Bait and Switch

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Bait and Switch

What It Means

Bait and switch is a fraudulent or deceptive marketing tactic in which a retail business advertises a certain product at an irresistibly low price (the bait) in order to lure consumers into their store. When the consumer arrives at the retail establishment seeking to buy the advertised item, however, a sales representative reveals that the item is “no longer available”, and then attempts to redirect the customer’s attention to a substitute product at a higher price (the switch).

Notorious as one of the most commonly used false advertising scams, bait-and-switch tactics are unfair for two reasons. First and most obviously, it is unfair to put out advertisements that make false promises to customers; if customers cannot depend on advertisements to deliver truthful information, they will not able to make informed choices about how to spend their money. Bait-and-switch tactics are also unfair because such advertisements often lure customers away from other businesses that are playing by the rules (that is, advertising merchandise they actually have in stock at real prices). A tactic that gives one business an unfair advantage over another is described as anticompetitive. The right to free and fair competition in business is one of the foundational principles of the American economic system; therefore, anticompetitive business practices are generally illegal. Indeed, bait-and-switch tactics are outlawed by the Federal Trace Commission (FTC), a U.S. government agency devoted to protecting American consumers from fraud and deception and to preserving the integrity of free competition in the marketplace.

When Did It Begin

The American advertising industry grew and developed at a rapid rate between 1900 and the mid-1930s. Whereas advertisements had previously been generated directly by the manufacturer of a product, in the early twentieth century advertising agencies emerged as a sophisticated creative and strategic force in American business, using methods of applied psychology in their advertising campaigns. Bait-and-switch tactics were among the many strategies conceived during this era to entice consumers to spend their money in ways they had not planned to spend it.

Although the FTC was originally founded under the Federal Trade Commission Act of 1914 to address the primary problem of anticompetitive practices in business, during the decades that followed, the agency became increasingly involved in efforts to protect American consumers from deceptive and misleading advertising practices. To this end the Wheeler-Lea Act was passed in 1938 as an amendment to the FTC Act, stating that false or deceptive advertising practices (including bait-and-switch) are illegal and granting the FTC its first official authority to regulate false advertising. Under the amendment the FTC may investigate and potentially fine businesses believed to be perpetrating such fraud.

More Detailed Information

Bait-and-switch tactics use psychological tricks to prey upon a customer’s emotions: by offering something that is of high value to the customer (say, a 50-inch plasma HDTV, or high-definition television, normally at least a $2,000 purchase, on sale for $399), the advertisement puts him or her in the mindset of making a purchase. The customer enters a state of anticipation or expectation. When the advertised television turns out to be “sold out” (although it is questionable whether there were ever any available at this price in the first place), the customer is disappointed; the desire for a new, high-tech television that was awakened by the advertisement remains, and the customer is now in a state of discomfort because his or her expectation of buying a new TV has not been fulfilled.

At this moment of disappointment, the customer is vulnerable to the suggestion of buying some other television or piece of home entertainment electronic equipment because making a purchase will help alleviate the discomfort of the unfulfilled expectation. “We do have some other great items on sale,” the sales representative will say. “How about this 30-inch flatscreen TV? It comes with a built-in DVD player and VCR. What a great deal for only $309!” Usually the switch product holds a lesser value (or is less desirable) for the customer but is more profitable for the retailer to sell. In the television scenario, for example, the customer who walks out with the 30-inch flatscreen TV has spent less money than he or she would have spent on the advertised 50-inch plasma TV, but the price of the flatscreen is close to its normal retail price, whereas the advertised price of the plasma TV was well below even its wholesale cost (meaning that the retailer would have incurred a significant loss if he had sold the plasma TV for $399). The overall value of the flatscreen TV is considerably less than that of the plasma TV, but the retailer makes a greater percentage of profit on the sale of the flatscreen.

We have seen how bait-and-switch tactics may unfairly affect a customer’s decision-making process. Now consider how this kind of false advertising affects the larger business environment. Mr. Palmero has been running his own electronics store for 20 years. He has built his reputation on selling quality products at fair prices, and business has always been steady. Suddenly, however, a new chain store called Crazy Larry’s moves into town and starts flooding the newspapers and radio waves with advertisements for outrageous deals on electronics products. One week it is a clearance on the top brand camcorder; the next week it is a three-for-one offer on MP3 players. These deals are too good to pass up, and people flock to Crazy Larry’s to take advantage of them. When they arrive, of course, Crazy Larry is “sold out” of the advertised item, but he encourages them to have a look around at some of his other great products. Some customers simply walk out, but a good many decide to purchase something because they have already made the trip to the electronics store. Every sale that Crazy Larry makes using bait-and-switch advertising is, in effect, unfairly taking business away from Mr. Palmero and other honest electronics stores like his. Taken to the extreme, Crazy Larry’s advertising scams could put many other stores out of business, and then local customers would have no choice but to shop at Crazy Larry’s. If Crazy Larry eliminates his competition, he will be free to charge whatever prices he likes, causing further detriment to consumers.

A market economy like the one in the United States depends on competition between businesses to keep quality and prices at optimum levels. Bait-and-switch tactics are listed among the false advertising practices outlawed by the FTC because they are both unfair to the customer and anticompetitive.

Recent Trends

Bait-and-switch tactics are used in a wide range of settings. With the housing boom that began in the late 1990s and lasted through 2006, many people reported being victimized by “the old bait-and-switch” when taking out a home loan. In this scenario the lender promises the borrower a certain set of terms for his or her loan. These terms (including the interest rate, loan fees, repayment schedule, and other details) are favorable enough to get the borrower committed to the loan (or, “off the street,” as they say in the industry). When it comes time to finalize the loan however, the borrower discovers that the loan papers reflect very different and much less favorable terms, such as a higher interest rate, penalties for paying the loan off early, or higher fees associated with the loan.

Although it seems like the borrower would protest immediately and refuse to sign the loan papers under the new terms, many borrowers are harried by all of the details and procedures of buying a new house or are worried that any delay will cause the seller to become annoyed and back out of the agreement, so they sign off on the new terms, vowing to revisit the issue later. Unfortunately, once the loan is signed, the process of changing the terms is complicated and can be expensive, especially if lawyers are needed. Many borrowers end up stuck with a loan they never would have accepted in the beginning.