Does Bait and Switch Really Benefit Consumers?

Transcription

1 Doe Bait and Switch Really Benefit Conumer? William L. Wilkie Carl F. Mela Gregory T. Gundlach Univerity of Notre Dame, Notre Dame, Indiana Abtract While the field of marketing cience ha long been intereted in the effect of promotional effort, public policy iue involving illegal marketer fraud and deception have generally not been addreed in thi body of work. One key exception to thi generalization i a Marketing Science article uggeting that the practice of bait and witch may be beneficial to conumer and, furthermore, that the Federal Trade Commiion hould invetigate reviing it tandard to legitimize thi practice (Gertner and He 1990). Thi finding and recommendation eemed o ignificant that it i urpriing that the recommendation ha not, to date, been explored in greater detail. In thi paper we further explore the impact of the two component of bait and witch: out of tock and upelling. We do thi by uing Moorthy (1993) theoretical modeling framework to ytematically extend and ae the Gertner and He model. We find that the previouly reported increae in conumer welfare that arie from allowing out-oftock condition at retailer i actually due to the utility created by aleperon explaining product feature and benefit, not by the out of tock. Thu, the ramification of both our legal and modeling analye are that deceptive baitand-witch practice reult in harm to conumer and hould not be legalized. Our paper conclude by propoing worthwhile modeling iue for further exploration. In addition, we ugget that our procedure for analyzing public policy iue (by exploring the confluence of law, conumer behavior, and marketing model) can erve a a ueful exemplar for further contribution to public policy by marketing cientit. (Pricing; Promotion; PublicPolicy; Bait and Switch) 1. Introduction New Rapid Carpet Center, Inc., offered a greatet carpet pecial ever, offering both 150 quare feet of carpet and an upright vacuum cleaner or rug for $77. When conumer reponded, the firm diparaged the product (tating only cheap people buy thi carpet) or aid it wa unavailable. In only one cae did a conumer init on the pecial, and the firm imply never delivered it. Actual price paid in repone to the highpreure ale tactic were much higher than the advertied pecial of $77, often in exce of $400 and a high a $723. No cutomer ever received the free gift. The firm wa found guilty of deceptive bait and witch practice, in addition to other violation (In re, New Rapid Carpet Center, Inc., et al. 1977). The field of marketing cience ha long been intereted in the effect of promotional effort to influence conumer choice of tore or item to purchae. Many apect of thi topic have been effectively tudied in uch area a advertiing, pricing, elling effort, /98/1703/0273$05.00 Copyright 1998, Intitute for Operation Reearch and the Management Science and deal. Marketing Science ha been prominent in featuring uch reearch. It i notable, however, that public policy iue involving illegal marketer fraud and deception have generally not been addreed in the body of marketing cience work in promotion. Clearly it i poible for an individual promoter to gain hort-term profit through the ue of conumer deception in advertiing, pricing, or elling practice (Lazear 1995), 1 but few marketing cientit have examined promotion that are deceptive or fraudulent in nature. A notable exception to thi generalization i a Marketing Science article by Gertner and He (1990), hereafter GH. Their paper advance an inherently urpriing concluion: that bait-and-witch practice can 1 We are indebted to Profeor Jame He for bringing thi reference to our attention. Marketing Science/Vol. 17, No. 3, 1998 pp

2 DOES BAIT AND SWITCH REALLY BENEFIT CONSUMERS? benefit conumer, and that the Federal Trade Commiion hould invetigate reviing it tandard to legitimize thi heretofore fraudulent practice (GH, p. 121). A the only article on thi topic in Marketing Science we could find, thi recommendation leave the field and thi journal in a provocative poition. Conequently, we decided to explore further and extend their model to better undertand what lead to thi recommendation. When we do thi we find that the concluion for public policy are the revere of thoe advanced by GH: we find that bait-and-witch practice hould not be legalized. Our analyi i preented in five ection: (1) a brief expoition of the law on bait and witch; (2) a brief overview of the GH article and model; (3) an outline of Moorthy (1993) framework a applied to bait and witch; (4) our application of thi framework to GH and our finding; and (5) concluion and implication. 