Deception in Retail Sale Pricing



Citation:

Patrick J. Kaufmann, Gwen Ortmeyer, and N. Craig Smith (1993) ,"Deception in Retail Sale Pricing", in E - European Advances in Consumer Research Volume 1, eds. W. Fred Van Raaij and Gary J. Bamossy, Provo, UT : Association for Consumer Research, Pages: 345-351.

European Advances in Consumer Research Volume 1, 1993      Pages 345-351

DECEPTION IN RETAIL SALE PRICING

Patrick J. Kaufmann, Harvard University, Cambridge, U.S.A.

Gwen Ortmeyer, Harvard University, Cambridge, U.S.A.

N. Craig Smith, Georgetown University, Washington D.C., U.S.A.

ABSTRACT -

Recently, the intensive promotional policies of department stores, as well as other lines of retail trade, have come under increasing scrutiny by state and local agencies. The focus of that scrutiny is whether the practice of high-low pricing (i.e. setting prices at an initially high level for a brief period of time and then discounting the merchandise from the so-called "original," "former," or "regular" price for the bulk of the season) is inherently deceptive. This issue is complex in that it is difficult to determine whether consumers understand that the "sale price" is, in fact, the price at which most of the merchandise is sold. In this paper we address that complexity in the context of a recent case involving the May D&F department store, operating in the state of Colorado. The key elements of deception in high-low pricing are discussed, followed by a review of the consumer behavior literature relating to reference/sale price comparisons. We then review the May D&F court case, in which the defendant was found to have been engaged in deception pricing. We conclude by discussing the remedy offered by the court and other possible remedies for the problems of deception arguably resulting from high-low pricing.

INTRODUCTION

In April 1991, when asked to discuss the practice of reference price markdowns for an article in Money magazine, a senior vice president of Bloomingdales was quoted as saying, 'You're talking about educating the consumer about markdowns. For us that would be self-defeating' (Vreeland 1991). Meanwhile, Sy Simms explains his company's policy of everyday low prices with his familiar advertising slogan, 'At Simms' the educated consumer is our best customer."

In 1988, over 60% of department store sales volume was sold at sale prices (McIlhenny 1989). [Retailing consultant, Martin Rothenberg, has been quoted as saying that currently 75% of all department store volume is being sold at promotional prices (Vreeland 1991).] Recently, the intensive promotional policies of the department stores, as well as those of other lines of trade, have come under increasing scrutiny by state and local agencies. The focus of that scrutiny is whether the practice of high-low pricing (i.e., setting prices at an initially high level for a brief period of time and then discounting the merchandise from the so-called 'original,' 'former' or 'regular' price for the bulk of the selling season) is inherently deceptive.

High-low pricing is prevalent across a wide variety of product classes, including apparel (men's, women's and children's), home furnishings, shoes, fine jewelry, and home electronics. Most retailers agree that consumers respond to sale prices, particularly when a comparative reference price is emphasized, and experimental research confirms the experience of the retail trade (Berkowitz and Walton 1980). Many state consumer protection agencies, however, contend that the success of high-low pricing is due to consumers incorrectly inferring a temporary exceptional value from the retailer's sale prices when the retailer makes a comparison to its former "regular" or "original" prices in its advertising. The argument for deception becomes less convincing to the extent that consumers understand that the 'sale price" is, in fact, the price at which most of the merchandise is sold. Research focused on consumer price perceptions has shed some light on these issues, but the courts continue to employ naive remedies for complex deceptive pricing problems. In this paper we examine that complexity in the context of a recent case involving the May D&F department store.

In the first section we discuss the key elements of deception in high/low pricing and review the consumer behavior literature relating to reference/sale price comparisons. We then examine the facts of the May D&F case in which the defendant was found to have been engaged in deceptive price advertising by the Colorado state court. In the final section, we discuss the court's order in that case and a number of other possible remedies for the problems of deception arguably resulting from by high-low pricing.

CONSUMERS' PERCEPTIONS OF SALE AND REFERENCE PRICES

How do consumers judge the value of a retail offering in today's highly promotional marketplace? Consider, for example, the wide variation in prices and price designations for a branded sofa as reported in the San Francisco Chronicle.

