It’s an experience most of us have had when shopping in a store. You’re rifling through the sales rack in search of a bargain. You find a shirt and trying to decide if it’s worth buying, so you look at the original price.
But if you’re shopping at a dishonest retailer, what’s on the price tag may fool you into buying an item that’s not really discounted all that much. The retailer might have been creative with the pricing. Was the clothing super-expensive for a short period of time, so it could be sold at a more dramatic discount? Or was the original price merely a loose estimate?
A new working paper from Donald Ngwe, an assistant professor at Harvard Business School, looked at how effective fake discounts are in driving business at retailers. Fake “original” list prices are a common strategy among some retailers — especially with outlet or discount stores.
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While outlet stores do sell products that were originally sold at full price in regular stores, they also carry products that were delivered straight from the factory. Those factory goods, which were meant only to be sold in outlet stores, often still carry an “original” price that was never an actual selling price upon which a discount is taken.
Ngwe first analyzed transaction data at outlet stores to examine the impact of fictitious pricing on consumers’ purchase choices. He then ran an experiment where he asked more than 1,000 consumers whether they would purchase a product after supplying them with both the real and a fake original list price.
Here is what he found:
Consumers’ choices reinforced the theory that they treat prices as a signal of a product’s quality, so a higher “original” list price increases the likelihood that they will buy a product. And that effect was even more pronounced when retailers falsified the original sale price. When consumers had more information, they were less sensitive to the fake prices and, therefore, less likely to be duped by this strategy. If consumers knew the true original price, the presence of a falsified original price did not increase demand for the product — and did make consumers feel less trusting of the retailer. How consumers can stay informed about product pricingNgwe identified two main factors that could counteract the deceptive practices retailers.
For starters, consumers may want to consider becoming loyal customers of specific retail locations. By shopping continually at a store over a longer period of time, the average consumer could become better informed of that retailer’s strategy. And this was shown to make them less sensitive to fake discounts when those were introduced.
On the flip side, Ngwe said there was evidence to suggest that these same consumers might be more sensitive to real discounts, so this strategy isn’t guaranteed to help their wallet per se.
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And consumers may want to shop at outlet locations that are closer to their full-price counterparts, so they compare prices. “The farther the nearest regular store is, the more sensitive consumers are to both real discounts and fake discounts,” Ngwe wrote. It helps when a consumer is familiar with the brand and people may be feel under more pressure to make a purchase, if they’d taken a special trip to an outlet village.
There are other options beyond the strategies identified by Ngwe. When it comes to online shopping in particular, price comparison tools such as Camelcamelcamel and The Tracktor can help a shopper determine how a sale compares to the product’s average long-term price.
Consumers shouldn’t expect the law to protect them. As Ngwe noted, although fictitious pricing is disallowed by the Federal Trade Commission, it is still a very common tactic among retailers. That’s in part because it’s very hard to regulators to prove a discount is, indeed, fake.
“Several FTC chairs have indicated that enforcement actions in this area have done more harm than good,” Ngwe wrote. “This is because of the difficulty and arbitrariness with which a ‘genuine’ discount might be differentiated from a deceptive one.”