2. The Law on Bait and Switch 2.1. FTC Guide Before preenting GH model, it i ueful to briefly outline the major apect of bait-and-witch practice and law. In the United State, deceptive practice are regulated through the Federal Trade Commiion (FTC), whoe mandate provide that deceptive act or practice, in or affecting commerce, are... unlawful (Wheeler-Lea Act 1938). The FTC ha defined deception to include any repreentation, omiion or practice that i likely to milead the conumer acting reaonably in the circumtance, to the conumer detriment (Federal Trade Commiion 1983a). Bait-andwitch practice are viewed to be deceptive and therefore unlawful. A noted at the top of Figure 1, the term bait and witch actually refer to a family of practice in which advertiing and peronal elling are coordinated in an effort to take advantage of unupecting conumer. To provide pecific guidance for marketer who wih to avoid bait-and-witch practice, the FTC provide the publication Guide Againt Bait Advertiing (1983b). The remainder of Figure 1 depict the flow of the proce and quote phrae from the FTC guide. Notice that a three-tage proce i involved: (1) the bait ad i run; (2) a conumer repond by viiting the tore or inviting a home ale call; and (3) the aleperon witche the propect from the low-priced unit featured in the ad to another, more profitable, purchae. It hould be treed that thi proce i ditinct from the normal, legal practice of upelling or trading up, in which a aleperon imply attempt to peruade a conumer to purchae a higher priced unit. The guide help with thi ditinction by treing the planned role of deception, a indicated in the four phrae decribing a bait ad in Figure 1. The lower portion of Figure 1 provide 10 example of witch elling practice provided by the FTC guide. Notice that the firt five example reflect action that make it unattractive or impoible for a conumer to purchae the advertied item. The ixth practice i directed toward ale plan or commiion arrangement that manipulate aleperon away from uch ale (in ome bait-and-witch operation, aleperon are warned by manager that the advertied item i nailed to the floor not to be old under any condition under pain of fine or termination). Example 7 through 10 reflect unelling or witching after the cutomer ha agreed to buy the advertied item Court Opinion At the federal court level, interpretation of bait-andwitch practice ha generally been conitent with the FTC guide, to which reference i often made. At the tate level, many court have adopted the Uniform Law verion of Conumer Protection Law, which pecifically identify bait-and-witch practice a deceptive. In aeing bait-and-witch cae, moreover, court opinion have generally been clear a to the unfair nature of uch act. A one court (In re, New Rapid Carpet Center, Inc., et al. 1977) oberved: Bait and witch i too common a commercial practice and it unfairne i too well ettled to require more than curory comment. (p. 106) Baed on many cae imilar to New Rapid, everal generalization regarding the practice are appropriate: Action are coordinated and practiced, relying on gaining ale through deception. Huge increae in actual price paid by bait-andwitch victim are common: in New Rapid actual price 274 Marketing Science/Vol. 17, No. 3, 1998

3 Doe Bait and Switch Really Benefit Conumer? Figure 1 Legal Apect of Bait & Switch I. Definition: Bait and witch refer to a family of practice in which advertiing and elling act are coordinated o a to milead, deceive, or defraud conumer. Typically, the initial ad offer an epecially tempting price on a certain model a bait to lure unupecting cutomer to the tore, whereupon the ale taff commence to witch the purchae to other unit actually intended for ale, uually at a higher price. II. A depiction of the proce (a decribed in the FTC guide): Not a bonafide offer to ell the advertied product. 1. Alluring but inincere offer. 2. Primary purpoe i to obtain lead to peron intereted in buying [thi type of] merchandie. 3. Advertiement create a fale impreion Even though true fact are ubequently made known... law i violated if the... contract... i ecured by deception. Planned dicouragement of purchae, or unelling after purchae of the advertied merchandie. Example include: 1. Refual to how, demontrate, or ell the advertied product Diparagement, by act or word, of the advertied product Failure to have ufficient quantity available to meet reaonable demand Refual to take order... to be delivered within a reaonable time. 5. Showing... a product i defective, unuable, or impractical for the purpoe... advertied Penalizing aleperon... to prevent or dicourage them from elling the advertied product. 