"A random survey of 'sale' and 'original' prices in Bay Area furniture stores found a difference of $1,680 between the highest and lowest 'original' price for a single Henredon sofa.

Model No. 8670, with identical 'E-grade' upholstery, was advertised at Noriega Furniture, a small furniture retailer at an 'original price' of $2320 on sale for $2170. A major department store offers the same sofa for $2500 - '35% off' the 'original' price of $4000. A major furniture chain advertised the same model originally priced at $3009 'on sale at 20% off' for $2749. Another small furniture retailer in Marin County offers the same sofa at $2476, 20% off its original price of $3095" (San Francisco Chronicle 1990).

The vigilant price shopper, in this instance, could save as much as $579 (21%) by buying at Noriega Furniture (as compared to the highest sale price of $2749 by the major furniture chain). There are certainly consumers who are vigilant price shoppers and product classes (branded furniture and automobiles, for example), where this type of shopping behavior may be typical. However, we believe that in many product classes, consumers lack either the ability or motivation to conduct such a price comparison.

A key dimension in determining the ability to compare prices is the patent similarity of merchandise across competitors. Thus, fine jewelry is a category where price comparisons are difficult because the merchandise is not branded and price differences may be attributed to differences in quality (see, for example, Gabor and Granger 1966, Monroe 1973, Monroe and Petroshius, 1981, Spence 1974, Huber and McCann 1982, and Gerstner 1985 for discussions of price-quality inferences when product quality is difficult to discern). Price comparisons may also be difficult in categories like electronics and appliances due to the proliferation of model numbers for essentially identical merchandise.

Motivation to gather information about competitors' prices is partly a function of the consumer's estimate of the possible amount to be saved by comparing prices. Consequently, the consumer's motivation to compare prices would be higher with bigger ticket purchases, particularly when there is substantial price variability across competitors, suggesting that an aggressive search would be worthwhile. Thus, two key determinants of motivation are overall price level and price variability. In many product categories, retail offerings are hard to compare, and the prices do not justify high search costs. How does a consumer determine value when the price comparison task is either too difficult or not worth the effort? Rational consumers are likely implicitly to consider the costs and benefits of being vigilant about obtaining and using complete price information, and determine that a simplifying decision process is more appropriate. Under this theory, the consumer satisfices, rather than optimizes, on her shopping decisions (Simon 1957; see also, Coombs 1964, Dawes 1964, and Simon and Newall 1971; and in the specific context of consumer choice, Bertman 1977, Bertman and Kakkar 1977, Einhorn 1971, Slovic, Fischoff, and Lichtenstein 1970, Wright and Barbour 1977, Shugan 1980, Wright 1975, and Russo 1977). Here, we suggest that some consumers satisfice even with respect to price information data which is usually considered the easiest to process.

One simplifying mechanism a consumer may use to determine good value is to refer to the retailer's reference/sale price comparisons. To do so, however, the consumer must draw one of two inferences from the retailer's reference/sale price advertising, i.e., that the sale represents good value because l)the retailer is now offering a product normally thought by the retailer to be worth SP (as evidenced by the fact that the retailer usually chargers $P for it) at some price less than $P, or 2) that the retailer's normal price is $P because that is the price also charged by all other competing retailers for that product, and that by temporarily offering the product at a price less than $P, the retailer is beating the competition's price.

In making either inference, the consumer avoids the costs of ascertaining the true value of the sale. Such information is, of course, often available. Direct evidence of the accuracy of the first inference would entail longitudinal monitoring of the focal retailer by the consumer. Direct evidence of the second would entail cross-competitor price comparison.

In the case of high-low pricing, the consumer's inferences may not be justified. If the retailer expects to sell little or no volume at the original price, the original price of SP will bear no relationship to the retailer's sense of the real worth of the product (inference 1). Nor will the original marked-up price reflect the price at which the product is typically available in the market (inference 2). The use of reference/sale price comparisons as a simplifying mechanism to infer good value, therefore, is inappropriate. Particularly troubling from a public policy standpoint is the fact that the research reported below indicates that although skeptical consumers now have come to discount the savings claims advertised by retailers, they still perceive at least some savings when reference prices are used. Consequently, even the savings, which customers have discounted, may represent a good value in the customer's eyes, and stimulate a purchase.

