Chicago Booth Review Podcast Hidden Fees, Drip Pricing, and Shrinkflation

Jean-Pierre Dubé: Why is it so difficult for a company to just say, "Here's the total net price, and if you're interested, click here. Here's a breakdown of all the pieces that went into that net price"? Why are they instead using drip pricing, and just gradually disclosing the price in steps to me?

Hal Weitzman: The US federal government is suing Ticketmaster parent company Live Nation, in part over what it says are excessive or junk fees. One feature of these fees is that they're hidden. You only find out at the end what the true price is. There's an irony in the case says, Chicago Booth's Jean-Pierre Dubé, since government itself is a keen user of hidden fees. Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman.

Dubé is an expert in pricing and he says hidden fees are an increasingly common way for retailers to obfuscate prices and avoid transparency. There's drip pricing, where companies gradually disclose the full price of a product or service, and shrinkflation, where retailers keep prices the same but put less in the package. So why do hidden fees work, and what should we do about them? All right, Jean-Pierre Dubé, welcome back to the Chicago Booth Review Podcast.

Jean-Pierre Dubé: Thank you.

Hal Weitzman: So we're talking about hidden fees, or junk fees, as they're sometimes called. Why do you think in general that companies and sectors seem to be increasingly depending on not raising their prices but charging us fees, additional fees?

Jean-Pierre Dubé: So there's a whole literature in consumer psychology on the practice of what's called partition pricing. And the underlying idea is that, instead of showing people the full net price to buy something, they break up in pieces. And we sometimes forget that, even when we buy a physical good, that physical good is bundled with a number of services. So for instance, if I buy something online, there may be shipping included in that, and there may be other... So if it's a gift, there's wrapping charges, and one solution for the firm would be just to show me here's the total price, and the other solution would be to partition that price.

I'm still going to get charged the same either way, but to break the price into pieces. And what does the psychology literature find? They find that people tend to be less elastic on some of these ancillary services that are bundled in with the core product. You know, if I'm buying a book, I'm going to be fairly elastic on the price of a book, but I might be less elastic on the shipping fee, and I might be even less elastic than that on the incremental tax, because once something crosses a state line, the taxing may be different on that, and I may not be as sensitive to it.

And then there's a bunch of questions about, "Well, why aren't we as sensitive to these other prices?" But the leading thinking and the leading answer would be, "I just don't pay that much attention." So where I pay attention is right up front. I'm going to pay attention, it looks like the biggest part of the price anyhow, and it usually is. So therefore, I figure if I get the item price right, then I'm doing well. And that gives companies a lot of leeway to charge a higher markup on their shipping than they do on the product itself.

Hal Weitzman: I'm wondering if, is one of the reasons this has happened a bit more in recent years because of comparison websites? Because comparison websites maybe give companies the ability to put the initial cost as lower, and then to add in a whole load of fees afterwards that could be variable?

Jean-Pierre Dubé: Hard to say what the direction of causality would be there. If consumers are comparing companies on the basis of the actual item price, then it makes sense that a comparison website would highlight those item prices and not the shipping and the taxes. And there was already papers published way back in the early 2000s, some of the early, early studies of what were called then shop bots, these online site price comparison engines, and academics routinely found that even when you did, on the comparison site, compare book price, tax price, shipping price, that people were much more elastic on the item price than the other prices.

Hal Weitzman: Okay, in other words, that's the one that we really, really care about. It's just-

Jean-Pierre Dubé: It's the one we pay attention to.

Hal Weitzman: The sticker price.

Jean-Pierre Dubé: Well, you know, in a world where it's complicated to compare all these different prices, making a multi-dimensional comparison is hard. We just pick a prominent attribute, and that's the item price. And we heuristically use that as a placeholder for what's the best deal.

Hal Weitzman: Now, I'm sure, now, of course, the US government is suing various companies for these so-called junk fees, and I-

Jean-Pierre Dubé: Which is ironic.

Hal Weitzman: Go ahead, why?

Jean-Pierre Dubé: Because that's the US government, that's what the governments do, at least state governments and municipal governments. There's a reason why we're one of the only places in the world where you can't find out exactly how much you owe in sales taxes until you get to the checkout counter. And there's been a paper about that that actually showed that if states were to bundle the taxes in with the item prices at the shelf, that retailers would sell us, and governments would collect less sales tax revenue.

