(a) What are the ‘hidden fees’ discussed in the article above? Why are they considered hidden? Give one other example of hidden fees based on another type of good or service (not in the article).
(b) Give one example of an actual government policy/law that has attempted to counteract problems associated with hidden fees and comment, using your knowledge of economic theory, on how successful you think the policy is (not in the article).
“These hidden fees, the report argues, can weaken the overall economy by making itless efficient.” Do hidden fees actually make the economy less efficient? If so, how? When answering, ensure you first clearly define the concept of efficiency.
(a) In the previous question, it is implied that hidden fees cause a lack of competition. However, it is also the case that hidden fees are the result of a lack of competition. Discuss why this might be the case.
(b) Given this, what policies can governments pursue to reduce the practise of hidden fees without directly prohibiting the use of hidden fees?
If hidden fees are profitable to sellers, then why don’t we observe hidden fees in all markets (e.g. the market for oranges)? Clearly goods and services with certain characteristics are more likely to be able to utilise and benefit from hidden fees.
Identify these characteristics and give appropriate rationale for each of them.
(a) The two goods discussed in the article are exports for the USA. How do hidden fees affect the importing (tourist/visitor) countries? Discuss specifically in terms of goods that are substitutes to international tourism, and the resultant changes to the market equilibriums and also surplus distributions of these goods.
(b) Consider the market for US dollars. The USA supplies US dollars and the rest of the world demands it. The interaction of demand and supply curves determine the exchange rate of US dollars vis-à-vis other countries. Given this, illustrate (using a fully-labelled graph) how the use of hidden fees in these export goods markets may potentially affect the exchange of the US dollars vis-à-vis another country that is importing such goods.
Hidden Fees and Their Impact on the Economy
The hidden fees entail those expenses that are not usually incorporated into the acquisition price and hence it difficult for the client to notice such charges (Agarwal et al. 2014, p. 240). The resort, baggage and the change itinerary fees are the hidden costs disclosed in this article. These costs are considered hidden because they are not included in the originally advertised prices. The sellers or the suppliers of the products introduce the hidden fees at some point in the transaction so as to raise the final price. The vendors often use this tactic to reduce the perceived prices and lure the clients to make the buying decisions founded on misinformation. As a result, these fees end up being deceptive, make the prices vague, and curtail effective decision making on the side of consumers.
Graphs shows resort fee charged by different hotels in Las Vegas
The hotels usually apply the resort charge. This fee incorporates a mandatory charge included in the hotel room price and becomes part of the cost, and yet it was not shown in the advertised price. To the surprise of the consumer, this charge usually forms a significant portion of the aggregate price, and in some instances, it is higher than the advertised price. Some hotel operators often attempt to justify the resort charge by linking the fee to water, gym, coffee services and other amenities provided to the customers. On the other hand, the change itinerary and baggage fees are imposed on travelers by the airline companies. Like the resort charge, these charges are not always part of the advertised price.
An Example of Hidden Expense: Documentation Fees
Documentation fee is a hidden fee associated with the purchase of a new car. The purchasers of new vehicles always encounter many charges that are added after the acquisition. Such amounts are not sufficiently revealed during negotiations or in the advertised price. Instead, they are introduced at the end of the purchase, and they are unavoidable and in some instances non-negotiable (Grubb 2015, p. 20). Therefore, the consumer only learns of the actual price of the car at the very end of the purchasing procedure after incurring additional costs. Documentation charge is an example of such costs and other hidden charges such as dealer preparation fee are applied. Although the documentation fee does not appear in the advertised price, the car dealers often introduce it once the client has settled the price for the new vehicle. This amount is charged to cater for the filing and preparation of the sales contract as well as other relevant paperwork.
Australian Consumer Law
The Australian Consumer Law is an example of legislation that attempts to mitigate the effects of the hidden fees. The rights of clients regarding the hidden fees are covered in this law under component pricing. The legislation requires the sellers to present to their customers the total prices (Coorey 2014, p. 56). This requirement relates to promotion across all mediums. If the vendor advertises a price that is only a proportion of the aggregate price of a commodity, then the total price should be displayed prominently. The single price must incorporate any tax, fee, levy, duty or other supplementary charges.
Consumer Protection Laws as a Mitigation Strategy
Australian Consumer Law is instrumental in reducing the incidences of consumer exploitation through the hidden fees by requiring the sellers to display the total prices (Langenfeld 2014, p. 79). However, in some situations, the law may not avail the necessary protection especially when the consumers are not informed about their rights. Moreover, inadequate resources and non-commitment from personnel intended to implement the policy can curtail its effectiveness.
The Hidden Fees and Economy
This term relates to the utilization of the entire inputs such as energy and time in the production of a particular output. Efficiency is achieved when waste of resources is minimized (Homburg 2012, p. 52). Therefore, economic efficiency indicates an economic state where each resource is allocated optimally to serve each individual in the best possible way while reducing wastage. The ideology of economic efficiency is founded on the principle that the resources are limited. As a result, there are no sufficient resources to have the whole aspects of the economy operating at their peak (Frank & Bernanke 2011, p. 73). Instead, the limited resources must be allocated to meet the wants of the economy in an ideal manner while limiting inefficiency.
