Sample Assignment on Hidden Charges

Answer 1 a)

According to definition hidden fees are the charges that are not published in the tariff but are charged for each bill. In this case the hidden fees are the charges that are imposed on the customers. The example of ‘resort fees’ implied on the guests on top of the published tariff rate is a hidden charge which is included in the bill. In the airline industry the instance of charging, ticket change fees and charges for baggage can be considered as hidden fees (DeVries, 2008). These are addition charges to the normal published tariff rates. The inclusion of miscellaneous charges is also a common example of hidden charges.

These fees are considered hidden because they are charged in addition to the normally published tariff. The customers and the users of the services are not aware of these charges before they subscribe to them. It could be further stated that the information regarding these charges are not included in the advertisements as well. The information of the charges are neither included in the product and service description (Wong and McKercher, 2012). The other reason to consider these charges as hidden is because the government is also not aware of these charges being imposed on the customers (Tomazos, and Cooper, 2012).

The popular example of these charges being charged in addition to the travel and tourism sector is in the banking and financial sector. This is the sector were the existence of the hidden charges can be experienced. The financial institutions charge additional charges as processing fees and miscellaneous charges on top of the interest rates that are levied on the borrowers. It can be further stated that the existence of the hidden charges are evident in the share market as well (Al-Wugayan, Pleshko, and Baqer, 2008). The companies and the brokers involved in the share market charges fees in addition to the brokerage fees from the traders, which are generally explained of informed to them earlier. These charges are generally in terms of miscellaneous and service charges. It has been evident that the most common form of Hidden charges are miscellaneous charges and hidden charges (Allred and Addams, 2013).

Answer 1b)

There are number of laws and acts that have been formulated to counteract the problem of hidden charges and fees that are imposed on the consumers and the users of the services. The law that provides protection to the consumers and action on the offenders are: Unfair competition law, false advertising law, Federal trade commission act and the consumer rights act. The government of different countries have tried to curb these because these charges have a negative effect on the psychology of the customers and tend to deteriorate the market condition.

In this regard it can be stated that the consumer protection act protects the customer from paying these charges. Moreover it could be stated here that the consumer protection act works on the postulates of the Federal Trade commission act. The act draws clear boundaries on the charges and the fees that can be levied on the customers. It has been considered a criminal offence on the part of the companies and organisations to make false advertisement for their products to gain market share. The laws state that, this can be considered as a violation of the right to information for the customers. The act has further propounded that making false advertisement in order to gain market share shall be considered as an exercise to deceive customers with oblique motive and intent. An act of not disclosing the same shall also be considered as an act of falsification. Further the act has drawn special boundaries on financial organisations on the charges which can be imposed on the users of the financial services. It has been stated here that the people and the organisations found to be guilty with such offences of charging hidden fees shall be treated with severity as per the rules and regulations of the act.

Here it can be stated that the act has made special note on the financial services sector. This is because, the instances of charging hidden fees to the subscribers of the services have been found to be maximum in the financial sector (Allred and Addams, 2013).

Answer 2)

Efficiency has different definitions, but the most commonly efficiency can be described as an ability of not wasting energy, effort, money and time, in performing a task. In this task it would be also important to describe economic efficiency. Economic efficiency can be defined as the economic condition in which all the resources are optimally allocated to serve individuals and entities in the preeminent way, while minimising waste and inefficiency.

It can be clearly stated in this context that hidden fees weaken the overall economy by making it less efficient.

In this context it can be said that the best and the most efficient market mechanism is perfect competition and free trade which promotes economic growth in a country. Perfect competition is considered as the most efficient market structure in a free market economy because it operate under the principles of transparent prices, perfect information, free entry and exit of firms in the market and large number of buyers and sellers so that all the firms are price takers. This enable in having prices equal to marginal cost of companies, optimising producer and consumer surpluses and in optimally allocating resources.

In this case hidden fees violate the principle of transparency necessary in the system. The transparency in the system is violated because perfect information regarding the prices being charged to the subscribers is not reflected properly. This prevents the consumers form shifting to an alternative producer who provides similar or better product at a lesser price. This is how inefficiency in the system is promoted. Therefore optimization of the resource is not possible. This weakens the economy because maximum output is not being realised at the least possible. In this case it can be further stated that the hidden prices increase the producer surplus whereas reduces the consumer surplus. Therefore the consumers lose out on the opportunity that they would otherwise have. This brings in a sense of apprehension among the consumers which affects the demand of the products and leads to an overall decrease in the national income which indicates weakening of the economy.

The other aspect that becomes important here is the fact that hidden prices affects the rational decision making process of the consumers. The main reason behind this fact is that people are not able to judge who provides the best services at the lowest cost. It has been seen from examples that people tend to opt for services that have a lower mark-up price but has a hidden cost associated. This is simply because they are lured towards the low prices which actually results in paying much higher prices for the products. It has been further evident that this causes lack of competition in the market. The lack of competition is caused because companies and organisation with transparent pricing policy fail to advertise low prices to the people while they are actually not. The people find the low prices attractive and shift to such products with the hidden fees. The firms with transparent pricing techniques miss out on business opportunity and ultimately depart from the market. This creates lack of competition and facilitates the firms with hidden fees in having monopolistic power.