7. Accepting a depoit, then witching the purchaer to a higher-priced product. 8. Failure to make delivery... within a reaonable time Diparagement [after ale]... of the advertied product... in any... repect. 10. Delivery of... product which i defective, unuable or impractical for the purpoe repreented... in the advertiement. ranged from double to nine time the price featured in the bait ad. Cutomer are often poor, uneducated and uceptible to hard-ell technique. Eay credit i often ued a a mean of upporting higher price for the ubtitute item and for cloing ale, but often et the tage for later problem with debt collection practice. The pot-ale action of bait-and-witch eller often reveal a contempt for their cutomer. Thee contemptuou behavior include refual to honor warrantie, refual to provide promied ervice or gift, and abuive or inappropriate credit collection practice. In ummary, the legal record of bait-and-witch cae reveal a marketing exercie for which the phrae Marketing Science/Vol. 17, No. 3,

4 Doe Bait and Switch Really Benefit Conumer? caveat emptor (let the buyer beware) i all too appropriate. Table 1 Variable Nomenclature Definition 3. An Overview of GH (1990) 3.1. Concluion Advanced Given thi background and the dubiou reputation of bait and witch in law and public policy, we find the GH (1990) concluion to be provocative. Thee include: Conumer are better off with bait and witch ex ante (p. 121). Conumer can be better off under bait and witch even ex pot (p. 121). The FTC hould invetigate further the ban on bait and witch becaue thi marketing practice can promote marketing efficiency (p. 121) A Summary of the GH Conumer Model Our goal i to better undertand what drive thee concluion to acertain the generalizability of thee finding. Since our model development build on the GH approach, we briefly recapitulate their model (which cover only Example 3 under witch in Figure 1, the iue of product tocking and availability). 2 To facilitate thi dicuion, Table 1 preent an overview of the nomenclature in the GH model. Within their model, conumer are aumed to oberve and repond to a feature advertiement for a brand (the featured brand ) at price p. Upon viiting a tore, the conumer find the featured brand either 2 Product tocking i alo an iue in the FTC treatment of upermarket advertiing of price pecial on food. Since forecating cannot be perfect, ome degree of overtock or undertock can be expected. A the cot of carrying added inventory to meet unforeen demand can raie price and hurt conumer (Balachander and Farquhar 1994, He and Gertner 1987, Ibrahim and Thoma 1986), rain check may be beneficial to conumer a a mean to meet unexpected demand. The FTC therefore promulgated a Trade Regulation Rule (the Unavailability Rule ) covering thi area in 1971, then amended thi rule in 1989 to looen retraint on eller (Federal Regiter 1989). However, the unavailability rule differ from bait and witch. With the unavailability rule, retailer maintain ufficient inventory to meet anticipated demand. Thi clearly differ from intentionally undertocking featured item for the purpoe of witching unupecting conumer to more profitable brand. Neither GH nor our analyi addree the iue of inventory cot. c C D F M p p t u V V S x c promoted brand variable cot featured brand variable cot conumer cot of uing a rain check retailer fixed cot retailer cot of promotion featured brand price promoted brand price conumer travel cot conumer utility featured brand value promoted brand value number of conumer in the population out of tock probability fraction of conumer who value promoted brand at V S out of tock with probability or in tock with probability 1. Conumer form expectation of (or foree) the tockout probability,, prior to viiting the tore. If the featured brand i not in tock, then the conumer i offered a rain check and expoed to a ale preentation for an alternative higher-priced model that i in tock. The cot to conumer of uing a rain check i given by D. The aleperon attempt to educate conumer about the value of a ubtitute brand in the tore (the promoted brand ). Becaue thi upelling alert conumer to benefit they might not have otherwie conidered or known, it add a value, S, over that of the featured brand. The promoted brand ell for price p. GH and our objective i to find the Bertrand equilibria value for, p, and p and