With high-low pricing, therefore, the public policy concern revolves around the question of whether some or all consumers discount the advertised savings sufficiently so as to obviate the problem of deception. If the consumer is this sophisticated, and sale price advertising is still found to be effective, we must allow for a third path for the consumer to infer good value from an advertised reference/sale price comparison; 3) that the advertised sale price is recognized to be the "normal price" in the sense that it is the price most consumers pay for the product, and therefore reflects the true worth of the product. Purchasing at that price does not deliver exceptional value, but it does assure the consumer that she hasn't paid too much. The skeptical consumer, therefore, knowingly uses the limited information contained in high-low sale advertising in an informed effort to find a satisfactory, if not optimal price for the product. Even this may be problematic from a policy standpoint; however, if the depth of discounts escalates over time, leaving even skeptical consumers confused.

Research addressing consumer use of retail reference prices provides substantial evidence that consumers are skeptical of the reference prices used by retailers (Fry and McDougall 1974, Blair and Landon 1981, Lichtenstein and Bearden 1988, 1989, and Urbany, Bearden and Weilbaker 1988}. Even though consumers do not believe that the reference price itself is the retailer's true normal price, their perceptions of the normal price are biased upward by the inclusion of the reference price in the sale advertisement. Thus, many studies have found that though consumers don't believe the savings implied in the reference/sale price comparison, they nonetheless perceive greater savings when a reference price is included (Fry and McDougall 1974, Blair and Landon 1981, Urbany, Bearden and Weilbaker 1988). These studies are thus supportive of the first consumer inference cited above, that consumers believe the sale is a good value because of the savings vis a vis the price normally charged by the retailer.

A number of studies also provide evidence of the second inference, that the sale price represents good value because it is a savings from the average market price, which itself is indicated by the reference price. Several studies have shown that the reference price can serve as either a surrogate for the average market price (Keiser and Krum 1976, Sewall and Goldstein 1979, Cox and Cox 1990), or can bias the consumer's estimate of the market price (Urbany, Bearden and Weilbaker 1988, Lichtenstein and Bearden 1988). Other studies have found that the sale price is perceived to be closer to the "lowest price in town" when a reference price is included in the advertisement (Fry and McDougall 1974, Blair and Landon 1981).

Interestingly, all of the studies reported above focus on the relationship between the reference price and the consumer's perception of the price normally charred by the advertising retailer and its competitors and not the price most people pay for the product. Thus, the savings that are inferred are calculated against what the retailer "normally charges." The question remains whether this is actually how consumers judge the value of an offering when such a great percentage of department store volume is done at promotional prices. If, by contrast, value is judged by the price most people pay for the product, and consumers accurately estimate that most people buy on sale, then their assessment of an offer could rest on the knowledge that buying on sale assures them of not being overcharged. This view, which represents the third inference described above, suggests that consumers understand that the item they want will be on sale somewhere if they are willing to look and/or wait for it.

What does the reference/sale price differential represent to such a consumer? If she believes that most people buy at the sale price, but that the reference price is close to the price normally charged, then the reference/sale price comparison represents the amount that she stands to lose if she is not a careful shopper.

The discussion above indicates the complexity of the construct "savings" in this context and the need for the courts to demand precise evidence on these issues when trying price deception cases. In particular, such evidence should incorporate research that uses competitive market settings in which respondents react to two or more retailers' promotional policies, because such settings more closely replicate the complex situation facing consumers.

Although some of the existing research has investigated the effects of reference/sale price comparisons on the stated intent to search further and the stated intent to purchase (Keiser and Krum 1976, Della Bitta, Monroe and McGinnis 1981), only one study has examined actual behavior, through the use of a simulated shopping experiment (Urbany, Bearden and Weilbaker 1988). Interestingly, this study indicated that reference/sale price comparisons reduced further search and increased purchase intent only when actual costs were imposed on further search. This result is consistent with our view that the potential for deception is particularly strong as ability to compare prices becomes more difficult, and thus the costs of search increase.

