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Reconsidering Fictitious Pricing

By David Adam Friedman. Full text here.

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 post-war era, the Federal Trade Commission (FTC) regularly prosecuted fictitious-pricing cases. The FTC ceased prosecuting those cases in 1969. This Article explains why the FTC should resume measured enforcement today.

Since the cessation of enforcement, the retail sector experienced several transformations. Over the past several decades, behavioral economics explaining the power of prior-reference pricing emerged. 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 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. This Article suggests that regulators renew enforcement efforts and recommend where they might start.