the reulting conumer equilibrium utility and firm equilibrium profit. GH further aume a homogeneou population of conumer defined by their value for the featured brand, V, their value for the ubtitute brand, V S, and their probability of being influenced by an in-tore promotion, c. A an illutration of thi proce, conider an advertied car model that doe not have a pecial paint package. Saleperon then how cutomer the paint package option on a different car (e.g., promote or upell). Each cutomer ha a certain probability, c, of being influenced by thi promotion (e.g., like the color of the paint package). Thoe who are influenced acribe a certain value, S, to the option (e.g., the 276 Marketing Science/Vol. 17, No. 3, 1998

5 Doe Bait and Switch Really Benefit Conumer? paint package i worth $500); thoe who are not (1 c) aign no added value to the option. GH alo aume that conumer face high earch cot, o they will either buy the featured brand, obtain a rain check, or buy the ubtitute brand. An added impetu for thi aumption i that, in equilibrium, the price and out of tock percentage conumer can expect to find acro tore are all equal, therefore diincenting further earch. The conumer obtain an expected level of utility u (1 )(V p) ((1 c)(v p D) c(v S p )), (1) where V S p repreent the value the conumer obtain from the ubtitute brand and V p D i the value the conumer obtain from uing the rain check (where D repreent the diminution in value of a brand that reult from exerciing a rain check). A conumer mut either buy the promoted brand or elect a rain check, the retailer can raie the price of the ubtitute brand, p, o that it value to conumer equal that of having to ue the rain check, that i V S p V p D. Thu, (1) reduce to u u(p, ) (1 )(V p) (V p D). (2) D i aumed to be proportional to an inconvenience cot (including travel cot), t, and the number of conumer uing rain check (e.g., longer line for proceing rain check), (1 c). Thu, D (1 c)t A Summary of the GH Store Competition Model In GH, tore profit are a function of the p, p,, c, the featured brand cot, C, the promoted brand cot, c, the cot of the value added elling (alternatively upelling ), M, the number of conumer, x, and fixed cot, F. GH further aume that tore will not promote unle the value of the promotion exceed it cot, cs M. The tore expected profit i determined by the profit from the advertied model if it i in tock plu the profit from the rain check and ubtitute if the featured model i out of tock. Specifically, p(p, p, ) (1 )x(p C) x[(1 c)(p C M) c(p c M)] F. (3) Like GH, we aume c C for implicity. Making ue of the fact that V S p V p D and auming, without lo of generality, that fixed cot are zero, (3) implifie to p(p, ) x(p C) cx[s (1 c)t] xm. (4) GH aume a Bertrand equilibria. To find the equilibrium value of p* and *, GH ubtitute u 0 for u in (2), which reult in p(u 0, ). They ubtitute p(u 0, ) into (4) to eliminate p, making p a function of and u 0, p(, u 0 ). A profit i a function of, the optimum can be found by etting the partial derivative of (4) with repect to, p(, u 0 )/, to zero. Once * i known, p* i found by etting (4) to zero and ubtituting * for (in Bertrand equilibria, competitive preure drive all firm to zero profit, hence the reaon for etting (4) to zero). The reulting * and p* are given by (cs M) * 2 (5) (2(1 c) t) 2 p* C * (1 c)(2 c)t. (6) To find the reulting utility, one ubtitute * and p* into (2), yielding 2 2 u* V C * (1 c) t. (7) One can eaily ee from (7) that u* V C; therefore, utility i higher in the GH bait-and-witch cenario. However, we note that out of tock, a captured by *, and upelling, which i influenced by c, are both preent (and confounded), o it i difficult to ae the underlying caue of thi gain in utility Uing Moorthy (1993) Theoretical Modeling Framework to Extend GH The foregoing i ufficient to illutrate that the GH model i internally conitent and that it concluion are correct given it premie. It alo how why we previouly noted that their analyi only addree the availability apect of bait and witch, and thu doe Marketing Science/Vol. 17, No. 3,

