The vulnerable are being ripped off and the OFT notices – but what will they do?

Glory be!  The Office of Fair Trading (OFT) has belatedly noticed that the public is being ripped off by the intentionally misleading deceitful pricing practices of ‘Big Retail’.

The deceitful practices concerned are a fraud on a monumental scale and are highly regressive in their impact yet few people have noticed what’s going on – they’re hidden in plain sight.  

If the OFT’s line of thinking is followed through and abuses are ended, the public stands to gain more financially than most left-leaning politicians ever dreamt of and, even better, the benefit will be greatest for the poorest and most vulnerable and done with no administrative overhead or perverse incentives … but, there’s a problem.  The OFT can only go so far on its own; it will soon reach the point (has already reached?) where it needs political muscle behind it and ultimately that will mean primary legislation.  In the meantime, I’m not holding my breath or expecting much to come from this move per se.   Only  when the political classes get behind this thinking will they move forward.  This is something that Lib Dems inside and outside of Parliament can and should get involved in.

The pricing practices the OFT is talking about include such tactics as  bogus reference pricing (e.g. was £9.99, now £4.99),  drip pricing (popular with budget airlines), volume offers (e.g. 3 for 2), free offers (buy X, get Y free), complex offers (containing multiple components like mobile phones) and a whole menagerie of others.  The BBC’s report is here and the OFT’s report is here.

For years the OFT has, like most regulators, been notably spineless for two related reasons.  Firstly, they were cognitively captured by a libertarian view that any regulation was automatically a bad thing, that it would interfere with the ‘natural’ workings of the market which was (wrongly) presumed to be always and everywhere beneficial.  Secondly, like all bureaucrats (and I have experience of this in a large company context) they try to intuit what the boss wants and deliver accordingly but sometimes misunderstand badly.  So, if the boss talks approvingly of  ‘regulation lite’, they may think that really means ‘regulation absent’ (especially when they have a libertarian-leaning mindset) when it may be that what he is actually opposed to is regulation badly and clumsily done by no-nothing jobsworths – a different proposition altogether.   Either way, you don’t readily go up against a powerful elite that has the ear of the boss.

Post the financial crisis the belief that markets should be left to themselves and that consumers are uber-rational calculating machines ceaselessly and accurately computing the optimal choice has become impossible to sustain except for a tiny band of true believers and this changes the mood music which, in the long run, changes everything.

Accordingly, the OFT has actually done some behavioural studies to see if deceitful pricing changes consumers’ perceptions in the real world as opposed to the fantasy world of the free marketeers and surprise, surprise it does as almost any normal person could have told them.   The OFT does not offer an estimate for the scale of the losses sustained by consumers but it is clearly huge or retailers would not spend so much time and energy on deceitful pricing.

Initial responses to the OFT’s report are instructive.  The British Retail Consortium (BRC), a lobby group for Big Retail (and a very effective one in my opinion) quoted by the BBC (see above link) advances counter arguments which are as full of holes as a Swiss cheese. 

Their man says, “Consumers … have all the information they need … “.   Err, no they don’t.   The whole point about deceitful pricing is that it aims to confuse and obscure the most important single bit of information in a buying decision – the price and hence the value.  Most people, even highly numerate ones, find it very difficult to work out which is the best buy from a range of competing offers and pack sizes.  This is a difficulty intentionally created by Big Retail – see for example here and here.

He goes on to say, “Discounts and promotions are part of our highly competitive retail market and customers benefit from them.”   Err, no again.   Anyone who ever did Economics 101 will know that ‘perfect competition’ exists only where, among other things, all parties to a transaction have the same good information about it.   Muddying the water on pricing means that consumers have very bad information and that the market is very imperfect.   A market with lots of offers is therefore one that doesn’t work very well for consumers.  According to the BRC, a record 37% of fast-moving consumer goods are currently under offer.  Well, yes.  Times are tough, but many of these offers are designed to avoid admitting that reference prices are too high and should be tumbling in a recession as severe as this one.

The BRC’s final reported claim is a classic piece of lobby BS.  “BRC members… would have nothing to gain from attempts to mislead and any extra legislation or over enforcement on this issue would therefore be pointless.”   Really!  So, they spend oodles of money on deceitful pricing of one sort or another purely for fun and no commercial gain.  How unique!  How remarkable!   So, can we take it that they will not oppose any legislation?  I think not!

Robert Peston’s blog has a more nuanced take on the OFT’s report.  He reports the boss of one of the largest fashion retailers as saying that any ‘visible price increases’ just will not happen – they will be ‘dealt with’ (i.e. hidden) in the product mix.  Is that t-shirt that’s double the price of the one you bought last year simply twice as expensive for the same quality or is it double the quality or somewhere between?  Will you know?  Are you supposed to know?

Peston goes on to anticipate the push-back from free-marketeers who think that unwary consumers deserve any plucking they get.  As he says this may not be a problem for the super-rich but it certainly is for those with a limited income.  I would add that the growth of deceitful pricing over recent decades is one of the factors behind growing inequality.   He gives a big hint that he thinks prices could be lower if retailers didn’t put so much effort into fooling people (he is right about this) and thinks that we would all be much better off if a “what you see is what you get'” rule applied.  I agree with him. 

Unfortunately, the OFT’s proposed remedy is not up to the task; although they are clear that many of these misleading practices are illegal, the OFT says that they will crack down only where the consumer detriment is considerable.  This perilously like saying that retailers will be allowed to continue ripping off the public so long as they only do it a little bit and that some law breaking will be tolerated.    Hence, firms that set out to cheat will have an edge on those that aim only to be what the OFT calls ‘fair dealing’ – or, in other words, the system will reward cheating.  This sets up a regulatory nightmare that is biased to fail.  

We should instead straightforwardly outlaw deceitful prices with penalties structured to fit the crime so that they simply don’t pay.  For example, to control bogus claims that something is ‘free’ legislate to allow the customer to demand it (and only it) free as advertised.  No external policing would be then be necessary.

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