THE MAY D&F CASE

Regulatory Perspective:

An increasing number of state and local authorities have charged that the advertising of high-low pricing is inherently deceptive. Their perspective is based on the historical use of sale events and discount prices to reflect exceptional temporary value when compared to the retailer's own everyday prices for in-season and undamaged merchandise. Determination of the legitimacy of a retailer's reference and sale prices, therefore, is accomplished by examining the length of time the regular price is in effect relative to the Sale price and/or the amount of merchandise sold at the regular price.

The Federal Trade Commission is charged with the responsibility for enforcing Section 5 of the FTC Act which prohibits unfair or deceptive acts or practices. In response, in 1964, the FTC adopted the first version of the "FTC Guides Against Deceptive Pricing." The current version of which is included as Part 233, in the FTC's Code of Federal Regulations of Commercial Practices C.F.R. 233). Although the FTC is not currently playing a major role in enforcing deceptive pricing laws, leaving enforcement to state and local authorities, the guidelines continue to be relevant both by reference in state legislation and as examples on which such legislation is based. Many states have instituted regulations that correspond with the FTC Guides Against Deceptive Pricing. Others have statutes which specify that compliance with the FTC Guides is a "complete defense" to allegations of deceptive pricing.

Critical in the FTC Guides, as well as in the state statutes, are criteria to be used in determining the legitimacy of an advertised reference price. What is common to most of the definitions is that the reference price is legitimate if it has resulted in significant sales or if it has been offered for a reasonable amount of time. Regulators have correctly noted that having significant sales at the reference price is not appropriate as the sole indication of a legitimate regular price because retailers, on occasion, make buying mistakes which necessitate heavy discounting in order to clear out 9 unpopular merchandise. Under either of these two conditions, the discounted price thus represents an atypical reduction from the retailer's day-to-day prices.

While providing general guidance on deceptive pricing, neither the FTC Guides, nor many of the state statutes specify what constitutes a reasonable period of time or what percentage of the overall sales of an item evidences good faith sales of the item at the reference price. Some states, however, have provided further criteria to use in such a determination. For example, in 1990, Massachusetts adopted retail advertising regulations stipulating that a reference price is legitimate if at least 30% of sales occur at that price or if the regular price is established for at least 15 days prior to the sale reduction and the item is not "on sale" for more than 45% of a 180-day period (940 C.M.R. 6.05(3)).

A number of states, including California, Georgia, New York, North Carolina, Pennsylvania, and Colorado currently are actively prosecuting deceptive advertising claims against department stores and other retailers. Typically, such cases are resolved out of court, with the retailer not admitting any guilt but still paying a fine and agreeing not to advertise sale prices unless the reference price can be substantiated. Such agreements, as a rule, apply only to the product category that has been investigated. The case against May D&F, described below is notable in that it is one of the few not settled out of court, and therefore, one which provides a fully developed description of the practices challenged by the government.

The State of Colorado v. the May Department Stores Company, dba May D&F: (District Court, Denver, Colorado: No. 89 CV 9274)

In June 1989, May D&F, a unit of the May Department Stores operating 12 department stores in Colorado, was charged with engaging in deceptive advertising practices in its Home Store department by the state attorney general's office. The Home Store department at May D&F includes housewares, cookware, mattresses, linens, textiles, small appliances, and electronics. The state alleged that since 1986, May had used fictitious or exaggerated reference prices as a basis for comparison against their sale prices. These reference prices included price designations such as "original" and "regular" price. The Colorado Attorney General gave several examples of suspect pricing, including:

*Bedding sheets that had remained on sale for eight months;

*A cutlery set advertised and displayed "on sale" for two years;

*A new style of luggage offered at its special "introductory price" indefinitely (Nielson 1989).