6 Doe Bait and Switch Really Benefit Conumer? not capture many of the fraudulent and deceptive apect that characterize bait-and-witch cae in law and publicpolicy. 3 Still, their concluion that lack of availability increae conumer utility remain an intriguing finding. Moreover, a the GH approach i baed on theoretical modeling technique, we can ue the framework firt expounded by Moorthy (1993) to develop a rigorou aement of the caue of the conumer urplu they dicovered. Specifically, Moorthy argue that theoretical model uch a GH are logical experiment where condition (different aumption) repreent treatment and finding repreent reult. Cauality may be acribed if a change in a treatment lead to a change in a reult. Thu, theoretical modeling, through manipulating ome aumption and controlling other, lead to a high degree of internal validity and a trong tet of cauality, imilar to lab experiment that manipulate ome factor while controlling for other. Thi logical experiment approach ugget a mean of iolating the caue of the conumer urplu found by GH. Specifically, the GH conumer model embed two manipulation: i) allowing for upelling and ii) allowing for out of tock. Thee factor are manipulated imultaneouly becaue the model aume a conumer alway buy the advertied item if it i in tock. By relaxing thi aumption, a logical experiment can be deigned to manipulate the factor eparately to acertain which one caue the reult. In o doing, it i crucial that all other factor be controlled. Thu, in thi paper, we will extend the GH model by deigning a full, 2 2 factorial model, predicated upon their approach and aumption but attempting to hold all other apect contant. Figure 2 preent a 3 The three example provided in the GH paper illutrate thi point. For two of the three, the GH model doe not comport with the text point being made. For example, in the paper opening illutration of bait and witch (p. 114), according to the formal model, the conumer would not be expoed to elling effort for any alternative and would chooe to purchae the advertied mattre (even though it had been preented in a deliberately unattractive manner to dicourage purchae). Furthermore, in one of the two illutration of the value of upelling (p. 122), applying the formal model would mean that the author would have been unable to purchae the more appealing VCR with remote control, ince the advertied model wa apparently in tock and would therefore be purchaed without any upelling preentation. graphical repreentation of the theoretical model we develop. It purpoe i to allow u to ae why the upelling/out of tock condition dominated for GH: I thi due to upelling alone, out of tock alone, or both in combination? We next preent our logical experiment and it reult. 4. Dientangling the Effect of Upelling and Out of Stock 4.1. The Refined Conumer Model To dientangle the effect of upelling from the effect of out of tock, we take two tep. Firt, we contrain out of tock to zero and ae the impact on conumer welfare and tore profit. Second, we allow upelling to all cutomer who viit the tore in repone to an ad. Thee tep in effect allow u to invetigate cell 3 in Figure 2B. Equation (1) therefore become u u(p, c) (1 c)(v p) c(v S p ). (8) The term drop from the equation a there are no out of tock. We then aume that a tore will charge a price on the ubtitute brand, p, uch that the conumer influenced by the in-tore ale promotion will have their value of the ubtitute brand approach the value for the featured brand, that i V S p V p. (9) The right ide of the expreion no longer contain the term D, a rain check are not needed due to tock availability. Uing (9), (8) reduce to u(p, c) V p The Refined Store Competition Model Here we proceed with the ame logic a in GH, albeit uing our new condition. Since there now exit no out of tock, tore profit are given by p(p) (1 c)x(p c M) cx(p C M) F. (10) The firt term repreent profit from thoe who purchae the advertied feature; the econd term repreent the profit ariing from conumer who buy the upold model. The expreion for profit i eentially identical to the bracketed term in (3). We aume c 278 Marketing Science/Vol. 17, No. 3, 1998

7 Doe Bait and Switch Really Benefit Conumer? Figure 2 The Theoretical Model 2A. The GH Model Upelling No Upelling 2B. Full Factorial Deign Upelling No Upelling 1 2 Out of Stock X Out of Stock X X 3 4 No Stockout X No Stockout X X The GH (1990) model create a two-cell comparion in which out of tock i paired with upelling and compared againt in tock, no upelling. The out of tock, upelling condition provide the greater conumer utility. The full factorial uper model (Moorthy 1993) enable comparion of two additional cell. Of primary interet i cell 3, in which upelling occur even when the featured product i in tock and available for purchae. C a in GH. Uing (9) to olve for p ( p), combining with (10), and implifying yield p(p) x(p C cs M). (11) To find the optimal price, p*, we again olve for the price that yield zero economic profit, p* C (cs M). (12) Here