Guides Against Deceptive Pricing

16 CFR Part 233 · Guides · in the Code of Federal Regulations 1968-1995 (27 annual editions)

Scanned CFR pages, OCR text may contain errors; the linked Library of Congress PDF is the authority. Not legal advice; not affiliated with the FTC. These rules and guides are historical: most were rescinded or replaced, so do not assume any is in force.

Latest edition: Library of Congress, 1995 CFR · Earliest edition: 1968 CFR

Text (1995 edition, OCR)

Federal Trade Commission

other words or terms may be used
which would tend to convey the im-
pression that the shoes or slippers ad-
vertised are made of a certain kind or
type of material when they are not.

(d) Examples of words and terms pro-
hibited by this section, when applied to
nonleather material are:

“Duraleather.”
“Barkhyde.”

[Guide 7]

PART 233—GUIDES AGAINST
DECEPTIVE PRICING

Sec.

233.1 Former price comparisons.

233.2 Retail price comparisons; comparable
value comparisons.

233.38 Advertising retail prices which have
been established or suggested by manu-
facturers (or other nonretail distribu-
tors).

233.4 Bargain offers based upon the pur-
chase of other merchandise.

233.5 Miscellaneous price comparisons.

AUTHORITY: Secs. 5, 6, 38 Stat. 719, as

amended, 721; 15 U.S.C. 45, 46.

SOURCE: 32 FR 15534, Nov. 8, 1967, unless
otherwise noted.

§233.1 Former price comparisons.

(a) One of the most commonly used
forms of bargain advertising is to offer
a reduction from the advertiser’s own
former price for an article. If the
former price is the actual, bona fide
price at which the article was offered
to the public on a regular basis for a
reasonably substantial period of time,
it provides a legitimate basis for the
advertising of a price comparison.
Where the former price is genuine, the
bargain being advertised is a true one.
If, on the other hand, the former price
being advertised is not bona fide but
fictitious—for example, where an arti-
ficial, inflated price was established for
the purpose of enabling the subsequent
offer of a large reduction—the ‘“‘bar-
gain’? being advertised is a false one;
the purchaser is not receiving the un-
usual value he expects. In such a case,
the “reduced” price is, in reality, prob-
ably just the seller’s regular price.

(b) A former price is not necessarily
fictitious merely because no sales at
the advertised price were made. The
advertiser should be especially careful,

19

§ 233.1

however, in such a case, that the price
is one at which the product was openly
and actively offered for sale, for a rea-
sonably substantial period of time, in
the recent, regular course of his busi-
ness, honestly and in good faith—and,
of course, not for the purpose of estab-
lishing a fictitious higher price on
which a deceptive comparison might be
based. And the advertiser should scru-
pulously avoid any implication that a
former price is a selling, not an asking
price (for example, by use of such lan-
guage as, ‘‘Formerly sold at $——”’),
unless substantial sales at that price
were actually made.

(c) The following is an example of a
price comparison based on a fictitious
former price. John Doe is a retailer of
Brand X fountain pens, which cost him
$5 each. His usual markup is 50 percent
over cost; that is, his regular retail
price is $7.50. In order subsequently to
offer an unusual ‘‘bargain’’, Doe begins
offering Brand X at $10 per pen. He re-
alizes that he will be able to sell no, or
very few, pens at this inflated price.
But he doesn’t care, for he maintains
that price for only a few days. Then he
“cuts” the price to its usual level—
$7.50—and advertises: ‘“Terrific Bar-
gain: X Pens, Were $10, Now Only
$7.50!” This is obviously a false claim.
The advertised “bargain” is not genu-
ine.

(d) Other illustrations of fictitious
price comparisons could be given. An
advertiser might use a price at which
he never offered the article at all; he
might feature a price which was not
used in the regular course of business,
or which was not used in the recent
past but at some remote period in the
past, without making disclosure of
that fact; he might use a price that was
not openly offered to the public, or
that was not maintained for a reason-
able length of time, but was imme-
diately reduced.

