In a free market, all costs should be subject to competition, so economists have long been stumped as to why you almost never see a hotel compete on minibar prices or a printer company advertise its low cartridge costs. Perhaps, some have said, most hidden fees are just too complicated (and therefore too expensive) to explain in advertising. Or maybe this is a case in which companies are acting irrationally, losing more by irritating customers than they gain in income. But in the May issue of The Quarterly Journal of Economics, the Harvard professor David Laibson and Xavier Gabaix of M.I.T. offered a different and more persuasive account of why hidden fees persist.
Their argument assumes the existence of two kinds of consumers — sophisticates and “myopes.” Sophisticates play the hidden-fee game well. They seek out low advertised rates and whenever possible avoid or find substitutes for the hidden fees, using cellphones at hotels, steering clear of the minibar and setting their printers to draft mode. Myopes, by contrast, obliviously sip $5 Cokes.
The Times goes on to say that no one has an economic incentive to turn ‘myopes’ into ‘sophisticates’, but that is in fact the Wesabe business plan. (Oops, I gave it away!) Since I’ve said that having your idea in the Times “Year in Ideas” issue is a bad sign for entrepreneurs, I’m very glad they missed that. 🙂