we find, a did GH, that the price of the advertied feature i below it cot. The ubidy (cs M) i due to the value added from upelling. Subtituting (12) and (9) into (8) yield u*, u* (V C) (cs M). (13) In Appendix 1, we how that utility in thi cenario i higher than the utility with tock out. In fact, the increae in utility to conumer i given by Du (cs M)(1 /2). (14) A cs M 0 and 1 ( /2) 0, Du i 0. Thu, utility to conumer i higher in a no out of tock environment if value-added upelling occur. Under thee condition, a bait-and-witch limitation on out of tock ha a poitive impact on conumer utility and no effect on tore profit. Therefore, it i clear that GH recommendation that the FTC reconider the legality of bait and witch i predicated upon value that can be added from upelling at the tore. Taken by itelf, allowing planned hortage (out of tock) reult in a net welfare lo. Furthermore, a i inverely proportional to the inconvenience cot of rain check, t, conumer welfare gain from retricting out of tock increae a inconvenience cot increae Comparing Solution Thu far, we have covered the cae of no out of tock with upelling and out of tock with upelling (cell 3 and 1 in Figure 2B). In cell 4, no out of tock and no upelling, all brand are old at cot under the Bertrand equilibrium, and conumer welfare or utility i imply given by V c. Finally, in cell 2, given tock out with no upelling allowed, the conumer receive utility u (1 )(V p) (V p D). Store profit are given by p(p, ) (1 )(p c) ( p c) p c p( p). Setting profit to zero in a Bertrand olution yield p* c. Solving u for p( ) and ubtituting into p( p, ) yield p( ) V u c D, which i maximized at * 0, or no tock out (thi reult ugget that conumer will viit firm that carry product in tock to avoid inconvenience cot). In addition, u* V p* *D V c. Figure 3 compare the conumer welfare in all four cell. The tore profit in all cae are zero o change in welfare acro condition are independent of tore profit. Marketing Science/Vol. 17, No. 3,

8 Doe Bait and Switch Really Benefit Conumer? Figure 3 Conumer Utility by Cell Upelling No Upelling Out of Stock V c [ * 2 (1 c) 2 t] V c ( *D) No Stock Out V c (cs M) V c Note that the third term in the upelling column are both poitive: thi ugget that upelling i the primary factor driving the increae in utility in thi model. 4 In fact, cell 3 preent the highet utility of all: it offer no out of tock, but with in-tore upelling. Thu, a 2 2 full factorial analyi of the bait-andwitch problem extend the finding of GH by ditinguihing the relative welfare contributed by the out of tock from that contributed by the upelling activity. Given the GH aumption and approach, our extenion of their model how a large, poitive main effect of upelling on conumer welfare, 5 a well a a poitive interaction between upelling and no out of tock. 5. Concluion and Implication The Marketing Science article by Gertner and He (1990) ucceeded in drawing our attention to ome intereting iue at the nexu of marketing model, conumer behavior, and public policy. Our contribution in the preent paper i twofold. Firt, in accord with Moorthy (1993) theoretical modeling approach, we have extended the GH model to uncover the ource of their finding. Baed on the reult of thi extended analyi, we would not upport their recommendation that the FTC reopen dicuion on the legality of bait and witch. Second, we have ought to demontrate 4 Strictly peaking, examining the effect of upelling alone would require that cell 1, the GH model, allow upelling to all conumer, not jut thoe who find the product out of tock. Otherwie, it i poible that the incremental utility cell 3 provide over cell 1 i due to an increae in the fraction of people that receive upelling rather than an elimination of tock out. Appendix 2 preent thi analyi and how that we can rule out thi competing explanation. 5 To complete thi analyi, we need alo to addre the poibility that a ban on out of tock might caue retailer to be wore off (have lower profit). If thi i the cae, they may chooe not to upell and, conequently, conumer will alo be wore off. In Appendix 3 we how that it i optimal for retailer to upell. We thank the area editor for raiing thi iue. that marketing cience can make a legitimate contribution to undertanding how public policy affect both conumer and honet marketer eeking to compete in a fair marketplace. It i our experience that the FTC conider uch contribution eriouly. It i important that marketing cientit not withdraw from dicuion of ignificant policy iue that can affect million of marketer/conumer