Could higher fees lead to lower prices?
| Pages | 297-305 |
| DOI | https://doi.org/10.1108/10610420910972828 |
| Date | 17 July 2009 |
| Published date | 17 July 2009 |
| Author | Fabio Ancarani,Eitan Gerstner,Thorsten Posselt,Dubravko Radic |
| Subject Matter | Marketing |
Pricing strategy & practice
Could higher fees lead to lower prices?
Fabio Ancarani
Alma Mater Studiorum, University of Bologna, Forli, Italy
Eitan Gerstner
Loughborough University Business School, Loughborough, UK
Thorsten Posselt
Fraunhofer Center for Central and Eastern Europe, Leipzig, Germany, University of Wuppertal, Wuppertal, Germany and
University of Leipzig, Leipzig, Germany, and
Dubravko Radic
Faculty of Economics and Management, University of Leipzig, Leipzig, Germany
Abstract
Purpose – Supplementary fees such as restocking fees, nonrefundable shipping and handling fees, and cancellation fees have become prevalent in the
USA, and customers as well as the popular media have raised serious concerns about them. This paper aims to test 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 findingsare 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.
Keywords Pricing, Cost accounting, Freight forwarding, Materials handling
Paper type Research paper
1. Introduction
Businesses increasingly impose fees on top of the prices they
charge for their core products. Supplementary fees such as
restocking fees, nonrefundable shipping and handling fees,
and cancellation fees are widespread in the USA, prompting
articles with titles such as “Land of the fee” (Jamieson, 2003)
or “Unreasonable fees give reason to flee” (Marshall, 2006).
These fees also help service providers collect billions of dollars
every year (McGovern and Moon, 2007; Thornton, 2003). In
recent years, customer complaints regarding these fees have
increased (Thornton, 2003). Many customers perceive them
as unfair, because the fees increase firm profits without
offering any discernable value to the customer (Cox, 2001;
Wirtz et al., 2003; Herrman et al., 2007). Furthermore, the
popular media has maintained that these fees create stealth
inflation and distort economic efficiency by diverting service
providers’ resources into inventing ways to impose charges on
customers.
When is it more profitable to use separate service fees
instead of combining these fees into one price? Recent
research has shown theoretically that the use of some fees
helps reduce consumer abuse of “friendly” customer service
policies, such as allowing product returns and service
cancellations. For example, consumers can abuse return
policies by buying products with the intention of returning
them after using them for a certain period of time. By
charging nonrefundable shipping and handling, restocking,
and cancellation fees, service providers can reduce such
consumer abuse (Hess et al., 1996; Fruchter and Gerstner,
1999; Xie and Gerstner, 2007). The general hypothesis that
follows from this research states that by charging higher fees
to control the abuse of service policies, service providers can
eventually lower their prices. This implies that the majority of
consumers who do not abuse the policy would enjoy the lower
price, and also that the expected price would be lowered for
all consumers who do not plan to abuse the retur n policy.
The hypothesis stating that some fees could lead to lower
prices is based on theoretical work, and to the best of our
knowledge, this hypothesis has not been tested empirically.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1061-0421.htm
Journal of Product & Brand Management
18/4 (2009) 297–305
qEmerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/10610420910972828]
297
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