The faulty logic of "protecting" consumers from the absence of annual fees

Omri Ben-Shahar —  7 January 2010

Our friend and University of Chicago law professor, Omri Ben-Shahar, fresh off a run participating in our credit card interchange fee symposium, has penned a guest post following up on our ongoing discussion of annual fees:

There is no annual fee for shopping at Wal-Mart, but there is an annual fee for shopping at Sam’s Club. Is there a consumer protection problem here?

Some people think that credit card issuers are acting badly by not charging annual fees, thus luring consumers into services that involve back end costs. By this logic, should retail stores like Wal-Mart be condemned for NOT charging annual membership fees, luring customers in, and making profit at check out lines? In fact, some stores probably charge a “negative” fee.  High-end retailers (Whole Foods, Neiman Marcus) provide a pleasant shopping experience and free samples. Low-end retailers distribute discount cards. They all charge these negative “membership fees” because they surely make up for it at the cashier. Should these retail techniques be regulated to protect consumers?

I find it puzzling why some retailers and service providers charge annual membership fees and others don’t. Why, for example, do wholesale clubs like Costco and Sam’s Club charge memberships while retail department stores do not? I am sure there is much to be learned from finding the answer to this puzzle, but I don’t think it has anything to do with consumer protection. Consumers are doing quite well in either format, and if there are problems of deception they are independent of the annual fee dimension.