tranaction and that repreent the character of the marketplace environment within which we want to operate. In thi vein, the paper by GH i a ueful application of marketing modeling to marketing iue in public policy. It offer a rich bai for extenion uch a our in future work. With reference to bait and witch pecifically, we would ugget that further model need to incorporate explicitly the planned fraud and deceit that characterize many bait-and-witch cheme and that have been the main reaon the practice ha been o roundly deplored in law and publicpolicy. A tep toward thi goal, the explicit incluion of diparagement of the advertied model would enrich our refinement, a would the explicit conideration of competitive effect and other deceptive witch elling tactic. Recent related work on high-preure elling (e.g., Chu et al. 1995; Wernerfelt 1994) how promie in thi regard. Relatedly, our finding employ the aumption that c (the proportion of conumer who repond favorably to the promoted item) i equivalent in the out of tock and no out of tock context. 6 However, it can be hown that, if retailer action (e.g., increaed elling preure on conumer) increae c in the out of tock cae, that no out of tock will occur 6 We aume that c i equivalent in the no out of tock and out of tock context for two reaon. Firt, the upelling of the promoted brand yield the ame information utility regardle of whether the featured model i in tock. A indicated by our automobile example, the percentage of conumer who prefer the color of the optional paint package (after the aleperon how it to them) hould be imilar in each context. Second, in equilibrium, retailer raie the price of the ubtitute brand a much a poible in each context (for example, it i more inconvenient for conumer to buy the featured brand when out of tock, leading the retailer, in thoe intance, to further raie the price of the ubtitute brand). Thu, the added conumer urplu provided by the ubtitute brand over it alternative i zero in both context. Thu, conumer will be no more likely to witch when the featured brand i out of tock than when it i in tock. 280 Marketing Science/Vol. 17, No. 3, 1998

9 Doe Bait and Switch Really Benefit Conumer? and conumer will be no better off even when c differ acro the context. Moreover, if any diparagement of the featured brand accompanie the greater elling effort, conumer will be trictly wore off in the baitand-witch condition (proof available from author). Another extenion regard relaxing the aumption that conumer will not hop at other tore when the featured brand i out of tock. We expect that relaxing thi aumption would likely reult in no out of tock in equilibrium. Conumer eae of buying elewhere i analogou to having a rain check cot of eentially zero. When thi happen, the bait retailer cannot raie price on the ubtitute brand to take advantage of the conumer cot ariing from the difficultie of purchaing an out of tock item. Thi would eliminate the correponding ubidy to the featured brand, eliminate out of tock, and reduce conumer utility to V c. Thu, higher tore-witching cot may favor baitand-witch practice. In contrat, upelling will likely till add to conumer utility due to the information utility conveyed by the promotion. Second, the aumption of perfect competition in the Bertrand equilibria belie the reality of bait-and-witch cheme eizing on marketplace imperfection to extract price and profit that would not be otherwie available. A uch, thi i a worthy challenge for future reearch. Overall, GH deerve credit for pointing to benefit of upelling and for opening new avenue of invetigation into etimating effect of coordinated effort of advertiing, elling, and pricing. Along thee line, we hope to ee increaed attention from marketing cientit to iue of marketing and publicpolicy. Iue in thi phere are often important and complex and can benefit from the rigor of the marketing cientit approach, particularly when leavened by interaction with the perpective of law and behavioral cience. 