The court found (District Court Order dated June 27, 2990) that May D&F's pricing, specifically its comparative price advertising was dictated by the "Comparative Price Advertising" policy developed in 1986 and in effect through August 1989. This 1986 Policy required that merchandise in the Home Store be offered at the so-called "original price" for at least 10 days at the beginning of each six-month selling season before being discounted. After the original price period, all advertising, in-store signage, and item price tickets indicated that the merchandise had been reduced from its original price. In addition, over the course of the six-month selling season, the merchandise could be discounted further for various sales of limited duration, including "15-Hour Sales" and "Three Days Only' sale events. After any such sale, prices were returned to the first discounted level and not to the original price. At the end of the six-month selling season, the original prices were restored for a 10-day initial period. [More specifically, May D&F pricing was the responsibility of its buyers, who were also responsible for the advertising within their departments. Buyers set two prices when ordering merchandise, an "initial mark-up price" and a "promotional mark-up price". The "initial mark-up price" reflected May D&F's usual or planned margin and was calculated using a formula that considered the cost of goods, the cost of doing business, and the company's profit goals. Merchandise was discounted to this price after being at the "original" price for 10 days. The "promotional mark-up price" was significantly greater than the "initial mark-up price" and wa used as the "original price" in effect for 10 days at the beginning of the season. Buyers set this price taking into account competitors' prices, manufacturer's suggested retail prices, the quality, popularity, and brand name of the merchandise, and other subjective factors.]

In August 1989, May D&F introduced a new comparative price advertising policy. Reference prices were lowered and were presented as 'regular prices' on in-store signage and advertisements rather than as 'original prices.' In addition, these "regular prices' were to be in effect 28 out of each 90 selling days, with the 10 days at the beginning of the selling season counting toward the 28 days. This 28 out of 90 day standard was derived from the standards given in Connecticut and Wisconsin statutes governing deceptive price advertising.

Customers who bought merchandise at the regular price were also able to return merchandise for a full refund under the store's new "Satisfaction Guaranteed" program even though prices had been subsequently reduced. Finally, May D&F hired a manager of consumer affairs in 1989 to monitor and ensure the credibility of May D&F's advertisements.

The Colorado State Attorney General claimed that May D&F's comparative pricing policies constituted deceptive advertising, and sought both civil penalties and an order setting limits on May D&F's comparative price advertising. At trial, the state argued that the original prices were "false, fictitious prices set not for the purpose of selling the items, but for setting subsequent discounts," (Sadler 1990) and elicited evidence that over 97% of a sample of 5,340 household items were sold at sale prices (Fulcher 1990). The state also charged that 'consumers don't know what the original price of the item was nor the actual savings, if any, of the marked down sales item" (Sadler 1990).

May D&F denied that it had engaged in any deceptive advertising or trade practices and offered among a number of defenses, that May D&F's ads were not misleading and caused no injury. May D&F argued that it would be placed at a competitive disadvantage, if forced to comply with a standard regarding either the proportion of time the merchandise must be at the reference price or the proportion of sales that must be done at the reference price (May D&F's Trial Brief dated May 7, 1990).

Issues Raised by the May D&F Case:

In reviewing the May D&F case, it is useful first to note that the average price level of the Home Store products mentioned specifically in the District Court Order ranged from $10 for a set of mugs to $79.99 for a Krups coffee maker. This suggests that even in the case of deep discounts, the amount potentially saved by vigilant price comparison may be quite limited relative to search costs, and many consumers will seek methods of simplifying their decision process.

More importantly, the task of comparing prices, for these types of products, can be quite time-consuming because such a wide variety of stores carry them. The pots, pans and small appliances, for example, are carried not only by other departments stores, but also by discount stores, warehouse clubs, and catalog showrooms. Some of these outlets, warehouse clubs for example, do not advertise and carry particular items only on an opportunistic basis, when an exceptional buy can be arranged with vendors. Thus the vigilant consumer must physically check a number of stores, some of which may not currently carry the item.

In addition, for many of the products, retailers inhibit cross-competitor shopping. For example, exclusive model numbers often are obtained for small home appliances. In the pots and pans category, groupings of items tend to be bundled as a set when offered "on sale." With retailers bundling different items as sets, the price comparison task of the set or of the individual pieces, becomes quite burdensome.

Given this, it is not surprising that two of the consumer witnesses in the May D&F case testified to having simplified their purchase process by relying on the sale advertising, only to find that such reliance was unjustified (Kahn 1991).