This graph demonstrates allocative efficiency. This kind of efficiency takes place when clients pay a market price that is related to the marginal costs. In the absence of hidden prices, the allocative occurs at point A. however, in presence of hidden fees, the price shoots from P1 to P2 which is an indication of allocative inefficiency since the prices exceeds the benefits.
Hidden fees are known to diminish economic efficiency. Transparency and correct information are essential components that contribute effectiveness in the market. Thus, when the sellers and suppliers of the commodities fail to avail accurate information regarding their pricing, they hinder the ability of clients to make informed decisions concerning their consumption (Case, Fair & Oster 2014, p. 50). Biased or deceptive prices go against the requirements of economic efficiency regarding optimal allocation of resources to serve the interests of each person in a best possible way. It is clear that if the hotel and airline owners provide correct price information, the clients will be in a better position to make good decisions about use the services depending on their economic strength (Kleindl, Burrow & Dlabay 2016, p. 32). Therefore, consumers end up paying exaggerated prices for products that seemed to be cheap.
The Hidden Fees and Competition
Hidden fees curtail healthy competition in the market. Such deceptive practice makes it difficult for the price-reducing rival to outdo the most expensive competitors. This scenario has the impact of lessening competition since strategies such as price reduction may not work (Carlin, Davies & Iannaccone 2012, p. 204). As a result, monopolies are likely to emerge in the market thus worsening the situation since there will intensified barriers to market entry. The clients will also develop mistrust towards the advertisements due to horrible past experiences. Studies show that hidden prices have significantly reduced the level of competition in the market of the United States. For example, only a few firms are benefiting from the increasing returns to capital, lower levels of business entry to market as well as diminished workforce mobility.
Concept of Efficiency and its Relationship with Hidden Fees
Policies Government Can Use To Reduce Practices of Hidden Fees
Full Cost Disclosure
The government can enact laws requiring the sellers and service providers to declare the total amount associated with a particular product or service. For example, the mandatory fee should be incorporated in all kind of advertisements. Full disclosure requirement can be instrumental in solving the problems associated with mere disclosures which are unable to sufficiently protect the rights of the clients. Moreover, comprehensive disclosure legislation can enable the customers to compare the prices among different vendors effectively. As a result, they will be in a position to make sound purchasing decisions that are devoid of manipulation from the deceptive advertisements (Fallert 2012, p. 145). The federal regulation on the airlines concerning the mandatory charges is a good example of disclosure policy that has helped minimized the adverse consequences of consumers associated with the hidden prices. For example, this regulation demands that the airlines advertise the total charges to be incurred by the clients (Buckland 2012, p. 78). Although this policy has some loopholes, the legislation has barred the airline agents from introducing charges like facility and taxes as hidden as these costs are included in the initial advertised price.
Banning Deceptive Trade Activities
Legislation outlawing deceptive trade activities can be effective in reducing the incidences of hidden prices. For instance, the law should prohibit all commercial practices considered to be unfair and misleading (Farnham 2016, p. 43). A business practice should be condemned as unfair if such custom is likely to influence the ability of the consumer to come up with an informed decision about a particular product to buy. Therefore, criminalizing the illegal commercial behaviors can be helpful in hindering the sellers from applying hidden fees on consumers due to fear of a possible legal suit.
The government can develop a policy to direct the providers of service and goods to charge a reasonable fee. A reasonable fee is the one that is not too low or high when it is related to similar costs for the same service (Roe & Repetti 2014, p. 564). Limits regarding what deem to be reasonable fee should also be clearly stipulated in the legislation to avoid an ambiguity that may arise (Morandin & Smith 2011, p. 30). For example, the law can specify that the flight change fee should not exceed thirty percent of the total flight expense. Studies show that limiting the magnitude of hidden fees is an effective way of protecting consumers from exploitation that may result from such practices. For instance, in the United States, the documentation fee differs significantly between the states that have regulation caps on such fees and those countries that have no regulation. The law is known to affect the level of documentation charges considerably (Clark 2016, p. 84). States without regulation have the documentation fee ranging between 675 and 999 U.S dollars while those with the law like New York have a documentation fee of 75 U.S dollars.
Hidden Fees in All Markets
Although the hidden costs exist and are profitable to the sellers, such charges are not available in all markets. It is clear that there are specific markets that favor hidden costs and that there are restrictions that eliminate these fees in other markets. For example, when the consumers have sufficient information regarding the prices of products, then it becomes difficult for the sellers to introduce hidden charges. Government intervention is some markets can also offer an explanation to this scenario (Repetti, Roe & Gregory 2015, p. 30). In many countries across the globe, the government sometimes imposes price controls especially on foods to make such products affordable to ordinary persons. In some instances, the government can also remove taxes on foods. As a result, it becomes difficult for the sellers to introduce hidden prices in such environments.
