News — A fresh article in the Journal of Marketing by researchers from Duke University, University of Notre Dame, and Microsoft analyzes the efficacy of utilizing "authentic regular prices" as a technique to decrease misleading pricing tactics.
The forthcoming Journal of Marketing study, authored by Richard Staelin, Joel E. Urbany, and Donald Ngwe, and titled "Competition and the Regulation of Fictitious Pricing," will be published soon.
The question of whether competition encourages honesty among firms is one that was assumed to be answered affirmatively by the Federal Trade Commission (FTC) over 50 years ago, when it ceased enforcing its regulations against deceptive pricing. Despite the significant increase in competition, especially within the crowded retail trade of the United States, the proliferation of deceptive pricing over the same period has contradicted the FTC's hypothesis.
The new article offers an explanation as to why competition is more likely to encourage deception rather than discourage it. The researchers suggest a potential solution: mandating that firms, when using reference prices during a sale, also provide information about the actual normal price of the item on sale.
The study commences by subjecting two assumptions that underpin the FTC's theory of "competition discourages deception" to critical evaluation:
- 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 selling prices lower and renders reference prices harmless.
However, empirical research gives a different picture. A robust finding in the marketing literature is that the addition of a high regular price stated in a price promotion increases consumer willingness to pay. The research illustrates how much consumers value “getting a good deal,” leading to greater sales for the retailer when comparative prices are used.
- The FTC’s second assumption is that competition drives out economic incentives to cheat. The theory is that, as competition heats up, firms have an economic incentive to be truthful and that any temptation to stray will be constrained by natural market forces.
In contrast to the FTC's theory, several recent economic models demonstrate the opposite - that is, the greater the competition, the more probable it is for a firm to provide "noisy" information in order to protect itself from competition and, in doing so, boost its profits.
Three recent empirical examples provide consistent support for model development, each finding:
- Consistent seller use of high reference prices at which products are never or rarely sold,
- Consumer choice being altered by these often fictitious reference prices, and
- Firms experiencing financial gains from posting inflated reference prices.
The Value of Firms Telling the Truth
Staelin suggests, "After assessing various regulatory alternatives, we have determined that the most effective method of inducing a change in firms' conduct is to compel them to be truthful. Our suggestion is that companies must disclose the actual normal price (TNP) of an item whenever comparative prices are employed in price communication."
To illustrate, say that a furniture retailer puts a sofa on sale as follows
- Regular Price $1399
- Sale Price $599
Let us suppose, as is typical, that during the previous three months, the vendor had only put the sofa on sale for two weeks, offering it at a price of $1399. For the remaining 10 weeks, the sofa was sold at $599, which is the actual regular price of the product.
The legally required disclosure of the "most regular" price would be displayed alongside the other two prices whenever a company intends to conduct a comparative price promotion.
- Regular Price $1399
- Sale Price $599
- True Normal Price $599*
*Legal Disclosure. True Normal Price = the price most often charged by this retailer in the past three months.
The leads to a question: Does providing TNP moderate the effect of a promoted Advertised Regular Price (ARP)? Urbany says, “We examine this question through a controlled experiment with 900 participants, where the participants’ choices in the study determined their total expected compensation. We find that the presence of an ARP with a sale price significantly raises the chance that a consumer will buy. However, adding TNP information drives out this effect of ARP.”
Our results support the premise that TNP provision would reduce or eliminate firms’ incentives to give anything but honest information to consumers in their price promotions and it would have an impact on average market prices, promotions, frequencies, and firm profits. We hope this study leads to a lively debate on the topic,” concludes Ngwe.
About the Journal of Marketing
The Journal of Marketing develops and disseminates knowledge about real-world marketing questions useful to scholars, educators, managers, policy makers, consumers, and other societal stakeholders around the world. Published by the American Marketing Association since its founding in 1936, JM has played a significant role in shaping the content and boundaries of the marketing discipline. Shrihari (Hari) Sridhar (Joe Foster ’56 Chair in Business Leadership, Professor of Marketing at Mays Business School, Texas A&M University) serves as the current Editor in Chief.
About the American Marketing Association (AMA)
As the largest chapter-based marketing association in the world, the AMA is trusted by marketing and sales professionals to help them discover what is coming next in the industry. The AMA has a community of local chapters in more than 70 cities and 350 college campuses throughout North America. The AMA is home to award-winning content, PCM® professional certification, premiere academic journals, and industry-leading training events and conferences.
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