"Consumer A had been watching ads for a Farberware rotisserie, and when it was "on sale," for "4 days only" at 40% off the "Regular Price" (stated as $119.99) she bought it at $71.99. She did no comparative shopping in advance. While shopping in a discount store, she saw the identical product in that store at $59.97 with a comparison price of $79.99 and a regular price of $64.97. She was angry. She checked a May D&F competitor and found a regular price of $74.99. She called the manufacturer in New York and the suggested price was $109.00, $10 less than May D&F's "regular price."

Consumer B purchased a Scanpan saucepan at 25% off the regular price of $99.99 or $74.99, and then saw it in three competitor stores at a regular price of approximately $74. When she complained, May D&F gave her a full refund" (Kahn 1991).

Testimony from two other consumers suggested that some buyers were more price vigilant and at least monitored prices within May D&F over time. Interestingly, the testimony from these two consumers does not indicate price comparisons across retailers.

"Consumer C had been watching some glasses priced at $15 and a set of mugs at $10. When she received a coupon with those glasses and mugs, it claimed "25% off last sold price with coupon only." At the store, the $15 glasses were now $21.99, the set of mugs $13. Twenty-five percent (25%) off the classes would be $16.50 on sale versus $15 before for the glasses and $9.75 versus $10 for the set of mugs.

Consumer D had been watching the prices on a Krups coffee machine. Prior to January 1990, each time she checked they were at $79.99. In that month, when they were advertised at 30% off, she found that the 30% off sale price was $79.99 and the regular price was either $109.99 or $119.99" (Kahn 1991).

Expert testimony offered by May D&F reported the results from a consumer survey suggesting that consumers were skeptical of May D&F's sale advertising (Shapiro 1989). In the survey of 500 Denver Metropolitan households, May D&F's advertised prices were generally perceived to be higher than those of other stores, even with an advertised 50% discount.

May D&F's expert witness disputed the notion that consumers inferred exceptional value from May D&F's sale advertising, suggesting instead that consumers were aware of the regularity of its sale events and thus were skeptical when they saw a 'sale' price. Even though consumers viewed the May D&F's Sale prices with some skepticism, they nonetheless used them to determine when May D&F's prices were competitive with other retailers. While confirming prior research on consumer skepticism, this study did not examine the behavior which would result from such perceptions. Specifically, would the skeptical consumer curtail further cross-competitor search?

Expert testimony for the State of Colorado (Urbany 1990) included the results of an experiment showing that the use of a reference price in a sale advertisement significantly increased both the consumer's perception of the available savings and the consumer's intention to purchase (see also, Fry and McDougall 1974, Keiser and Krum 1976, Blair and Landon 1981, Urbany, Bearden and Weilbaker 1988, and Lichtenstein and Bearden 1989).

Nevertheless, respondents indicated low expectations concerning the amount of sales which are made at the retailer's regular or original price. More than 40% believed that less than 25% of sales volume was done at the reference price, even though over half believed that the reference price would be in effect for more than 55% of the time. In other words, although sale periods for particular items at particular retailers were perceived to be relatively short, respondents apparently believed that most consumers were smart enough to wait and/or identify a retailer who was currently discounting.

Taken together these studies indicate that a significant proportion of the respondents (albeit a minority) have drawn the third inference described above. However, although many had a sense that the sale price more closely approximated the actual value of the product than did the reference price, they still did not appreciate the extent to which that was true. This underestimation, then, would discourage further cross-competition price comparisons, and thus, even those consumers drawing the third inference were partially deceived by the May D&F pricing policies.

THE COURT'S DECISION

In June, 1990, the Colorado Court, using the FTC Guidelines for purposes of interpretation, ruled that May D&F's 1986 and 1989 pricing policies violated the Colorado Consumer Protection Act (C.R.S. Section 6-1-101 to 115) prohibiting false or misleading statements of fact concerning the price of goods; saying,

"May D&F's "original" price for practically all of its merchandise in the Home Store was a fictitious high price established as a reference price for the purpose of subsequently advertising bargain reductions from that price. The clear expectation of May D&F was to sell all or practically all merchandise at its 'sale' price. May D&F's 'regular' price, pursuant to the 1989 policy was certainly a step in the right direction, but May D&F's failure to disclose to the public its subjective and unique method of setting its 'regular' price for reference purposes, and, its unique schedule or calendar for establishing when those 'regular' prices are in effect, have been shown at trial to effect consumers' choices and conduct concerning merchandise to their detriment" (District Court Order, June 27, 1990).