Answer 3a)

In the aforementioned part it has been clear that hidden fees can create lack of competition in the market, in the same way it can be further reiterated that hidden fees might be a result of lack of competition as well. Lack of competition means the firms has greater pricing power in the market which enables them to charge a price for the product depending on the pricing power. In this context it can be argued that why does the companies or the organisations have transparent pricing policies even though there is lack of competition prevalent in the market. There are two reasons responsible for it. Firstly a transparent pricing policy from the companies would attract other companies to enter the market seeing the profit margin. This would be a threat to the organisations already operating in the market, and would definitely be a proposition for losing the existent market share and the profit levels. This is what the companies definitely do not want to encourage (Cheah et al.2011). This further encourages them to carry on with the proposition of charging hidden fees to customers after realising the published tariff rates. The other reasons for the hidden fees being prevalent in the economies are that the governments and the other regulatory agencies might have prices ceilings. In order to avoid the price ceiling or to safe guard itself from the laws, the companies charge hidden prices. This ensures that they meet the legal requirement and avoid penal action and continue with the enhanced market share and level of profit which would otherwise be impossible (Wong and McKercher, 2015).

In this sense lack of competition in the market enables them to carry on with hidden prices, had there been competitors they might have been forced to some decree to avoid such pricing strategies in the fear of losing the market.

Answer 3b)

It has been evident from the report that the extent to which the hidden fees are charged is huge. Solely in the United States the hidden fees charged in the tourism sector tantamount to about 2 billion USD and to about 22.5 billion in the airline industry. In this scenario it can be stated that without prohibiting hidden fees the government can employ additional implications on the firms like providing them with additional subsidies or tax incentives. The firms in this regard will only be able to enjoy these benefits offered by the government only if it does not charge hidden fees to its customers or any fee thereof which has not been published as tariff or government tax (Adams, 2006). The government can encourage new firms to enter the sectors which increases competition among them and introduce a sense of competition that if they charge hidden fees to the customers, the customers will shift to the alternative provider. In this aspect the company can provide loans to the new entrants to establish businesses and other infrastructural assistances which will help them in setting up their businesses. In this context it can be further stated that if the government is able to judge that the fees that are being charged is creating a lack of competition in the market can adopt measures in a similar manner. In this context of moderating and eliminating the instances of charging hidden fees by the organisations, it can be stated that creating customer awareness is of primal importance. This would help in bringing down the amount of hidden fees being charged if the customers refrain themselves from purchasing similar products. When the organisations get to understand that people would not subscribe to the services having hidden charges and fees will automatically stop charging them.

Answer 4)

Even if charging of hidden fees and charges are more profitable to sellers, still we observe that all sellers do not impose hidden fees or charges on its customers. The companies and organisation mainly refrain from such activities because of multiple reasons. In this context it can be reiterated that there are different countries in the world which have strict rules and regulations in regards to hidden fees. It has been evident that if the companies violate the rules and regulations set in this regard, they have to face strict legal and financial penalties from the government which prevents them from such actions. It has also been evident from different instances that hidden fees and charges are not applicable to all goods and services. It is only applicable to certain goods and services. It has been evident that the selling of primary goods does not include hidden charges, as for example it can be stated that selling of a dozen of oranges is generally not expected to have hidden charges. This is simply because selling of this good does not provide the seller to charge hidden fees. It has been evident from here that charging of hidden fees can be attributed to a certain degree of complexity in the system. It is noted that goods and items with inelastic demand curves generally expected to contain hidden fees and charges. In this regard it has also been evident that hidden fees are absent in a perfectly competitive industry and market structure. The examples of hidden fees being charged is all the more evident in monopolies, oligopolies and imperfectly competitive structures.

It has been evident that primary goods generally have a perfectly competitive market structure whereas secondary and tertiary goods fall into the structure of imperfect competition. The main reason behind primary goods being perfectly competitive is the easy entry and exit from the market, low infrastructural requirement and less capital adds to it. In this case of primary goods it can be stated that there are large numbers of buyers and sellers which does not give them a chance to charge hidden fees. In cases of secondary and tertiary goods the same is not true. This allows for limited numbers of organisation in the market and a scope to charge hidden fees.

