Economics: Market failure – Stopping sludge

February 9, 2023
By David Leonhardt, Good Morning, The New York Times, Feb. 9, 2023
Good morning. We explain why the Biden administration is trying to crack down on those sneaky fees charged by hotels, rental cars, internet providers and more.
Ticketmaster is especially aggressive about imposing fees.Paul Sakuma/Associated Press
A market failure
Sneaky fees have become a big part of America’s consumer economy.
Hertz charges almost $6 a day simply for using a toll transponder in a rental car. Marriott and Hilton add nightly “resort fees” to the bill even at hotels that nobody would consider to be resorts. American, Delta and United list one airfare when you first search for a seat — and then add charges for basic features like the ability to sit next to your spouse.
Ticketmaster is especially aggressive about imposing fees, as I experienced recently while buying two tickets to a football game. When I initially selected my seats on Ticketmaster’s online stadium map, they cost $48. The bill at checkout was more than one-third higher — $64.40.
President Biden has announced a crackdown on these fees (which his administration calls “junk fees”), and he devoted a section of his State of the Union address to them. “Look, junk fees may not matter to the very wealthy, but they matter to most other folks in homes like the one I grew up in,” he said Tuesday night. “I know how unfair it feels when a company overcharges you and gets away with it.”
Today, I want to explain why anybody is even worrying about this problem. After all, in a competitive capitalist economy like ours, shouldn’t the market have already solved it?
The market solution to sneaky fees seems straightforward. When Marriott starts charging $50 nightly “resort fees,” Hilton can call out its competitor and try to steal Marriott customers. And some companies do take this approach: Southwest Airlines advertises a “Bags Fly Free” policy, an obvious swipe at rivals.
But the mushrooming number of fees has made clear that competition does not usually eliminate the practice. Why not? Academic research has suggested that there are two main reasons.
First, human beings are not the efficiently rational machines that economic theory pretends they are. An entire branch of the field, behavioral economics, has sprung up in recent decades to make sense of our limited attention spans.
If you are familiar with the best-selling book “Thinking, Fast and Slow,” by Daniel Kahneman, you will recognize these ideas. We lead busy lives that keep us from analyzing every purchase, and we get distracted by salient but misleading information (like a low list price). Big companies, with the resources at their disposal, have learned to take advantage of these limitations. The economist Richard Thaler refers to practices like these as “sludge,” the evil counterpart to nudges that use behavioral economics to improve life.
True, one company could call out another for using sludge. But doing so often requires a complex marketing message that tries to persuade people to overcome their psychological instincts (like the appeal of a low list price). For that reason, Hilton can probably make more money by charging its own sneaky resort fees than by criticizing Marriott’s.
“Once some subset of hotels start charging these fees and generating a significant amount of revenue,” Bharat Ramamurti, a Biden adviser, told me, “that creates pressure on hotels to do this, or otherwise they’re getting left behind.”
No choices
The second major reason is monopoly power. In some markets, consumers don’t have much choice. Ticketmaster’s fees outrage many people. But I didn’t have any choice when I bought those football tickets. There was no rival service selling them.
In recent decades, many American industries have become more concentrated, partly because Washington became more lax about enforcing antitrust laws. Thomas Philippon, an N.Y.U. economist, has estimated that increased corporate concentration costs the typical American household more than $5,000 a year.
In some industries, sludge and monopoly power feed off each other. The small number of dominant internet providers, for instance, reduces the chances that a new entrant can design a business strategy around undercutting Comcast’s and Verizon’s sneaky fees. Those new entrants don’t exist. Comcast and Verizon have also figured out how to make the cancellation of internet service unpleasant and time-consuming. Airlines — another concentrated industry — use frequent-flier programs in a similar way, effectively punishing customers for switching to a different carrier.
Bharat Ramamurti, a Biden adviser.Oliver Contreras for The New York Times
The crackdown
The Biden administration is trying to address both causes of sneaky fees. On antitrust, it has adopted a policy more confrontational than that of any other administration in decades. That effort is in its early stages, without many big victories. Still, the administration does seem to be taking corporate concentration seriously.
As for the sludge itself, the administration has already taken steps to restrict a few examples, such as charges for late payments on credit cards. Biden has asked Congress to pass a law with stricter rules for other industries.
The administration’s bigger focus for now is on disclosure — requiring companies to tell consumers up front what the full cost will be. The Transportation Department has proposed such a rule for airlines.
Disclosure rules often have the advantage of being easier to enforce than outright bans on sneaky fees: If the government bans one kind of fee, companies can often repackage it in another way. “The best we could hope for is that consumers see the full costs transparently and that the government facilitates that,” Thaler, a Nobel laureate in economics, told me.
Ramamurti, the Biden adviser, put it this way: “We don’t want firms to be competing with each other to be hiding the true price of their product.”
How much of a difference Biden’s actions will make remains unclear. But the administration’s effort is based on an idea supported by a lot of evidence: The free market doesn’t solve all problems.
The U.S. government over the past half-century has moved toward an economic policy that often allows corporations to behave as they want, based on the theory that the free market will solve any excesses. The results haven’t been very good. During that same half century, economic growth has slowed, corporate profits have risen faster than wages, income inequality has soared, and living standards have grown slowly.
Sneaky fees turn out to be a small but telling example of why the modern economy isn’t working so well for many Americans.
More on Biden
Biden’s State of the Union address focused on taxing the rich and creating new government programs. It’s part of a bid to win back working-class voters through their wallets.“Lots of luck in your senior year”: decoding a Bidenism from the State of the Union.

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