Ways to safeguard buyers against fraudulent comparison pricing

Researchers from Duke University, the University of Notre Dame and Microsoft have published a new version Marketing Journal Article looking at the use of “true regular prices” during the sales process as a way to reduce deceptive pricing scams.

The study was written by Richard Staelin, Joel E. Urbani, and Donald Ngoy.

Does competition make companies more honest? More than 50 years ago, the FTC assumed the answer was yes when it stopped enforcing sneaky pricing regulations. Since that time, competition has increased dramatically, particularly in the crowded US retail business. However, contrary to the FTC hypothesis, the scam prices spread over the same period.

This new article explains why competition is more likely to encourage deception than to discourage it. The researchers suggest a possible solution: Require companies that use reference prices during the sales process to also provide information on the true normal price of the item for sale.

The study begins with a critical assessment of two assumptions that underlie the FTC’s “competition discourages deception” theory:

1) The first assumption is that inflated reference prices are largely ignored by consumers, who focus primarily on evaluating the actual selling price in a promoted deal. As such, price competition pushes sales prices down and renders reference prices innocuous.

However, empirical research gives a different picture. A strong finding in the marketing literature is that adding a regular high price mentioned in price promotion increases the consumer’s willingness to pay. The research shows how much consumers value “getting a good deal,” which results in more retailer sales when comparative pricing is used.

2) The FTC’s second assumption is that competition drives economic incentives to cheat. The theory is that as competition intensifies, firms have an economic incentive to be honest and that any temptation to stray will be restrained by natural market forces.

However, a number of recent economic models show the opposite; That is, the more competition there is, the more likely the company is to provide “noisy” information in an effort to protect itself from such competition and increase its profits in the process.

Three recent empirical examples provide solid support for the development of the model, each outcome:

Seller’s consistent use of high reference prices at which products are never or rarely sold,
Consumer choice is altered by these often fictitious reference prices, and
Companies that gain financially from publishing inflated reference prices.

All this leads to the conclusion that there is a significant negative impact of fictitious reference pricing on consumer welfare.

Companies value telling the truth

“After evaluating several regulatory options, we conclude that the best way to effect real change in firms’ behavior is to require them to tell the truth. Our proposal is to require firms to disclose the true natural price of the commodity (TNP) whenever comparative prices are used in price communications,” says Stellen.

To illustrate, suppose a furniture retailer offers a sofa for sale as follows:

The regular price is $1399

The selling price is $599

Also suppose, as is common practice, that in the past three months the retailer has offered the sofa for sale at $1,399 for only two weeks. For the other 10 weeks, the sofa was offered at $599. Therefore, $599 is the price that is usually charged for the product.

This “more regular” price will be published along with the other two prices as a legally required disclosure when a company wishes to receive a comparable price promotion.

that it:

The regular price is $1399

The selling price is $599

Real regular price $599*

* Legal disclosure. True regular price = the price that retailer would most likely charge in the past 3 months.

Leads to the question: Does providing TNP mitigate the impact of the normal advertised price (ARP)? Urbany says, “We examine this question through a controlled experiment with 900 participants, in which the study participants’ choices determined their total expected compensation. We found that having an ARP with a sell price significantly increases the likelihood that a buy will be made.” However, adding the TNP information leads to Rule out this ARP effect.”

“Our results support the hypothesis that providing TNP would reduce or eliminate incentives for companies to provide anything but truthful information to consumers in their promotional quotes, and this would have an impact on average market prices, promotions, frequencies, and company profits. We hope that this will lead to The study led to a lively debate on the subject.”