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Public Policy in Private Markets Advertising and Selling Practices.

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Presentation on theme: "Public Policy in Private Markets Advertising and Selling Practices."— Presentation transcript:

1 Public Policy in Private Markets Advertising and Selling Practices

2 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

3 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

4 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

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

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

7 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

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

9 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

10 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

11 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

12 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

13 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

14 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

15 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

16 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”

17 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

18 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

19 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”

20 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

21 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

22 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

23 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


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