Could Higher Fees Lead to Lower Prices

Purpose – Supplementary fees such as restocking fees, nonrefundable shipping and handling fees, and cancellation fees have become prevalent in the United States, and customers as well as the popular media have raised serious concerns about them. This paper tests whether such fees could benefit consumers because they lead to lower prices. Design/Methodology/Approach – Transaction data that include prices and fees were collected from different service providers, including hotels, airlines, online retailers, and restaurants. The data were collected from different countries at different points in time. Cross-sectional and panel data sets were used to test the relationship between fees and prices. Findings – The empirical results indicate that on average higher fees lead to lower prices for the majority of customers who do not abuse customer-friendly service policies. These findings are valid for different service industries in different countries even after controlling for unobserved heterogeneity using panel econometric models. Originality/Value – The results are consistent with the hypothesis that special fees are used to limit the abuse of customer-friendly service policies, thus helping service providers to offer lower prices to the majority of customers who do not abuse these policies