Public Policy in Private Markets

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 Competition Policies (completed) Information Policies: information that is presented to consumer Product Quality policies: health, safety, quality Non-Price Consumer Protection

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

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

6. Information Policies • Product Standardization and Information Disclosure • 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 Message Received Literal Content of Message

8. Possible Situations

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: 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 • A claim is likely to mislead a reasonable consumer • FTC’s judgment, experts, surveys, focus groups • Do consumers have enough knowledge to judge? • 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 • 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 • 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: • 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 • 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 • Vehicle is being sold “as is” or with a warranty? • % of the repair costs a dealer will pay under warranty • Oral promises are difficult to enforce • Get all promises in writing • Keep the Buyers Guide for reference after the sale • Major mechanical and electrical systems on the car • Major problems that consumers should look out for • Have the car inspected by an independent mechanic before purchase

22. Enforcement of Advertising and Selling practices • Remedies: • Consent decree: firm agrees not to engage in practices in the future • Advantage: fast • 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: • 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 • Corrective advertising: • Correct prior deceptive impression • Ex: Listerine 1938-1972 said it prevented colds; later ad said: “Listerine will not help prevent colds or sore throats or lessen their severity” • Restitution: $$ compensation or refund