The judge permanently enjoined May D&F from its practice of advertising a "regular" price as a reference price to be compared to the discounted price, unless May D&F fully and completely disclosed to consumers its method of determining the "regular price" in the sale advertisement. The judge also permanently enjoined May D&F from using reference price terms with meanings unique to May D&F or reference price terms whose commonly understood meaning by consumers differed from that used by May D&F, unless May D&F defined the terms in the sale advertisement. Finally, May D&F was permanently enjoined from advertising sales of limited duration, like "4-Day-Only Sale," in such a manner as to communicate to consumers a false sense of urgency to purchase. May D&F was ordered to pay an $8,000 fine to the state, $2,000 for each of four consumers who had testified at the trial that they had been victims of May D&F's deceptive advertising, and to pay the costs and attorney fees the state attorney general incurred in prosecuting the case (District Court Order, June 27, 1990).

The May D&F case has not yet been fully resolved. In October 1990, the State of Colorado appealed the District Court's decision to permit May D&F to continue pricing according to its 1989 policy if the company included in its advertisements a disclosure that described its method of determining prices. The following disclosure appeared on page 28 of May D&F's 36 page 1990 Catalog and was referenced on the bottom of pages that advertised Home Store merchandise:

Pricing Policy

Advertised merchandise in the Home Store my be available at these or similar sale prices in upcoming sales this season. Reference prices are based upon competitor's prices for similar merchandise, manufacturer's suggested retails, and other factors, including subjective ones. Regular prices are established by offering merchandise initially for 10 consecutive days at the regular price, and afterward, by offering the merchandise at the regular price for at least 28 out of every 90 days. The 10-day offering period is included in the 28 days. Original price is used with merchandise whose prices we have permanently reduced (May D&F 1990).

By permitting May D&F to continue to advertise sale and reference prices, as long as it publishes an accompanying explanation, the Colorado court invites the question as to whether such a ruling is sufficient to correct for potential deception in the future.

Although the disclosure indicated the period during which the regular price was in effect, and thus prevented consumers from falsely drawing the first inference of good value, it did nothing to prevent them from inferring that the sale price represented a low price vis a vis the competition. This is especially problematic here where the product categories covered by the court's decision are ones for which the consumer will have limited ability and motivation to compare prices. In those product categories where ability and motivation to compare prices across competitors are high, however, it would appear that such a disclosure would be a sufficient remedy.

Even in product categories which should be highly comparable, it is important that the court takes note whether the retailer has intentionally exacerbated the problem by making the price comparison task more difficult. For example, in categories such as hard goods and electronics, some retailers have negotiated with branded vendors to receive "exclusive" models, differing only cosmetically from the same item sold by competitors. The net effect of this proliferation of model numbers is to reduce dramatically the consumer's ability to compare prices, thus encouraging consumers to rely on reference/sale price comparisons as evidence of good value.

Two other remedies may provide a solution to the problems associated with high-low pricing. These remedies, which are actions to be taken by the offending high-low retailers, are 1) providing full information of the comparative prices across competition, thus improving the consumer's ability to compare prices, and 2) switching to more stable pricing. It should be noted that the remedy demanded by the judge in the May D&F case, providing disclosures in retail advertisements that outline the retailer's sale policies, is the corrective action that is the most common remedy currently used by retailers across the country- The above analysis suggests, however, that this remedy may not be completely effective.

The second remedy, providing comparative prices, addresses consumer ability to compare prices specifically. This approach has been used by a number of retailers in branded product categories like tires, appliances and electronics, which are less fashion sensitive and therefore comprise more standard merchandise selection.

This remedy presents a number of operational difficulties, however. Most importantly, only a retailer with prices equal to or lower than the lowest priced competitor would be willing to present competitor prices in its advertisements. This is not likely to be the case, particularly among department stores when they compete with more efficient category specialists. In addition, even in branded categories, varying model numbers may make the development of a comparative price list quite difficult. As a result, retailers selling electronics and appliances, that encourage consumers to compare prices, maintain extensive derivative model number lists specifying which comparisons are accepted. Direct comparisons become even more difficult in unbranded categories like fine jewelry and furniture.