(e) If the former price is set forth in
the advertisement, whether accom-
panied or not by descriptive terminol-
ogy such as “Regularly,’’ ‘‘Usually,”
“Formerly,” etc., the advertiser should
make certain that the former price is
not a fictitious one. If the former price,
or the amount or percentage of reduc-
tion, is not stated in the advertise-
ment, as when the ad merely states,


§ 233.2

“Sale,” the advertiser must take care
that the amount of reduction is not so
insignificant as to be meaningless. It
should be sufficiently large that the
consumer, if he knew what it was,
would believe that a genuine bargain or
saving was being offered. An advertiser
who claims that an item has been ‘‘Re-
duced to $9.99,”" when the former price
was $10, is misleading the consumer,
who will understand the claim to mean
that a much greater, and not merely
nominal, reduction was being offered.
[Guide I]

$233.2 Retail price comparisons; com-
parable value comparisons.

(a) Another commonly used form of
bargain advertising is to offer goods at
prices lower than those being charged
by others for the same merchandise in
the advertiser’s trade area (the area in
which he does business). This may be
done either on a temporary or a perma-
nent basis, but in either case the adver-
tised higher price must be based upon
fact, and not be fictitious or mislead-
ing. Whenever an advertiser represents
that he is selling below the prices being
charged in his area for a particular ar-
ticle, he should be reasonably certain
that the higher price he advertises does
not appreciably exceed the price at
which substantial sales of the article
are being made in the area—that is, a
sufficient number of sales so that a
consumer would consider a reduction
from the price to represent a genuine
bargain or saving. Expressed another
way, if a number of the principal retail
outlets in the area are regularly selling
Brand X fountain pens at $10, it is not
dishonest for retailer Doe to advertise:
“Brand X Pens, Price Elsewhere $10,
Our Price $7.50’’.

(hb) The following example, however,
illustrates a misleading use of this ad-
vertising technique. Retailer Doe ad-
vertises Brand X pens as having a ‘‘Re-
tail Value $15.00, My Price $7.50,”’ when
the fact is that only a few small subur-
ban outlets in the area charge $15. All
of the larger outlets located in and
around the main shopping areas charge
$7.50, or slightly more or less. The ad-
vertisement here would be deceptive,
since the price charged by the small
suburban outlets would have no real
significance to Doe’s customers, to

20

16 CFR Ch. | (1-1-95 Edition)

whom the advertisement of ‘Retail
Value $15.00” would suggest a prevail-
ing, and not merely an isolated and un-
representative, price in the area in
which they shop.

(c) A closely related form of bargain
advertising is to offer a reduction from
the prices being charged either by the
advertiser or by others in the advertis-
er’s trade area for other merchandise of
like grade and quality—in other words,
comparable or competing merchan-
dise—to that being advertised. Such
advertising can serve a useful and le-
gitimate purpose when it is made clear
to the consumer that a comparison is
being made with other merchandise
and the other merchandise is, in fact,
of essentially similar quality and ob-
tainable in the area. The advertiser
should, however, be reasonably certain,
just as in the case of comparisons in-
volving the same merchandise, that the
price advertised as being the price of
comparable merchandise does not ex-
ceed the price at which such merchan-
dise is being offered by representative
retail outlets in the area. For example,
retailer Doe advertises Brand X pen as
having ‘‘Comparable Value $15.00’. Un-
less a reasonable number of the prin-
cipal outlets in the area are offering
Brand Y, an essentially similar pen, for
that price, this advertisement would be
deceptive. [Guide IT]

§233.3 Advertis: retail prices which
have been established or suggested
by manufacturers (or other

nonretail distributors).

(a) Many members of the purchasing
public believe that a manufacturer’s
list price, or suggested retail price, is
the price at which an article is gen-
erally sold. Therefore, if a reduction
from this price is advertised, many
people will believe that they are being
offered a genuine bargain. To the ex-
tent that list or suggested retail prices
do not in fact correspond to prices at
which a substantial number of sales of
the article in question are made, the
advertisement of a reduction may mis-
lead the consumer.