Hal Weitzman: So a long-standing proponent or user of junk fees has been the US government and state governments themselves, but nevertheless, they're suing for these junk fees, and the companies have come out and defended themselves against these accusations. And one of the things they've said is, you know, that, "We are transparent, nobody's forced to buy anything." And so I know another topic you want to talk about is shrinkflation, how companies have made products smaller, while keeping the prices the same, effectively pushing up the price. But if, I mean, a consumer could look at how many potato chips are in, or what the weight of the potato chip is in the pack, and see that it's less. They could go through and see the fees before they purchase, so they're not really hidden. There is transparency, it's just maybe not there all up front? What do you think?

Jean-Pierre Dubé: It's an obfuscation of a price. That's what shrinkflation is. That's what the add-ons that restaurants are fooling us with, with the 5% or 6% upcharge that you don't really notice until you get your final bill. It may be buried somewhere in tiny print on the back of the menu, the resort fee you get charged when you check out of the hotel. It may be buried somewhere in the website that this exists, but the reality is, if we, as consumers, had to go and research all the pieces of the price, meaning I have to go through the entire hotel website or I have to read the entire menu, including all the small print before I can order, I mean, the amount of time and effort that requires would be overwhelming.

And so companies are taking advantage of the fact that they know we're not going to do this. They know we can't do this. We're being overburdened in some sense, if the onus is on us to reassemble the net price and it's dishonest. The same thing, by the way, a similar criticism has been made on transparency, consent, and privacy regulation, that most companies would argue, "Hey, as soon as you got to my website, the first thing I showed you was a pop-up saying, 'Do you allow us to track cookies?'"

But usually when's the moment where that pop-up comes? There's some critical content I want to see on the website, and as I'm trying to advance and get that content, I'm excited. We're impatient as people, up pops this consent request, and I just hit whatever button to advance, and if anything, I might default towards, "Yes, I accept," because I'm worried I might not get access to the content if I say no.

Hal Weitzman: With the cookies, I think it's more complicated, because if you shut it down, the assumption is you consented.

Jean-Pierre Dubé: If I shut it down, I've consented.

Hal Weitzman: Yeah, so if I X out the box that says, "Do you consent to [inaudible 00:07:44]-"

Jean-Pierre Dubé: Well, that may be true.

Hal Weitzman: ... the assumption is that I've consented.

Jean-Pierre Dubé: May very well be true, but the bottom line is it's not reasonable to expect a human being to be able to devote all of this effort to reassembling, in the case of partitioned prices, all of the prices, in the case of privacy consent, all of the contingencies on what it is I'm actually consenting to. And that's why it seems like it's transparent, but in reality, the companies know, because there's tons of psychology research on this, that it's not really transparent.

Hal Weitzman: But the things you're talking about are not necessarily new. It sort of reminds me of small print of anything. I mean, anyone who's taken out a mortgage in the United States knows that you never actually read any of the documentation that comes with it. You're usually directed not to bother reading it, just to sign it. And the same, it makes me think of banking, where banks depend on people to leave money in their checking account, where they earn no interest, so they can take an interest elsewhere.

And there's well-known customer stickiness in banks, where they know that, after a certain amount of time, with a certificate of deposit, most consumers don't go around and shop around for another deal, or insurance, the same. So I can think of lots of examples where the same kind of inertia or lack of information for customers has the same kind of result. Is it really anything new, or has it just spread, do you think, from one industry to another?

Jean-Pierre Dubé: I feel like we're kind of aggregating a whole bunch of different kinds of things here. I mean, right now, you're right, I mean, people don't do research. So I go to a vendor, I get the price, I buy, not realizing that there's another vendor out there selling a parody product at a fraction of the price, right? But now, I'm talking about measures that companies take that they don't have to take. I don't need to partition up all my prices into pieces. I can always have a disclosure at some point that says, "By the way, here's the total price, and click here if you want to see how I came up with that price." That would still be providing the same information.

But the critical missing piece of information is when I tell you what the total's going to be, and I delay that. I delay that. A study of StubHub found that if StubHub... By the way, StubHub does in fact tell you what the net price will be, including their fees, when you're browsing tickets. But in an experiment, they tested and asked, "What would happen if we didn't? What would happen if we did what Airbnb used to do, where you'd have to wait till the checkout counter to then see all of the additional fees?" And the answer is, ticket sales go up 10%,.

And this could be mental accounting. In my mind, I already feel like I own the ticket, so I just don't want to walk away from it, or I experience a psychological loss. It could just be I don't pay any attention. By the time at the checkout counter, I'm not doing all the math on the price, because I think I already know what the price is, so maybe I just didn't notice this add-on fee, any number of things. But the fact is, if StubHub continues, which it does, to tell me the net price, we know that StubHub is selling fewer tickets than it could, because it doesn't want to fool us or obfuscate its pricing.

