How to Dodge the Tourist Traps: The Economics of Hidden Fees

Gabaix-Laibson’s theory explains that transparency creates adverse selection problems for honest companies. When Hotel UpFront advertises “no hidden charges” with hefty upfront prices, it attracts only moderately savvy customers willing to pay for transparency. Meanwhile, Hotel FlyTrap’s fee-heavy model captures both unsavvy customers (who pay everything) and truly savvy ones (who arrange virtual SIMs, buy 7-Eleven snacks, exploit cheap rooms subsidized by minibar-drainers). This means “no hidden charges” also implies “if you can avoid hidden charges, you should choose our competitors”—transparent companies lose the most profitable customer segment (ultra-savvy) while competitors profit from customer heterogeneity, enabling hidden charges to flourish “even in markets with costless advertising” where information asymmetry theoretically shouldn’t persist.

The CMA guidance explicitly forbids car-hire companies from adding compulsory local charges that weren’t disclosed at booking time, directly targeting practices Harford experienced with both Europcar and Avis. The CMA argues that even if charges like tourist taxes are inevitably paid later in local currency, they “can and should be mentioned at the time of booking.” This addresses situations where online prices cover drop-off locations but omit mandatory driving fees for those countries—the absurd scenario Harford sarcastically imagined where booking systems assume customers would “wrap up the car in brown paper and ask Deutsche Post and Post Italiane to deliver it to Bologna.” The regulation recognizes that calling charges “local” or “inevitable” doesn’t excuse failing to disclose them when customers make purchasing decisions.

Midata made “much more progress in banking than energy” because product complexity fundamentally compounds comparison difficulties. While phone use patterns and electricity consumption vary across consumers, “at least those patterns vary in ways that are easy to compare”—standardized units enable meaningful evaluation. However, “more idiosyncratic products, or one-off purchases” create exponential complexity: “Where and when did you want to drive that car? How good a view do you want your theatre tickets to have, and would you like to include drinks at the interval?” Consumers want “variety and choice, even customisation, but we also want honest, comparable pricing”—competing desires that may be fundamentally irreconcilable. As Harford notes referencing the Rolling Stones, “you can’t always get what you want,” suggesting technological solutions face inherent limitations when product heterogeneity prevents straightforward standardization.

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This is an Intermediate-level article requiring understanding of basic economic concepts (competition, market incentives, adverse selection) while following counterintuitive theoretical arguments through accessible analogies. Readers must grasp how Gabaix-Laibson theory explains transparency’s paradoxical disadvantages, understand the Hotel UpFront/FlyTrap analogy’s distinctions between moderately and truly savvy customers, recognize how obfuscation weakens competitive pressure beyond individual instances, and synthesize personal anecdotes with economic theory and policy solutions. Success requires comfort with economic reasoning without advanced technical knowledge—recognizing why “no hidden charges” creates adverse selection, understanding how information asymmetry undermines market efficiency, appreciating regulatory solutions’ complementary role alongside individual consumer savvy. Harford’s accessible writing style and vivid examples make sophisticated economic arguments comprehensible to educated general readers without economics training.

Harford adapts the serenity prayer’s structure—”grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference”—to consumer contexts: “customers will find themselves acting out a version of the serenity prayer, wishing for the savvy to spot the price traps that can be avoided, the grace to accept the price traps that cannot, and the wisdom to know the difference.” This acknowledges realistic limitations despite regulatory efforts and technological promises. Some traps (bringing 7-Eleven snacks, arranging virtual SIMs) are individually avoidable through preparation; others (mandatory local charges, structural obfuscation weakening overall competition) require systemic solutions beyond individual action. The wisdom component—”know the difference”—becomes crucial: wasting energy fighting unavoidable traps creates frustration, while accepting avoidable ones wastes money. The adaptation suggests consumer empowerment requires both individual savvy and acceptance of structural constraints.

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