The Equilibrium Effects of Regulating Junk Fees: Evidence from the Rental Brokerage Market

Hidden “junk” fees have the potential to distort competition, creating high costs to consumers. However, regulating them can lead to adverse effects, especially in complex markets with intermediaries where they are most prevalent. To explore the equilibrium adjustments of regulating hidden fees, we leverage a unique matched landlord-broker dataset and a recent policy reform in the UK rental market capping non-salient broker fees charged to tenants. To guide our empirical analysis we first develop a conceptual framework of imperfectly competitive two-sided markets with non-salient price components. We estimate pass-throughs of the broker-tenant fee price cap to broker-landlord fees and advertised rental prices, examine demand responses, and net exit of both brokers and landlords. In line with imperfect competition, brokers absorb 75% of the regulation and landlords the remaining 25%. There is no market exit of landlords or brokers. Combining our reduced-form estimates and the theoretical framework we find that the policy saved tenants £376 per tenancy (equivalent to 4% of median yearly rent), landlords lost £74, and brokers lost £288. Overall, there was an aggregate welfare gain of £14 per tenancy, amounting to at least £16.4 million per year, as the policy reallocated market shares from less to more productive intermediaries. If the fee had been fully salient, consumer savings would be almost halved, and reallocated to landlords. Our results highlight the importance of economic analysis for designing consumer protection regulation.