The Sinister Logic of Hidden Online Fees

Airbnb recently announced that it would start offering more upfront information about prices on the platform. Until now, Airbnb has used a pricing strategy that is informally known as “drip pricing,” in which a company lures in customers by showing a low price and then tacks on fees as they go along, in the hope that customers will focus their attention on the low initial price rather than the total. An Airbnb customer who tries to book a $300 room for a night can easily end up spending $600 after fees and taxes are tacked on. Hidden fees are good for Airbnb but bad for customers. Airbnb isn’t alone in using hidden fees. UberEats, eBay, Lyft, Instacart, Etsy, Ticketmaster, Postmates, and StubHub, among others, all engage in drip pricing, shrouding their fees to varying extents. This might not be a big deal if customers fully anticipated and accounted for the fees. Hidden fees turn out to be a lucrative pricing strategy, at least in the short term. The fundamental problem is that in order for markets to discipline misleading pricing strategies, customers need to anticipate and account for the strategic behavior of companies. In practice, customers don’t always notice a company’s behavior, and companies too often exploit this to tip the scales in their own favor. This can lead companies to withhold unfavorable information or make it unnecessarily complicated. Airbnb’s announcement comes at a time of significant regulatory scrutiny, with potential regulation on the horizon. President Biden called for agencies to look into ways to reduce hidden fees, and the FTC has announced plans to pursue the issue. Price transparency regulation and enforcement can be valuable and can help to prevent companies from engaging in deceptive pricing strategies. When companies exploit behavioral biases, regulation needs to play a role.

[Michael Luca is an associate professor of business administration at Harvard Business School]