Reconsidering Fictitious Pricing

Abstract

Advertised price discounting recently proliferated in retail markets, bringing with it deceptive discounting or "fictitious pricing." Many retailers advertise discounts based on fictitious or false prior-reference prices. In the immediate postwar era, the Federal Trade Commission regularly prosecuted fictitious-pricing cases. In 1969, the FTC ceased prosecution. In this Article, I explain why the FTC should resume measured enforcement today.

Since the cessation of enforcement, the retail sector experienced several transformations. Over the past several decades, the behavioral economics explaining the power of prior-reference pricing emerged. According to the consensus, advertised discounts induce consumers to stop shopping sooner than otherwise, because consumers will absorb a signal that they have found the right bargain. However, the prevalence of fictitious advertised discounts decreases the chance that consumers will end their shopping on the most competitive offers. This Article addresses the nature of the welfare harm that results from fictitious pricing, noting the difficulty of shaping a remedy for individual harm from the practice. Private litigation and state prosecutions reveal that civil penalties and injunctive relief provide more appropriate avenues for addressing this practice. The challenge for federal and state regulators will be to find the level of regulation that maximizes welfare. I suggest that regulators renew enforcement efforts, and recommend where they might start.

Keywords: consumer, consumer law, advertising law, pricing, behavioral economics, bounded rationality, retail, welfare, contracts