Stubhub and the Case of the Stubborn Junk Fee

Exhibit A for why self-regulation and 'free markets' won't end deceptive pricing.

Photo credit: Focal Foto

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Washington, D.C., Attorney General Brian Schwalb announced last week that his office is suing Stubhub, the ticket re-selling platform, over its use of “junk fees.”

As a reminder, junk fee is a broad descriptor for mandatory fees that are not disclosed until the end of the purchase process and that don’t actually pay for anything in particular. They’re all over the economy, tossed onto bills for rental housing, cell phones, moving trucks, carpet cleaning, and on and on.

“For years, StubHub has illegally deceived District consumers through its convoluted junk fee scheme,” said Schwalb. “StubHub lures consumers in by advertising a deceptively low price, forces them through a burdensome purchase process, and then finally reveals a total on the checkout page that is vastly higher than the originally advertised ticket price. This is no accident — StubHub intentionally hides the true price to boost profits at its customers’ expense.”

Schwalb’s complaint lays out a comprehensive explanation for how Stubhub creates a false sense of urgency and employs a series of nonsense steps to convince buyers to accept whatever fees are tacked onto their purchase at the last moment. It also notes that Stubhub purported to give buyers the option to turn on a filter that would include all mandatory fees in their price, but that the filter did not actually do so until Schwalb’s office alerted Stubhub to the discrepancy earlier this year.

As someone who has personally spent a lot of time working on junk fee policy over the last year or so — including trying to convince lawmakers to ban them statewide — I appreciate the AG’s case, especially because many of the allegations point to behavior that was indeed predatory and potentially fraudulent.

That said, I feel a little bad for Stubhub! Not too bad, but, you know, a smidge.

Why? Well, about a decade ago, Stubhub actually tried to eliminate junk fees — and failed. Its experience shows why policymakers need to step in and regulate this area of pricing, rather than relying on corporations themselves or the courts to do it for them.

In 2013, Stubhub initiated a change in its pricing model. It abandoned the use of junk fees — a model which is employed by other major tickets sellers such as Ticketmaster — and moved to an “all in” pricing model, wherein those fees were disclosed up front.

“The hope was that the industry would follow and that would yield greater transparency,” said one Stubhub executive.

Things didn’t work out that way. Instead, ticket buyers balked at prices that appeared artificially higher than those shown by other vendors. This caused Stubhub to lose, by some reports, up to 20 percent of its market share.

So just two years after moving away from junk fees, Stubhub climbed back into the garbage and started charging them again. And it surely didn’t hurt that Stubhub ran a real-time experiment comparing the behavior of shoppers on whom junk fees were levied against those who weren’t hit with them, with the junk fee-d up side resulting in higher profits. As the study found, “Overall, the StubHub users who weren’t shown fees until checkout spent about 21 percent more on tickets and were 14 percent more likely to complete a purchase compared with those who saw all-inclusive prices from the start.”

Why did that happen? There’s a psychology at work with junk fees wherein shoppers feel the pull of lower prices, fail to calculate fees accurately, or they simply believe everyone uses junk fees and therefore refuse to reward those businesses that do away with them because they don’t buy that they’re truly gone. And by the time consumers have sunk time and energy into a purchase, they are understandably loathe to start all over again somewhere else, even if they’ve been subjected to a whole host of ridiculous fees.

“When people get to the end of the process, there’s a variety of psychological reasons they’re locked in,” said one researcher. “They overestimate the cost of starting over, they underestimate the benefits.”

Stubhub told Wahingtonian magazine it is “disappointed that the DC Attorney General is targeting StubHub when our user experience is consistent with the law, our competitors’ practices, and the broader e-commerce sector.”

And, indeed, Stubhub has a point: Junk fees have become standard across industries, and Stubhub’s experience shows how they create a race to the bottom, allowing the less transparent actors to appear less expensive than those competitors that are actually being honest, giving them an unfair advantage in the marketplace. Stubhub itself revealed that an industry player that tries to do the right thing will get punished because of the false perception that its prices are higher.

None of which is to lionize Stubhub, to be clear. After its failed experiment in all-in pricing, as Schwalb’s complaint lays out, it appears to have gone all in on trickery and deception to pad its profits.

But the Stubhub case shows why formal rules to eliminate junk fees are necessary: This is an area in which “self-regulation,” “market forces,” or whatever you want to call it simply will not work because of the advantages embedded in deception and the widespread belief that all the players in the marketplace are, at some level, corrupted. Lack of regulation leads to a race to the bottom, as the market incentives actually point toward worse behavior. Stubhub is by no means unique in its tactics.

I’ve written before, this is not just a consumer rights issue, but an anti-monopoly issue: Corporations that employ junk fees are gaining a competitive advantage by being more deceptive and ultimately charging higher prices, harming competitors that want to do the right thing, but are compelled into the same anti-consumer behavior as their less savory competitors. Add in that many of the worst offenders are in consolidated markets where consumers have few options and tacit collusion across the industry is easier due to limited participation, and you have a area in which policy is the necessary — nay, the only — option for creating clear, competitive, transparent markets.

And, for those who care about such things, eliminating junk fees has consistently polled as a serious political winner. “When companies charge hidden junk fees at checkout, it can cost thousands of dollars a year. I just signed a bill into law banning that crap in Minnesota,” said Minnesota Gov. and vice presidential candidate Tim Walz when he signed a junk fee ban into law earlier this year.

I hope Schwalb wins his case and Stubhub is forced to change its ways, but it would be even better if there were broad based support for laws to eliminate junk fees across the economy adopted in every state and city.

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SHAMELESS SELF-PROMOTION: I have a new piece in The New Republic looking at Gov. Tim Walz’s record in Minnesota, how Democrats there have used a slim legislative majority to effectively challenge corporate power, and what that might mean for the Harris campaign and potential administration. Read it here.

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UPDATE: I’ve written a few times about corporate landlords using third-party algorithms, supplied by corporations such as RealPage, to fix rental housing prices. Well, San Francisco last week became the first city to adopt a municipal-wide ban on the use of rent-fixing software. Read more here.

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— Pat Garofalo