Hal Weitzman: Right, the way you described it, the psychology of it also reminded me of another industry, which maybe isn't related, but buying a car in the United States. If you go and buy a car, there's often an additional fee that comes in right at the last gasp, when mentally, you're already driving the car away, and that's been used for years, to add on costs to the price of a car. So these techniques have been around, right?

Jean-Pierre Dubé: Yep. The fact that prices, especially taxes, people always want to obfuscate the tax. They want to make sure where they minimize how much attention you're paying to taxes, especially on large-ticket items, because on a car, your sales tax, this could get in the thousands of dollars.

Hal Weitzman: I want to again try and put, not that I want to take this view, but I'm going to try and put the other side, which again is this point that, yes, we're psychologically there, but you don't have to make a purchase, right? You are told what the cost is before you click purchase.

Jean-Pierre Dubé: Not always. When I go to a restaurant, I'm not told there's a 5% add-on fee. Instead, what tends to happen is you order your food, you get your bill after you've eaten, it's too late to reverse your decision, and you look at the bill, and suddenly you notice, if this was a big dinner, this could be an extra $20 or $30, maybe more. And you're like, "Where did this come from?" And the restaurant tells you, "This is a service fee we charge."

And then, to make sure that we're shamed into not disputing it, they'll tell us, "We need this to help pay our staff their benefits." And nobody wants to deprive somebody who's making minimum wage of additional compensation. But the truth is a 5% add-on is no different from raising the prices. So if they're going to charge me 5% extra, why not raise all the prices on the menu by 5%? I don't even need to know that this was to cover staff benefits, just raise all the prices.

Or alternatively, raise all the prices and then have a notice on the bottom of the page of the menu that says, "If you feel our prices are higher, please note that we've added 5% to help pay our staff wages." Now, I do know ahead of time and I could change my mind, and of course, it's the fact that I could change my mind and buy less food, which is exactly why the restaurants are delaying that information or obfuscating as best as possible, so that I'm not going to notice until it's too late.

Hal Weitzman: And that's something that seems to be a hangover from the pandemic era, right? That a lot of restaurants in particular added money for their staff, added a charge for their staff, and people were happy to pay it, because they wanted the restaurants to stay open, and then of course, they didn't get rid of it.

Jean-Pierre Dubé: We had a double whammy, you're absolutely right. Companies can be very opportunistic when there's a very publicly visible cost. In this case, it was a shock to businesses. They had to be closed, then consumers are less likely to find prices increases to be unfair, and we'll pay them grudgingly. We'll say, "This seems like a fair reason to raise your price." But then, we had the second hit, which was then inflation, and companies have been struggling to contain inflation. Some companies just raised their prices, which, as painful as it is for their business and for the customers paying, it is what it is, and people certainly weren't happy about that. But I think we've seen an escalation in the use of what you call junk fees, these hidden fees, as a way to try and raise prices in ways that will go unnoticed.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out. It's called Entitled, and it's about human rights. Co-hosted by lawyers and law professors, Claudia Flores and Tom Ginsburg, Entitled explores the stories around why rights matter and what's the matter with rights.

So it sounds like there are two different things that you've been talking about. One is we're sitting in a restaurant, we have a meal, at the end of the meal, suddenly we're hit with a surprise, which is the prices are 5% higher than we thought they were going to be, and there's a fee that somehow we missed, even if there was a tiny mention of it somewhere, but probably we didn't see it at all. That to me is somewhat different to the other two examples that we talked about, shrinkflation, where if I paid more attention, I would notice that, or the airline fees or whatever, the Airbnb fees, where I am warned before I actually make the purchase. And there's no embarrassment for me to bow out and say, "I'm not going to take the vacation." So how are those two different or how are they the same?

Jean-Pierre Dubé: These are all varying degrees of obfuscation, right? We're obfuscating information about the price, and what I think they share a common theme on is there are ways for companies to monetize the consumers' inattention, right? They're monetizing the consumers' cognitive limitations to find all the prices, and reassemble the net price we're interested in. Yeah, the case of the restaurants is one of the most egregious, because the restaurateurs know that the customer doesn't see this until it's too late, which means there's no recourse. You're stuck with this charge, and you could refuse to pay it. I don't think legally, if I didn't observe it, I'm not sure whether legally they can force you to pay that fee. But then, there's the social norm. It feels really embarrassing and feels really unethical to then be told you don't want to pay something that's going to help a minimum wage employee, so this is a very unethical practice.

