August 14, 2017 by Paul Dughi
When a company like Amazon buys a company like Whole Food, the Federal Trade Commission (FTC) takes a look at a lot of other things than just the business deal at hand. Reuters reports that the FTC is looking into allegations of misleading price tactics used by Amazon.
The investigation comes on the heels of a consumer watchdog group citing Amazon for what it calls deceptive practices by posting inflated list prices and leading consumers to believe they’re getting a better deal than they really are.
The aptly named group, Consumer Watchdog, had previously petitioned the California Attorney General to investigate Amazon. John Simpson, Consumer Watchdog’s Privacy Project director, let it rip in criticizing Amazon. Now it’s asking the FTC to step in after its analysis. In the letter sent to the FTC, Consumer Watchdog detailed 1,000 products from Amazon in June. 46% of those products had reference prices (list price). 61% of those with list prices, the group says, were higher than the product sold in the 90 days prior.
“Amazon CEO Jeff Bezos is building the company’s business on lies and unfairly ripping consumers off.” – John Simpson, Consumer Watchdog’s Privacy Project director
“The conclusions the Consumer Watchdog group reached are flat out wrong,” Amazon said in a statement. “We validate the reference prices provided by manufacturers, vendors and sellers against actual prices recently found across Amazon and other retailers.”
In its previous petition to California Attorney General Xavier Becerra, Simpson wrote:
“Amazon and its executives are cynically flouting the law to increase sales and profits. A company cannot claim it’s discounting something from a certain price when virtually nobody charges that amount. It’s false advertising violating the California Business and Professional Code, as well as an unfair and deceptive practice violating the Federal Trade Commission Act. We call upon you to take immediate action to hold Amazon and its CEO Jeff Bezos accountable for this outrageous abuse.”
You can read a copy of Consumer Watchdog’s petition here:
Other retailers are facing similar complaints
Other retailers have been accused of similar things over the years: marking up the retail or regular price and then offering a “sale” at a discount when the products were never sold at the regular prices.
Under California law, stores can’t post a former price unless it was true – within the last three months or they post the date when it was sold at that price. That’s what led to lawsuits against Kohl’s, Sears, Macy’s and JC Penney by the Los Angeles City Attorney.
In a separate action, Kohl’s agreed to settle a class-action suit claiming the retailer used false “regular” and “original” prices in advertising its products. Kohl’s denied that it used false price comparison advertising or that it has done anything wrong. Still, the retailer agreed to pay out $6.5 million dollars to settle the suit.
JC Penney in 2015 agreed to a $50 million-dollar settlement (also without admitting fault) for similar claims stemming back to 2012.
The suit by the City Attorney said examples were in the thousands. Here are just a few examples cited:
- JC Penney advertised a swim top (maternity) for $31.99 and claimed a 30% discount off the $46 original price.
- Kohl’s listed a pair of cargo shorts for $35.99 marked down from a $60 regular price.
- Sears listed a Kenmore washer for sale at $999.99 marked down from the regular price of $1,179.
None of these items, the suit claims, were ever sold online for more than the sale prices.
Online Retailers targeted for pricing actions
The Consumer Watchdog group bills itself as a nonpartisan, nonprofit public interest group. In its petition, it charges Amazon with violating Article 1, Sec. 17501 of the California Business and Professional Code.
They go so far as to call it a scam.
The group says many items Amazon is selling give the selling price as well as a price with a line through it, a reference price, sometimes described as a “list” price or “was” price. This reference price creates the impression that the consumer is getting a deal because the price paid is substantially lower the one with the line through it. The catch is that the product is widely available from many other outlets at prices much lower than the crossed-out reference price. The price was much higher than the price charged in the marketplace, and in many cases, it was a completely fictitious price, charged by no one, says Consumer Watchdog.
In 2014, a California Court fined Amazon competitor Overstock.com $6.8 million for misleading consumers with phony reference prices like those Amazon uses. In January 2017, Canadian regulators fined Amazon $1 million CAD for failing to verify the accuracy of its reference prices.
Amazon’s reference prices had once been posted for virtually every product offered for sale on the Amazon website. Though not as prevalent as once was the case, research shows that the practice continues.
Study: Of 4,000 products, 1,000 had misleading pricing
Consumer Watchdog says a detailed study of Amazon’s website conducted by a data researcher from Feb. 3 – Feb. 6 of more than 4,000 products found Amazon published reference prices with a line through them on more than a quarter of its listings, and that the majority of these crossed-out prices exceeded—sometimes by large margins—any plausible definition of the “prevailing market price.”
“In other words, the reference prices were an entirely bogus notional price that created the false impression that customers were getting a deal when they were not. When correcting the inflated list prices, the fictitious discounts often vanished,” the group says.
You can read the full research report documenting Amazon’s misleading practices here:
Here is a summary of the study’s claims from Consumer Watchdog’s news release:
- Amazon includes reference (crossed-out) prices on more than a quarter of its stock
- A majority Amazon’s crossed-out prices are greater than the prevailing market price, regardless of how the prevailing price is defined (between half and three-quarters, depending on measure used)
- About 40 percent of Amazon’s crossed-out prices are greater than the highest price charged by any known competitor
- On average, Amazon’s reference prices overstate the median market prices by $22, or about 20 percent
- Amazon Marketplace vendors also post reference prices in excess of the prevailing market price, but they do so less frequently and to a lesser degree than Amazon itself
- Amazon appears to be in breach of its own List Price policy, and its practices appear to violate federal regulations governing deceptive pricing and California law.
You can read a copy of the Amazon study here.
If you want to really go deep on this subject, you can read my explanation of how anchor pricing works.