Competition and the Regulation of Fictitious Pricing

Abstract

Fifty years ago, the Federal Trade Commission (FTC) stopped enforcing its fictitious reference pricing guidelines, emphasizing the search qualities of price and the belief that competition would drive out deceptive behavior. Yet this practice of posting false, inflated comparison prices alongside sale prices has proliferated. Building on prior analytic work and the documented effects of reference pricing on search behavior and consumer choice, we develop a descriptive model explaining why fictitious reference pricing has spread instead of being extinguished by competition. After summarizing the model with a series of generalizations, we consider potential regulatory solutions to the problem. We propose that disclosure of the true normal price charged may be the only solution that could plausibly influence both consumer and firm behavior. Then, based upon the existing literatures, interviews with practitioners and regulators, an analysis of other nations’ approaches, and the results of a laboratory study of 900 consumers to examine how they integrate “true normal price” information into deal evaluations, we develop a set of propositions about the likely effects of requiring firms to disclose recent selling prices for goods, identifying both potentially benefits and challenges associated with such a requirement.