But even the case of ticketing, like airline tickets and so forth, the mere partitioning of the price, we know psychologically, it just makes it complicated for somebody to think about a price, because now I have to think in multiple dimensions, but there's another little factor, and that is many of these businesses delay the disclosure of that information. Yes, technically, I know all the fees before I make my purchase, but in many settings, retail settings, travel and lifestyle settings, there's a delay of some of the price information.

And that's why I mentioned that, in the case of StubHub, they learned, although they never did this, they learned it in an experiment that if they delayed the disclosure of their fees, even just by a few seconds, to when I get to the checkout page, that would increase their purchases 10%. Obviously, people weren't noticing. So if it's really the case that companies are intent on being transparent, then why not show us the total net price and the breakdown after the total net price right up front? If they feel they're being transparent, why not do it that way? The fact that they're delaying, and sometimes this is called drip pricing, where you just gradually reveal the price, the fact they're doing that already shows you that there's an intent to deceive.

Hal Weitzman: Okay. So I talked in the introduction about the Ticketmaster case, Department of Justice suing Ticketmaster and Live Nation. How does that fit into everything we've been talking about?

Jean-Pierre Dubé: Maybe tangentially at best. I mean, I really think of the main objections against Ticketmaster/Live Nation is about monopoly theory and leverage. I mean, the merger of Ticketmaster/Live Nation integrated the sale of tickets, which is a very important part of running a tour for a large artist, and the venues themselves. And so Live Nation owns many of the best venues for large rock concerts and other large events, and Ticketmaster is a very dominant supplier of ticket services.

They do all the revenue generation for the artists, and they've tied those two together, which means you can leverage monopoly power from one market into the other market. So if I'm an large artist and I want to use Ticketmaster, I'm going to be required to use a Live Nation property. And similarly, if I'm an artist and I want to use a specific Live Nation property, now I have to do all my ticketing through Ticketmaster, and it's that leverage that I think is going to be at the heart of the case.

Hal Weitzman: Okay. Now, I mean, what we've talked about is things that nobody likes, nobody likes hidden fees, nobody likes to feel deceived. And then, to get to the checkout page and find out, actually, it's a lot more than they thought, but they are going to do it anyway, because it's just the cost of getting to the end. It makes me wonder if making consumers more aware might be the answer, rather than changing companies' behavior. If consumers are more aware, for example, we talked about shrinkflation, if they're watching out for that, isn't that the best option? It would seem hard to regulate against shrinkflation.

Jean-Pierre Dubé: But again, think about the process of going grocery shopping. There are hundreds of thousands of SKUs on the shelves of a large supermarket, and-

Hal Weitzman: SKUs being products.

Jean-Pierre Dubé: Sorry, stock keeping units. Yes, there are hundreds of thousands of unique products across the aisles of a very large supermarket, and each aisle, could you imagine that I now, on top of having to compare all the hundreds, sometimes, at least best, even dozens of items, and looking at their prices, and looking at what they are, I now have to go and read the fine print on every label to see what's the pack size and then try and see if it's changed, which of course requires me to know what was the pack size last week? Most people just don't notice. And making matters worse, the packets, the packages themselves still look the same.

So visually, there's no cue to me that the pack size has changed. If there's no visual cue to me the pack size is different, why would I think I need to now go and read the small print, to find out that, actually, that exact same pack of rolls of toilet paper, paper towel have actually 30% fewer plies per roll? Why would I even think to look at that?

And because we're making these decisions over and over again, there's a long literature on this, we already shop heuristically, because it would be taxing to literally optimize and deliberate every time I walk down the paper towel aisle, for example. So we just look for our favorite brands, maybe we compare it to our second favorite brand. We look at the prices and we go, "It wouldn't occur to me that one or both of them has massively reduced the quantity of stuff inside that otherwise totally unchanged external packaging."

Hal Weitzman: Well, is it massive or is it subtle? Is that why we're missing-

Jean-Pierre Dubé: I mean, a 30% reduction in number of plies per rolls-

Hal Weitzman: Okay, that would be massive.

Jean-Pierre Dubé: ... is pretty massive, though. That's what Walmart did with their private label toilet papers.

Hal Weitzman: Okay, so it's a lot of effort for me to pay attention to it. Again, so that's why you're saying it's part of the same kind of trend, because monetizing my inattention?

