The New York Times has an article by Damon Darlin about how foolish consumers subsidize sophisticated consumers. The piece is pretty vague, but the idea behind it is one that I do my best to take advantage of in my business dealings.

The two economics professors — Mr. Laibson at Harvard and Mr. Gabaix at the Massachusetts Institute of Technology and Princeton — have looked at how companies hide fees and costs. They found that sophisticated consumers have somehow learned how to game the system by having enough naïve consumers around to subsidize them.

The smartest strategy, they say, is for the sophisticated consumer to choose the service with the most hidden charges and highest add-on prices, but then avoid paying those added costs. "The sophisticated consumer takes advantage of that," Mr. Gabaix said. "The naïve pay all the fees." ...

For example, you see an offer for a room at Nontransparent Hotel for $75 (which costs the hotel $100 to provide). The guy checking in behind you also rents a room, but will rack up $70 in fees from the minibar, the phone and garage parking (all of which cost the hotel $20 to provide). You, on the other hand, were not tempted by the minibar, used your cellphone for calls and took public transportation to the hotel. The other guy subsidized your room.

Smart consumers now have a strategy. They should go to the company offering the discounted product even if the company has loads of hidden fees. The sophisticated consumer then exploits the company by taking the below-cost product and shunning the fees. "It’s a perpetual battle between the firm that fools consumers into paying fees and the smart consumer who can avoid them," Mr. Laibson said.

Every time I call a creditor -- be it a utility, cellphone provider, credit card company, or whomever -- I always ask them to waive fees, cancel charges, or upgrade my service for free. Most of the time they will. I get new, free, top-of-the-line phones from Cingular all the time, and I get interest rate reductions and fee waivers from my credit card companies several times a year. Ask and thou shalt receive. Plus, I never pay the outrageous prices for food from hotel minibars or movie theaters.

(HT: Sound Mind Investing Blog.)



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