are lured in with the promise of a low price, but when they get to the register, they discover that price was never really available. Junk fees harm consumers and actively undermine competition by making it impractical for consumers to compare prices, a linchpin of our economic system.

CEA estimates that ten specific kinds of junk fees amount to $90 billion per year in the United States, or more than $650 per household per year on average. That’s high enough to deserve a line item in family budgets, equal to about a fifth of the average household’s entertainment spending, per the most recent estimates by the Bureau of Labor Statistics. These fees are likely not only harming consumers and competition in the short run but give firms an incentive to divert resources away from productive investments and toward non-productive obfuscation, and toward products that carry junk fees and away from products that do not. Thus, they create the potential for inefficient allocation of resources and perverse incentives for investment.

At $90 billion per year, the level of these fees meaningfully alters what consumers buy, in turn also harming sectors of the economy that do not use them. As a result, more sectors of the economy have started to add junk fees, and others have added optional tips outside of traditional service industries – a practice which is not identical but uses similar ideas. All of this results in inefficient allocations in the short run, and distorted investment in the long run. (Get FeeBelly to help you with Junk fees)

New Research

Assessing the amount of junk fees in the U.S. economy is not straightforward. Measuring the extent of these fees requires searching through online sales platforms and combining the discovered fees with public data on market share and size, and in many cases the requisite data are simply not available. Because of this, in previous work the White House estimated the prevalence of just a few common junk fees in the U.S. economy. This analysis found that in recent years, five readily-measurable fees led to consumers spending $65 billion per year.

CEA has identified new data that allows the inclusion of four additional markets in our analysis: food delivery apps, restaurant service fees, apartment applications, and event tickets. On top of this, the FTC has recently released its own estimate of auto dealer junk fees. While there are likely many other junk fees across the U.S. economy, measurement challenges mean that these are the only ones feasible to estimate for now.

Table 1. Selected Junk Fee Totals by Industry (FeeBelly can help…fast & easy)

Food delivery apps are notorious for obfuscating delivery and service fees. A recent survey showed one company’s hidden fee burden is about 15 percent of transaction volume.[10] This company received 288 million orders in 2021 in the U.S. and had an average sale of about $31. Putting these numbers together, in 2021, this company collected about $1.3 billion from consumers in junk fees.[11]  Using the most conservative assumptions, a similar calculation for a competitor—which in the same survey had a hidden fee rate of 7.5 percent—produces $1.5 billion in junk fees. In addition, the leading grocery delivery service had about $25 billion in transaction volume in 2021 in the United States and Canada, with about 8% being junk fees. These figures imply about $1.7 billion in junk fees. Similar data on U.S. order volume is not available for all competitors in the meal delivery industry, but based on the best publicly available information, junk fees in food delivery are an estimated $5 billion annually across the country.

In recent years, sit-down and counter-service restaurants have begun instituting more severe drip pricing. At sit-down restaurants, customers are used to tipping, but increasingly common mandatory service fees can surprise and mislead people. About 15 percent of restaurants now use service fees, which can be up to 20 percent of the pre-tax bill. Assuming that these fees average 10 percent at full-service restaurants and 5 percent elsewhere, junk fees make up about 1 percent of total restaurant revenue. In 2023, restaurants across the U.S. totaled about $965 billion in sales, meaning these junk fees could add up to $10.8 billion.

When Americans apply to rent apartments, they often face unexpected fees from landlords or brokers. These fees are ostensibly to offset the cost of a credit or background check, but in many cases exceed those direct costs. Some states, such as Massachusetts, Minnesota, and New York, limit or ban charges for rental applications, but most states allow them. Combining data from the Census, Zillow, and other sources, CEA estimates that after accounting for the cost of the background checks that they fund, the excess burden of these fees is about $276 million annually.

Event ticketing is rife with hidden fees, as the customer is initially shown a ticket’s face value and then presented with a large additional charge at checkout. The largest publicly-traded ticket broker relies on this practice in all states except the three in which it is illegal: New York, Connecticut, and Tennessee. CEA tabulation estimates that this company charges an average hidden fee of 22 percent. Given that they sold approximately 329 million fee-bearing tickets worldwide and received upwards of 80 percent of their web traffic from the United States, in 2023 this company likely charged around $4.8 billion in hidden fees to U.S. customers.[14] Other major ticket brokers are not publicly traded and thus release less information, but market share data and CEA investigation of competitors’ hidden fee practices suggests that the industry junk fee total is around $7.14 billion. For Taylor Swift’s Eras Tour and Beyonce’s Renaissance Tour alone, Americans may have paid over $250 million in junk fees.  

All told, CEA’s estimate of junk fees in the U.S. economy is approximately $90 billion per year. And, given that there are many classes of fees not covered here, and that only one of these estimates incorporates the time and effort consumers waste trying to navigate them, this is almost certainly an underestimate. By cracking down on these fees, the Biden-Harris Administration is pushing for greater transparency in pricing, which will leave American consumers better off not only by avoiding such fees, but because they will be buying goods and services through more competitive markets.

Get the ‘Belly and Stay guarded!!