Even with directly comparable merchandise, any competitive price list is quickly outdated as high-low retailers continue to manipulate reference and sale prices. Finally, while this approach may be an appropriate way of signalling value within a product category, it is difficult to imagine how a retailer, during a storewide sale period, could advertise competitor prices across all of the departments participating in the sale.

The third remedy, a return to stable pricing, seems most appropriate over the long run because it addresses both motivation and ability to compare prices. If consumers either lack the ability or are unwilling to go through the effort to compare prices, but still want to buy at a fair value, then a retailer with a reputation for fair prices may gain their loyal patronage. This remedy represents, in addition to better business practice form a public policy standpoint, a better long-run retail strategy. With stable, every day prices, management focus can shift from a focus on organizing weekly sale events, to greater attention to other facets of the business including merchandise planning and customer service. In addition, stable pricing has a number of operational benefits including, for example, lower advertising, distribution and inventory carrying costs (for a more complete treatment of the operational benefits, see Ortmeyer, Quelch and Salmon 1990).

The key in implementing the third remedy, however, is the conversion period in which the formerly high-low retailer must regain consumer trust in its everyday prices. This requires convincing consumers, who respond to promotional cues because they are the most convenient way to assure fair value, to break their established habits and evaluate the new everyday prices against competitors' sale prices in particular. Not surprisingly, the conversion to more stable pricing is likely to be most troublesome in difficult-to-compare product categories like fine jewelry and furniture. Consumers may continue to use high-low retailers' reference prices as indicators of product quality for these products, which makes it difficult for the retailer converting to stable everyday pricing to establish its reputation for value vis-a-vis high-low retailers carrying comparable merchandise. One retailer that appears to have converted successfully from high-low pricing to stable, everyday pricing, is Dillard Department Stores. As reported in a Goldman Sachs & Co. Investment Research Report on the company (February 5, 1991):

During the past several years, Dillard has "taken the plunge," each year removing one or two of these storewide sales; henceforth, it will conduct only two storewide events, a spring sale in April, and a fall sale in October. These two storewide promotions are supplemented by a myriad of small, focused sales in specific products by vendors (for example, Van Huesen shirts) and, of course, Dillard continues to run promotional clearances. At the same time, the company has (similar to Nordstrom) initiated a "maximum initial markup" policy, thereby enforcing that everyday prices remain substantially competitive. Dillard management reported that sales comparisons (against the previous year) slowed sharply in days and weeks when sales were eliminated, but were more than compensated in other periods, when more competitive everyday prices have enhanced volume growth. As Dillard's comparable-store sales increases of 9.5% in fiscal 1989 and 12.5% in the first nine months of fiscal 1990 indicate (even adjusting for the takeover of the leased footwear departments and Dillard's favorable exposure to the Texas market), customers have indeed recognized the value of more competitive everyday prices (Goldman Sachs & Co., Investment Report, page 22).

According to Goldman Sachs, Dillard's conversion to stable everyday pricing was facilitated by its lower cost structure, which itself was made possible by the company's sophistication in retail technology. Thus, the company is able to operate profitably at a lower gross margin and correspondingly, passes the savings through to the customer in the form of exceptionally competitive everyday prices.

Dillard's successful conversion to stable everyday pricing, and its reputation as one of the stars among today's top retailers suggests the potential of stable everyday pricing as a part of a retailer's overall strategy. Our view is that, ultimately, the long-term solution to the ethical and legal problems created by high-low pricing is to offer merchandise at "regular" prices that have some real meaning to the consumer. The Dillard's example suggests that this solution may make sense from a "good business" perspective as well.

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----------------------------------------

Authors

Patrick J. Kaufmann, Harvard University, Cambridge, U.S.A.
Gwen Ortmeyer, Harvard University, Cambridge, U.S.A.
N. Craig Smith, Georgetown University, Washington D.C., U.S.A.



Volume

E - European Advances in Consumer Research Volume 1 | 1993



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