(b) There are many methods by which
manufacturers’ suggested retail or list
Prices are advertised: Large scale
(often nationwide) mass-media adver-
tising by the manufacturer himself;


Federal Trade Commission

preticketing by the manufacturer; di-
rect mail advertising; distribution of
promotional material or price lists de-
s‘gned for display to the public. The
mechanics used are not of the essence.
This part is concerned with any means
employed for placing such prices before
the consuming public.

(c) There would be little problem of
deception in this area if all products
were invariably sold at the retail price
set by the manufacturer. However, the
widespread failure to observe manufac-
turers’ suggested or list prices, and the
advent of retail discounting on a wide
scale, have seriously undermined the
dependability of list prices as indica-
tors of the exact prices at which arti-
cles are in fact generally sold at retail.
Changing competitive conditions have
created a more acute problem of decep-
tion than may have existed previously.
Today, only in the rare case are all
sales of an article at the manufactur-
er’s suggested retail or list price.

(d) But this does not mean that all
list prices are fictitious and all offers
of reductions from list, therefore, de-
ceptive. Typically, a Hst price is a
price at which articles are sold, if not
everywhere, then at least in the prin-
cipal retail outlets which do not con-
duct their business on a discount basis.
It will not be deemed fictitious if it is
the price at which substantial (that is,
not isolated or insignificant) sales are
made in the advertiser’s trade area (the
area in which he does business). Con-
versely, if the list price is significantly
in excess of the highest price at which
substantial sales in the trade area are
made, there is a clear and serious dan-
ger of the consumer being misled by an
advertised reduction from this price.

(e) This general principle applies
whether the advertiser is a national or
regional manufacturer (or other non-
retail distributor), a mail-order or
catalog distributor who deals directly
with the consuming public, or a local
retailer. But certain differences in the
responsibility of these various types of
businessmen should be noted. A re-
tailer competing in a local area has at
least a general knowledge of the prices
being charged in his area. Therefore,
before advertising a manufacturer’s
list price as a basis for comparison
with his own lower price, the retailer

21

§ 233.3

should ascertain whether the list price
is in fact the price regularly charged
by principal outlets in his area.

(f) In other words, a retailer who ad-
vertises a manufacturer’s or distribu-
tor’s suggested retail price should be
careful to avoid creating a false im-
pression that he is offering a reduction
from the price at which the product is
generally sold in his trade area. If a
number of the principal retail outlets
in the area are regularly engaged in
making sales at the manufacturer’s
suggested price, that price may be used
in advertising by one who is selling at
a lower price. If, however, the list price
is being followed only by, for example,
small suburban stores, house-to-house
canvassers, and credit houses, account-
ing for only an insubstantial volume of
sales in the area, advertising of the list
price would be deceptive.

(g) On the other hand, a manufac-
turer or other distributor who does
business on a large regional or national
scale cannot be required to police or
investigate in detail the prevailing
prices of his articles throughout so
large a trade area. If he advertises or
disseminates a list or preticketed price
in good faith (i.e., as an honest esti-
mate of the actual retail price) which
does not appreciably exceed the highest
price at which substantial sales are
made in his trade area, he will not be
chargeable with having engaged in a
deceptive practice. Consider the follow-
ing example:

(h) Manufacturer Roe, who makes
Brand X pens and sells them through-
out the United States, advertises his
pen in a national magazine as having a
“Suggested Retail Price $10,” a price
determined on the basis of a market
survey. In a substantial number of rep-
resentative communities, the principal
retail outlets are selling the product at
this price in the regular course of busi-
ness and in substantial volume. Roe
would not be considered to have adver-
tised a fictitious “suggested retail
price.” If retailer Doe does business in
one of these communities, he would not
be guilty of a deceptive practice by ad-
vertising, ‘‘Brand X Pens, Manufactur-
er’s Suggested Retail Price, $10, Our
Price, $7.50.”

