A Simple Framework for Estimating Consumers Benefits from Regulating Hidden Fees

Policy makers are increasingly turning to regulation to reduce hidden or nonsalient fees. Yet the overall consumer benefits from these policies are uncertain because firms may increase other prices to offset lost fee revenue. We show that the extent to which firms offset reduced hidden-fee revenue is determined by a simple equation that combines two sufficient statistics, which can be estimated or calibrated in a wide range of settings: a parameter that captures the degree of market competitiveness and a parameter that captures the salience of the hidden fee. We provide corroborating evidence for this approach by drawing upon evidence on the effect of fee regulation under the 2009 Credit Card Accountability Responsibility and Disclosure Act. We also illustrate the applicability of our approach by using the framework to assess a hypothetical regulation of airline baggage fees.

Agarwal, Sumit and Chomsisengphet, Souphala and Mahoney, Neale and Stroebel, Johannes, A Simple Framework for Estimating Consumer Benefits from Regulating Hidden Fees (October 2, 2014). Available at SSRN: https://ssrn.com/abstract=2504516 or http://dx.doi.org/10.2139/ssrn.2504516