Public Policy in Private Markets Advertising and Selling Practices

Announcements 5/1: Last day of classes HW 7 due, posted You will get exam 2 back, together with a “tentative” grade Tue, 5/8 Comprehensive final exam: 4:00 – 6:00 pm, Thompson Hall 106

Overview of this Course 1. Competition Policies (completed) 2. Information Policies: information that is presented to consumer 3. Product Quality policies: health, safety, quality Non-Price Consumer Protection

Overview of this Course 1. Competition Policies (completed) 2. Information Policies: information that is presented to consumer 3. Product Quality policies: health, safety, quality Non-Price Consumer Protection

Information Policies A. Product Standardization and Information Disclosure B. Regulation of Advertising and Selling Practices

Information Policies A. Product Standardization and Information Disclosure B. Regulation of Advertising and Selling Practices FTC Act, Section 5

Advertising and Selling practices Regulated by FTC:  FTC Act, Section 5 outlaws “unfair methods of competition and unfair or deceptive acts or practices” When is advertising deceptive? FTC:  Not about whether true or false  Focuses on deceptiveness Literal Content of Message Message Received

Possible Situations Literal Content of Message Message Received Example TrueNot DeceptiveA TrueDeceptiveB FalseNot DeceptiveC FalseDeceptiveD

Possible Situations C: False and not deceptive  Beer ads: higher status  Geico: talking gecko D: False and deceptive  Pill X will make you lose 10 lbs in 10 days  Bowflex? 20 min/day, 3 days/week, results in 6 months

Possible Situations C: False and not deceptive  Beer ads: higher status  Geico: talking gecko D: False and deceptive  Pill X will make you lose 10 lbs in 10 days  Bowflex? 20 min/day, 3 days/week, results in 6 months

2. Information Policies:  Regulation on how products are presented to consumers E.g.: advertisements, labeling, unit pricing  How much information is needed?  What format should this information have? E.g. Nutrition labeling in UK: new proposal to have traffic lights on nutrition labels

Possible Situations A: True and not deceptive  Total: “gives you 100% of the RDA of 10 essential vitamins and minerals” B: True and deceptive  Campbell: “calorie for calorie noodle soup contains more protein than a peanut-butter sandwich” True, but soup serving has 1/10 the calories of a sandwich’s Deceptive: comparison should be on basis of servings RDA: Recommended dietary allowances

Possible Situations C: False and not deceptive  Beer ads: higher status  Geico: talking gecko D: False and deceptive  Geico ? 15 minutes could save you 15% or more on car insurance  Bowflex? 20 min/day, 3 days/week, results (?) in 6 months

Advertising and Selling practices FTC focuses on B + D: Advertising deceptive if 1. A claim is likely to mislead a reasonable consumer  FTC’s judgment, experts, surveys, focus groups  Do consumers have enough knowledge to judge? 2. Claim is material Must affect consumers’ decisions/well-being In general, do not have to show:  Advertiser intended to deceive  How many people were deceived

Advertising and Selling practices Who is the reasonable consumer?  Suspicious and hard headed?  Ignorant, unthinking and trusting?  Foolish and feeble minded? Typically: ads must be non-deceptive to mostly everyone (i.e. the average consumer). Advertising Substantiation: If particular claim is made, you must prove it (scientifically)  E.g. 4 out of 5 doctors prescribe drug A

Types of Deception 1. Claims of Composition:  Presence of certain ingredient  Partial truth about ingredient’s content  Omitting relevant info falls in this category: Example: McDonald’s fries “cooked with 100% vegetable oil”, but it does not say it includes beef extract for flavor 2. Claims of Function/Efficacy: Claiming something the product does not do Wonder Bread: “helps brain function and memory; it does it better than other equivalent products”

Types of Deception 3. Endorsements:  Endorser must be bona fide user of the product  There must be some reality to the endorsement 4. Mock ups: Can’t misrepresent product or those of competitors Must show time elapsed (e.g. oven cleaner) Must be realistic (e.g. show true food pictures) Example: Campbell’s ads using marbles in bottom of bowl so veggies would stick out

In-Class Work Come up with an example of deceptive advertising that falls into the “True but Deceptive Category” What kind of deception does this example represent?  Claim of composition, claim of efficacy, endorsement or mock up

Enforcement of Advertising and Selling practices Procedures: 1. Case by Case  FTC issues complaint against specific ad, ad campaign or selling practice  Administrative Judge Law tries case  Firm may appeal to courts  Mostly issues of deception 2. Industry Guides/Recommendations:  FTC’s view of what ad and selling practices are (not) legal  Do not carry any force of law (only guide to companies)  Example: “Green marketing claims”

Enforcement of Advertising and Selling practices Procedures: 3. Trade regulation rules  Formal regulations issued by FTC after hearing process  HAVE force of law  If violated you can be prosecuted for violating rule rather than section 5 of FTC Act. Examples:  Funeral rule + Used Car dealers rule  Franchise disclosure rules (1979): contractual rights, franchisor financial info, list of franchisees, business facts, restrictions + responsibilities of each party, etc.  3 day cooling off period for door to door sales

Example: Used Car Dealers Rule The Buyers Guide: Disclosure document that gives consumers important purchasing and warranty information o Vehicle is being sold “as is” or with a warranty? o % of the repair costs a dealer will pay under warranty o Oral promises are difficult to enforce o Get all promises in writing o Keep the Buyers Guide for reference after the sale o Major mechanical and electrical systems on the car o Major problems that consumers should look out for o Have the car inspected by an independent mechanic before purchase

Enforcement of Advertising and Selling practices Remedies: 1. Consent decree: firm agrees not to engage in practices in the future  Advantage: fast 2. Cease + Desist Order  Prohibits offender from engaging in practices found to be illegal (also, sometimes, closely similar practices)  Penalties if behavior persists after order ($10k/day)  However, repeat offenses are common

Enforcement of Advertising and Selling practices Remedies: 3. Affirmative disclosure order:  Seller can’t make certain claims (or sell product) unless relevant facts are included in message  Example: cigarettes must carry health warning 4. Corrective advertising:  Correct prior deceptive impression  Ex: Listerine said it prevented colds; later ad said: “Listerine will not help prevent colds or sore throats or lessen their severity” 5. Restitution: $$ compensation or refund