The Los Angeles city attorney recently filed lawsuits against four of the country’s biggest retailers – JCPenney, Sears Holdings, Kohl’s and Macy’s – for luring customers in with fake discounts.
This shouldn’t come as much of a surprise to anyone who has paid close attention to the retail industry. Big retailers have been known to use “bait and switch” tactics to pretend they are giving customers big savings, all to pad their own sales figures. Ask anyone who has waited on line early Black Friday morning how many of those super deals were really available.
We have even seen retailers use this ploy when it comes to public policy. Big-box retailers and chain department stores worked the back channels in Washington to score a major payday in 2010 when Congress set a price cap on the money these chains had to pay to process debit card payments.
The result - a $36 billion-and-counting windfall for the same industry that is now hoodwinking its customers with misleading ads.
Even the tactics are similar. In the California case, JC Penney or Macy’s might advise a designer coat that typically sells for $400, but “for now” it is now on sale for half that amount. The process is called “false reference pricing.”
In the Washington version of this story, retailers promised their customers savings, but then failed to deliver on that promise. A study from the Federal Reserve Bank of Richmond found just 2% of these retailers had actually lowered prices after Congress passed legislation boosting their bottom lines.
Two percent.
It shouldn’t be a big surprise that these same companies are pretending to give their customers over-inflated discounts. After all, right around the time Congress passed this price cap, Mallory Duncan, the general counsel of the National Retail Federation, promised the legislation would “make it easier for retailers to give a discount to customers.”
As the Fed study shows, that is obviously not the case and looks more like false advertising to the lay person.
This law, authored by liberal Illinois Sen. Dick Durbin, is a classic example of Congress disrupting the free-market for the benefit of a politically connected industry. Just like Macys, JCPenney and others misled customers to boost sales, the entire industry misled Congress to prop up their businesses, which was on the cusp of being challenged by the likes of Amazon.com. Mr. Durbin authored his amendment at the request of Walgreen and a coalition of big retailers. They promised to cut prices if government imposed price controls. Prices were not reduced and consumers lost some basic market-enticements like free checking, as banks looked to make up revenue lost from the Durbin scheme via additional fees.
The good news in California is that the city attorney in Los Angeles filed suit to prevent these department stores from duping their customers. Now, it’s time for Congress to step in to do the same thing at the federal level. By overturning the so-called Durbin Amendment, members of Congress could prevent retailers from more false advertising about the benefit of price caps.
Pretending to lower prices on artificially over-priced goods doesn’t make them any cheaper, just like telling customers they are saving money even when they aren’t doesn’t make it so.
