Without admitting any guilt, JCPenney recently agreed to pay the plaintiffs in a class action lawsuit $50 million to make the case go away. It started when a shopper in a California JCPenney alleged that the sale price that the retailer advertised was really just its regular price. Despite promoting the price as a 30 percent discount, JCPenney had never charged any higher price for the garment.

The broader question is whether JCPenney, and other discount retailers, engage in a misleading practice by which they mark prices higher than they ever expect to sell the products, then immediately discount them to what they consider a reasonable price point. In this case, consumers are fooled into thinking that they have gotten a deal, when really they are just paying the retailer’s low prices. Other retailers similarly have been accused of using such deceptive reference prices, such as Kohl’s and Men’s Wearhouse.

For retailers that engage in these practices, the most effective method often involves private label or exclusive products. For example, at JCPenney, the Liz Claiborne blouses at the heart of the lawsuit were not available for sale anywhere else. Thus, consumers had no means to compare the prices with the costs they faced elsewhere.

According to regulations enforced by the Federal Trade Commission, the lack of comparison isn’t the heart of the problem though. Rather, federal regulations insist that calling something a sale requires that it be sold at a higher price for some reasonable amount of time, and some retailers seem unable or unwilling to meet that requirement.

Discussion Questions: 

1. What is a deceptive reference price?
2. Do you believe that JCPenney uses deceptive reference prices?
3. What other retailers do you believe uses deceptive reference prices?

 Source: Hiroko Tabuchi, The New York Times, November 11, 2015