7 Appendix 1 The incremental utility in the no out of tock condition i given by u* NBS u* BS (V C) 2 2 (cs M) [(V C) * (1 c) t]. (A1) 7 The author wih to thank Profeor Scott Baier, Thoma Coimano, Joeph Guiltinan, the editor, area editor, and two reviewer for their inight and uggetion. Any remaining error are the ole reponibility of the author. Making ue of (5) to ubtitute for *, implifying, and then uing (5) again to ubtitute * back into the equation lead to the expreion for the incremental utility a (cs M)(1 ( /2)). Recall, by aumption, (cs M) 0. A 0 1, the term (1 ( /2)) i alway greater than zero. Hence, the utility gain to conumer arie from prohibiting out of tock. Appendix 2 If upelling i allowed to all conumer in GH, then the conumer utility function become u (1 )[(1 c)(v p) c(v S p )] i [(1 c)(v p D) c(v S p )], (A2) where p i i the price the retailer charge for the promoted brand if the featured brand i in tock and p o i the price for the promoted brand if the featured brand i out of tock. We allow two price becaue the retailer i able to command more for the promoted brand if the featured brand happen to be out of tock. The correponding tore profit are given by p (1 )[(1 c)(p C M) c(p o C M)] [(1 c)(p C M) c(p C M)]. (A3) o Auming, a before that p o and p i are adjuted uch that V S p i V p and V S p o V p D and making ue of the previouly outlined procedure to find the optimal tock-out level, price, and the correponding conumer utility, it can be hown that, * 0, p* C (cs M), and u* V C (cs M). Thu, retailer will never intentionally undertock (becaue conumer, knowing, will go to other tore where they do not uffer the inconvenience of an out of tock) and the olution degenerate to the no out of tock, upelling condition. Appendix 3 The practice of featuring a model at a low price, then offering to ell other model to thoe people who repond, clearly can offer added utility for conumer. To the extent that tore chooe to upell i exogenou, contraining out of tock to zero add welfare to conumer. However, if the deciion to upell i endogenou, Equation (8) and (10) will change. Thi can be important, a it i not immediately obviou whether a ban on out of tock might induce reeller not to upell. If thi were the cae, conumer would no longer be better off. To ae thi deciion, another deciion variable, d, could be added to the profit equation to repreent the percent of cutomer that a tore will upell to. Equation (10) become p(p, p, d) x(1 d)[(p c)] x d[(1 c)(p c M) c(p c M)] F. i (A4) If d 1, upelling occur 100% of the time and (A4) reduce to (10). If d 0, there i no upelling and the problem reduce to our notock-out, no-value-added elling cell. Next, let the conumer utility a a function of upelling be given by Marketing Science/Vol. 17, No. 3,

10 Doe Bait and Switch Really Benefit Conumer? u(d, p) (1 d)(v p) d[(1 c) (V p) c(v S p )]. (A5) We aume that tore will adjut their price on the ubtitute brand o that V S p V p. Uing thi reult, (A5) reduce to u(p) (V p), (A6) which i equal to (2). The utility equation i therefore independent of c and d, uggeting that d can be eparately maximized in Profit Equation (A4). Equation (A4) for profit i linear in d (i.e., profit qd r). If the coefficient, q, of the d term i poitive, then d 1 maximize profit a profit increae linearly with d. Collecting term in (A4) and making ue of the relationhip V S p V p when the featured brand i in tock, we ee that the coefficient of the d term i x(cs M). (A7) A x 0, and cs M 0, (A7) i greater than zero. Thu, d* 1 and the profit-maximizing olution i to upell to all conumer. Thi reult ugget that tore are likely to continue to upell even when out of tock doe not occur, thereby maximizing conumer welfare. Reference Chu, W., E. Gertner, J. D. He Cot and benefit of hardell. J. Marketing Re Balanchander, S., P. Farquhar Gaining more by tocking le: A competitive analyi of product availability. Marketing Sci Federal Trade Commiion. 1983a. Policy tatement on deception. 45 ATRR 689. Federal Trade Commiion. 1983b. Guide againt bait advertiing. 16 CFR Ford, G. T., J. Calfee Recent development in FTC policy on deception. J. Marketing Federal Regiter Amendment to trade regulation rule concerning retail food tore advertiing and marketing practice: Federal Trade Commiion (Augut 28) Gertner, E., J. D. He Can bait and witch benefit cutomer? Marketing Sci He, J. D., E. Gertner Lo leader pricing and raincheck policy. Marketing Sci Ibrahim, A. M., L. C. Thoma An example of when partial tockout are economically optimal. J. Operational Re. Soc In re, New Rapid Carpet Center, Inc., Charge Account Factor, Inc., Charge Account Credit Corp. and Lee Kantor d/b/a Lee Wood (1977), 90 F.T.C. 64 (order). Lazear, E. P Bait and witch. J. Polit. Economy Moorthy, K. S Theoretical modeling in marketing. J. Marketing 57 (April) Wheeler-Lea Act Pub. L. No. 447, Ch. 49, 52 Stat Wernerfelt, B On the function of ale aitance. Marketing Sci. 13 (Winter) Thi paper wa received July 9, 1997, and ha been with the author 3 month for 1 reviion; proceed by Charle B. Weinberg. 282 Marketing Science/Vol. 17, No. 3, 1998