Jean-Pierre Dubé: I think we could fairly ask the question, "Why is the burden, this burden of consent, when it's data privacy or of knowing the... Why is this falling on the shoulders of the consumer?" As I said earlier, why is it so difficult for a company to just say, "Here's the total net price, and if you're interested, click here. Here's a breakdown of all the pieces that went into that net price"? Why are they instead using drip pricing and just gradually disclosing the price in steps to me? So if I'm online, there's first the item price I see in the search results, and then if I click through on that item and put in my cart, then I can see that there's maybe taxes that are going to be charged on that.

And then, it's only when I get to the final checkout page, then they disclose the shipping fee, because they'll argue they didn't know my zip code before. I mean, but there's multiple prices, and they're withholding that in information over time. Even in a retail store, I won't really know that sales tax until I go to the checkout counter. Yes, technically speaking, we should all know the percent amount, and you could multiply by that percent amount and figure out the taxes, but we just, we forget.

Hal Weitzman: Okay, so it sounds like educating consumers is not going to be a complete answer. So what would be an answer? So let's take the cases that you've talked about, the restaurant, I guess you would say no hidden fees. You just have to increase your prices if you're going to increase them at the beginning, not at the end?

Jean-Pierre Dubé: I mean, if the restaurants can't control themselves, I'm not sure I have a legal opinion on this, but that legal opinion's coming. There's already private class actions against companies like Lettuce Entertain You for this.

Hal Weitzman: That's a restaurant operator in Chicago.

Jean-Pierre Dubé: That's a large Chicago restaurant operator, they have many different chains and outlets. Hilton and Marriott, there's private class action against them. I think in 2018, the class action estimated that they collected over $3 billion just in these hidden resort fees.

Hal Weitzman: Okay, so in the case of the restaurant, the corrective would be to tell them, "No hidden fees at the end." If they want to change their prices, change them up front. For the other one, for online shopping, presumably the correction would be to tell me what the total fee is up front, and there's no addition once I put that in my basket.

Jean-Pierre Dubé: That's right. I mean, when you're comparison shopping, there should be some access to the net price. I shouldn't have to do that, I shouldn't have to add all these three or four, five different prices, I shouldn't have to add them all up in my head.

Hal Weitzman: I guess the complication there though is that, presumably, so take an airline, nowadays, airlines charge you for seats, if you want to choose your seat, they charge you for luggage, if you want to take luggage. So the airline could say, "I didn't know you wanted to take luggage, that's like ordering another starter."

Jean-Pierre Dubé: Fair enough, and so the kinds of laws we're seeing enacted right now are largely for fees, like fees that you're charged regardless of what level of service you select. So Airbnb, for example, prompted regulation in Europe and also in Australia that requires them to disclose the property prices when you're browsing with the Airbnb fee already included. So I think that's what we were talking about and we should be... You're right that the discussion's gotten a little broader, but I was always thinking of this as a discussion about add-on fees, right?

Hal Weitzman: Just on fees.

Jean-Pierre Dubé: These add-on fees.

Hal Weitzman: Well, the reason that I think it's germane is because that's a cost that you used to... I mean, in the old days, you would get at least one bag free, and on some airlines you still do, and you would get a seat. If you were booking with another person, you could guarantee you'd be sitting together. Nowadays, that's not necessarily the case.

Jean-Pierre Dubé: I guess the airline, and this is a murky one, but I suppose you could look at customer data. What percentage of airline traffic actually travels without a piece of luggage? I mean, you always see somebody on a day trip, so that exists. Consultants do day trips, lawyers do day trips. So there is a class of passengers, but what percentage is that? And at some point, if the percentage is like 1% or less, then I think it follows that a reasonable traveler on a plane these days, on a commercial airline, pre-scheduled commercial airline is going to need to have some degree of luggage, so there should be an expectation that my luggage is part of the ticket.

Hal Weitzman: Right.

Jean-Pierre Dubé: It's not going to be on the seat there, but people travel, always travel with more than a personal item.

Hal Weitzman: Okay, so we've solved hidden fees and restaurant prices. What about the shrinkflation? Because that seems like a tricky one to actually legislate about.

Jean-Pierre Dubé: I guess, and this is always in the eye of the beholder, if the packaging hasn't visually changed in a way that a reasonable consumer would notice, but something inside did, then if it's not clearly communicated to the consumer, it's deceptive advertising. This could be something the Federal Trade Commission could take more ownership on.

Hal Weitzman: Okay, all right. Well, this is obviously going to be a very interesting case. I mean, all of these examples that are going to go on and on, and maybe at some point, we'll have you back and we can talk about the wins they've been for the consumer in this area. But for the moment, thank you so much JP Dubé, for coming on the Chicago Booth Review Podcast.

Jean-Pierre Dubé: My pleasure.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter, so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.