In this case it can also be stated that even in a oligopolistic structure there are firms who do not charge hidden fees even though it is profitable. This is because hidden charges and fees have a negative impact on the minds of the customers which makes them apprehensive. This apprehension in the minds of the customers has the potential to drive the customers away from firm. In the present context where it is especially important to hold on to a customer base, therefore the companies refrain from such activities (Lepper and Greene, 2015). This helps the companies to keep their customers satisfied and hold on to the existing base of customers. This also helps companies in addressing new customers due to their clean image. The globalisation factor has also has added to it, in this context it can be stated that if the customers are unhappy, they can shift to alternative international firms for their services or products. These pose a risk to the national firms of losing their market to international organisations; therefore they refrain from imposing hidden fees and continue with a clean image which helps them in their business (Anderson, 2006).

Answer 5a)

Considering the two goods to be export commodities of the countries and the both the goods to be normal goods. An increase in the price of the product is likely to decrease the demand of the product in the foreign market and create a excess supply of good in the internal market further decreasing the price of the goods. This has the potential to weaken the economy. In this case of hidden fees being charged to the Visiting tourists can be it can be stated that if the fees charged is above the international equilibrium price, the price of the good is expected to increase in the foreign market and therefore will have the potential to reduce demand (Deardorff, 2014). In this case it can be further stated that perfectly substitute good to international tourism would be alternative tourism opportunities in the home country or other countries of the globe. In this case the hidden charges will provide opportunities to the other countries and tourism facilities in the home country. This will also create a surplus in the tourism facilities in the visiting country and will eventually reduce the price from the demand supply perspective (Krugman, 2008).

The demand of the substitutes that is the tourism in the home country and other international destination will increase and the surplus in that market will be consumed by these people who will opt for the substitutes. This will increase the price of the substitute goods eventually (Krugman, 2008).

Answer 5b)

(Source: Author’s Creation)

In figure1 demand and supply of US dollar have been shown. The S-S shows denotes the original supply curve of USD which remains unaltered. The D-D denotes the original demand curve. Form this diagram it can be explained that the hidden fees decreases tourism in USA and therefore reduce demand for dollars among foreign tourist. As the demand for dollars fall the exchange rate is expected to take a hit and therefore the exchange rate for dollars in the international market falls from the equilibrium level E to E1 which is at a lower trajectory.

Here from the above diagram it can be clearly explained that the hidden fees in the tourism industry is likely to increase the price of the tourism service in United States and create apprehension among people. It is most likely that demand for the service will reduce, as people will not likely visit such destinations where they are unsure about the prices and practices (Deardorff, 2014). This increases the demand for the alternative choices. As people no longer visit United States they will not require us dollars to carry on their activities, they will require some other currency. Therefore the demand for the dollar will fall it becomes less desirable to people. This is why people will offer less of other currency in order to get a unit of dollar. This is why the exchange rate will fall.

Source: Author’s Creation

On the other hand due to increased demand for alternative sources of tourism the currency of the other states is expected to increase. In this regard in order to obtain an additional unit of dollar people will further pay less of the other currency. This will weaken the economy, as importing of similar goods in United States will require paying more of the home currency and reduce its reserves. The above figure shows the reverse phenomenon where the exchange rate increases from T₁ to T_2. Increased demand for the alternative currency increases the exchange rate of currency for those currencies.

Reference List

Tomazos, K. and Cooper, W., 2012. Volunteer tourism: At the crossroads of commercialisation and service?. Current I ssues in Tourism, 15(5), pp.405-423.

Wong, C.U.I. and McKercher, B., 2012. Day tour itineraries: Searching for the balance between commercial needs and experiential desires. Tourism Management, 33(6), pp.1360-1372.

Logar, I., 2010. Sustainable tourism management in Crikvenica, Croatia: An assessment of policy instruments. Tourism management, 31(1), pp.125-135.

Adams, D., 2006. Management accounting for the hospitality, tourism and leisure industries: A strategic approach. Cengage Learning EMEA.

Anderson, S.W., 2006. Managing costs and cost structure throughout the value chain: research on strategic cost management. Handbooks of Management Accounting Research, 2, pp.481-506.

Lepper, M.R. and Greene, D. eds., 2015. The hidden costs of reward: New perspectives on the psychology of human motivation. Psychology Press.

DeVries, P.D., 2008. The state of RFID for effective baggage tracking in the airline industry. International Journal of Mobile Communications, 6(2), pp.151-164.

Al-Wugayan, A., Pleshko, L.P. and Baqer, S.M., 2008. An investigation of the relationships among consumer satisfaction, loyalty, and market share in Kuwaiti loan services. Journal of Financial Services Marketing, 13(2), pp.95-106.

Allred, A.T. and Addams, H.L., 2013. Service quality at banks and credit unions: what do their customers say?. International Journal of Bank Marketing.

Cheah, S.J., Shah, A., Shahbudin, M., Fauziah and Taib, M., 2011. Tracking hidden quality costs in a manufacturing company: an action research. International Journal of Quality & Reliability Management, 28(4), pp.405-425.

Krugman, P.R., 2008. International economics: Theory and policy, 8/E. New Delhi: Pearson Education India.

Deardorff, A.V., 2014. Terms of trade: glossary of international economics. Singapore: World Scientific.

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