Characteristics Likely To Facilitate Hidden Fees
Little Information On The Side Of Consumers
When the clients lack information or have insufficient information about the prices associated with a good or a service, they are likely to be exploited by the sellers. Studies show that most victims of resort fees are the tourists from other countries. Such clients have little or no information about the products and services of hotels and thus end up paying resort fee which was not part of the advertised prices.
Luxurious Goods and Services
Luxury services and commodities are in better position to attract hidden prices. For instance, the resort prices vary among hotels in the United States and not all the hotels charge this extra fee. Research reveals that the upscale and luxury hotels with expensive goods and services often charge resort fees (Heidhues, K?szegi & Murooka 2016, p. 15). This practice is not common among the budget, midprice and economy hotels that may or may not have luxuries.
Sports events and concerts are also examples of secondary needs that have higher chances of attracting hidden charges. Such services are known to have a higher amount of mandatory fees attached (Repetti, Roe & Gregory 2015, p. 800). For instance, the online vendors add hidden fees such as service fee, delivery fee, and processing fee to tickets charges at different phases of the acquisition process. These charges are compulsory and are usually not linked to any extra services during the entertainment.
The hidden prices thrive in case the sellers and suppliers of products can introduce other services to appear as additional to what the consumer had purchased earlier (Vinod 2011, p. 58). For example, it is the habit of the hotel operators to link the resort fee charged on clients to water, gym, coffee services and other amenities. Moreover, the availability and increased use of Internet services have made the hotel owners to add internet charges as a hidden fee for the guests.
Fees That Can Be Introduced Without the Consent of the Customer
Sometimes it is difficult for consumers to make a follow up on prices of certain services and products they consume. This scenario is tied to the complexity of business rates imposed on clients especially in telecommunication and banking markets. The carriers in telecom markets charge fees such as mobility administrative charge. This fee is not always included in the advertised prices, and consumers have less or no control over its imposition.
Impact of Hidden Fees on Importing Country
The hidden prices make the consumers pay higher prices for the products. The visitors from another country will have to spend a lot to get the services rendered. This scenario raises the prices of imports. As a result, the net exports of the importing country will significantly reduce. A reduction in net exports will consequently affect the status of Balance of Payment (Kleindl, Burrow & Dlabay 2016, p. 44). If the importing country is experiencing the Balance of Payment surplus, the surplus will decline considerably. On the other hand, if the nation is having Balance of Payment deficit, then the Balance of Payment will continue to deteriorate.
Changes in Market Equilibrium
Domestic tourism is a substitute to international tourism. Changes in local tourism are likely to affect the demand for international tourism. For example, development of new domestic tourist sites can sway the market to favor local travel. Therefore, the demand for international travel can be influenced by the availability of local tourism.
Some of the events that can lead to increase in the price of domestic tourism include an increase in transport costs or an increase in the government taxation (Case, Fair & Oster 2014, p. 62). When the price of domestic tourism increases while that of international tourism remains constant, consumers are likely to increase their demand for international travel. On the graph above, this change is shown by the shift of demand curve from D0 to D1. The equilibrium price and quantity will increase, that is, change from point A to B.
Government tax reduction on home tourism amenities and also reduction in travel expenses will make the local tourism cheap and more affordable. Moreover, increases in home travel sites and places are likely to drive down the price thus increasing the demand for local tourism (Carlin, Davies & Iannaccone 2012, p. 64). When individuals change their desire for domestic tourism, the demand for international travel will decline. On the graph above, this change is depicted by a shift of demand curve from D1 to Do. Likewise, the equilibrium price and quantity will decline, that is, a change from point B to point A.
The Foreign Exchange Market for American Dollars
The value of exports determines the strength of currency. If a country gains more from the exports than what it imports, then its currency will be stronger compared to the trading partner (Sarno, James & Marsh 2012, p. 32). The graph below shows trade between the United States and Japanese. In this scenario, America exports the tourism services to Japan. Before the Japanese tourists get the services in the United States, they must exchange their Yen for the U.S dollars. This means that they will use their Yen to acquire the U.S dollars. Since the United States airline and business owners have hidden fees in their services, it means that the Japanese visitors will use more Yens to buy the dollars. This is because the hidden costs increase the prices of commodities purchased by the tourists significantly. This situation, therefore, increases the demand for U.S dollars which results in a stronger dollar.
Quantity demanded (U.S Dollars)
An increase in demand for U.S dollars will shift the demand curve from D0 to D1. As a result, the number of dollars required will increase, that is, movement from Q1 to Q2. Also, the value of the dollar will increase, that is, the change from 110 to 120. Initially, one U.S dollar purchased 110 Yens. But after the trade, one U.S dollar buys 120 Japanese Yens. In this case, the United States dollar increases in the value as the Japanese Yens depreciate.
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