(i) It bears repeating that the manu-
facturer, distributor or retailer must in


§ 233.4

every case act honestly and in good
faith in advertising a list price, and not
with the intention of establishing a
basis, or creating an instrumentality,
for a deceptive comparison in any local
or other trade area. For instance, a
manufacturer may not affix price tick-
ets containing inflated prices as an ac-
commodation to particular retailers
who intend to use such prices as the
basis for advertising fictitious price re-
ductions. (Guide TT)

§233.4 Bargain offers based upon the
purchase of other merchandise.

(a) Frequently, advertisers choose to
offer bargains in the form of additional
merchandise to be given a customer on
the condition that he purchase a par-
ticular article at the price usually of-

‘fered by the advertiser. The forms
which such offers may take are numer-
ous and varied, yet all have essentially
the same purpose and effect. Rep-
resentative of the language frequently
employed in such offers are ‘Free,’
“Buy One—Get One Free,’’ ‘‘2-For-1
Sale,” ‘‘Half Price Sale,” ‘‘1¢ Sale,”
“50% Off,” etc. Literally, of course, the
seller is not offering anything ‘‘free’’
(i.e., an unconditional gift), or % free,
or for only 1¢, when he makes such an
offer, since the purchaser is required to
purchase an article in order to receive
the ‘‘free’’ or ‘‘1¢’? item. It is impor-
tant, therefore, that where such a form
of offer is used, care be taken not to
mislead the consumer.

(b) Where the seller, in making such
an offer, increases his regular price of
the article required to be bought, or de-
creases the quantity and quality of
that article, or otherwise attaches
strings (other than the basic condition
that the article be purchased in order
for the purchaser to be entitled to the
“free”’ or “‘1¢” additional merchandise)
to the offer, the consumer may be de-
ceived.

(c) Accordingly, whenever a ‘“‘free,”
“2-for-1,” “‘half price sale,’ ‘‘l¢ sale,”
“50% off or similar type of offer is
made, all the terms and conditions of
the offer should be made clear at the
outset. [Guide IV]

16 CFR Ch. | (1-1-95 Edition)

§233.5 Miscellaneous price
sons.

The practices covered in the provi-
sions set forth above represent the
most frequently employed forms of
bargain advertising. However, there are
many variations which appear from
time to time and which are, in the
main, controlled by the same general
principles. For example, retailers
should not advertise a retail price as a
“wholesale” price. They should not
represent that they are selling at ‘‘fac-
tory” prices when they are not selling
at the prices paid by those purchasing
directly from the manufacturer. They
should not offer seconds or imperfect
or irregular merchandise at a reduced
price without disclosing that the high-
er comparative price refers to the price
of the merchandise if perfect. They
should not offer an advance sale under
circumstances where they do not in
good faith expect to increase the price
at a later date, or make a “limited”
offer which, in fact, is not limited. In
all of these situations, as well as in
others too numerous to mention, ad-
vertisers should make certain that the
bargain offer is genuine and truthful.
Doing so will serve their own interest
as well as that of the public. (Guide V]

PART 234—GUIDES FOR THE MAIL
ORDER INSURANCE INDUSTRY

Sec.

234.0 Definitions.

234.1 Deception (general).

234.2 Advertisement of benefits, losses cov-
ered or premiums payable.

234.3 Health of the applicant or insured.

234.4 Disclosure of policy provisions relat-
ing to renewability, cancellability, or
termination.

234.5 Testimonials, appraisals or analyses.

234.6 Deceptive use of statistics.

234.7 Identification of plan or number of
policies.

234.8 Deception as to introductory, initial
or special offers.

234.9 Misrepresentation as to licensing, ap-
proval or endorsement of insurer, policy
or advertisement.

234.10 Deception as to “group” or ‘“‘quasi-
group”’ policies.

234.11 Allocation of benefits under a ‘‘Fam-
ily Group” policy.

234.12 Deceptive use of trade names, service
marks, etc.

compari-