We're all gulled by special offers

BBC business editor Robert Peston on advertising prices

I asked the boss of one of our largest fashion retailers whether he was concerned about the substantial size of price increases he would have to force on consumers in the new year, as a consequence of the looming VAT rise, the increment in the cotton price (which has softened a bit) and the substantial inflation which China is now exporting (in contrast to the deflation that it used to export).

He more-or-less called me a blithering idiot. Visible price increases? Don't be so naive, he said. Most of these problems could be dealt with by "changing the product mix".

What does that mean? It means there'll be more clothing on the shelves that's ostensibly better quality, priced at - say - £20 an item, and very few £2 t-shirts. Or to put it another way, it's not so much that the price of the really cheap stuff will go up very sharply, but that there will be very little of it around.

Of course there will be considerable consumer detriment, a squeeze on spending power - especially for those on lowest incomes. But the impact will be hidden to an extent: it won't manifest itself in a conspicuous across-the-board price increase.

I suppose two questions follow. First, whether this change in the product mix will be adequately picked up by the statisticians who calculate the official British inflation rate (history would suggest probably not). Second, whether shoppers will be fooled into thinking prices haven't gone up that much - and will simply be puzzled about the absence of the very cheapest clothing.

Which of course brings me very neatly on to today's fascinating report, The Advertising of Prices, by the Office of Fair Trading, the competition watchdog - because it is all about how most of us as consumers are supposedly easy to fool into making the wrong or superfluous purchases, by fiendish pricing strategies employed by consumer businesses.

You know the sort of thing I'm talking about: big adverts in shop windows trumpeting a "closing down sale", for a store that never closes; discounts offered on an "original" price, where that original higher price was charged for not much longer than a nano second; websites that advertise an incredibly low price for a service - such as travel - on the homepage, but keep adding extra charges in a "drip drip" way as you navigate towards the checkout; special offers of that gadget you always wanted for the first customers to turn up at the shop, when there are almost none of the gadgets in stock at that low price.

Now you may think that you are resistant to such ruses. But the OFT says you are fooling yourself. On the basis of extensive research - both its own and external - it is persuaded that almost all of us will end up buying something that we didn't intend to buy, having been lured into a shop or website by a spurious special offer that doesn't really exist.

What's less clear is whether we make the superfluous purchase because we are embarrassed to admit - even to ourselves - that we've been gulled, or whether it's because we don't want to go away empty handed having invested precious time in the trip to shop or website. Either way, oh-so modish nudge or behavioural economics really does seem to apply when it comes to retail purchases.

Now I hear the free-market adherents and entrepreneurs among you screaming "so what!!!!!". If consumers are there for the taking, take 'em, you'll say. If someone who really believes they can fly to Barcelona for 20p, they deserve to be charged £150, as a lesson, you might argue.

Well that may be so for those households with more money than they need. But surely not for those on a tight budget.

And although the OFT is saying it doesn't like any of these putative misleading pricing practices, and is clear that many of them are illegal, the watchdog says it will crack down only on those where the consumer detriment is considerable: it won't punish retailers who only occasionally stray into falsely claiming to offer the deal of the millennium, so long as the provable harm to consumers was minimal.

That said, there is a more fundamental point for the industry to consider, I've long thought. Which is why they employ so many people whose job is to persuade us that their prices are cheaper than they really are. Surely, if those consumer-facing firms deployed the same resources into finding ways to improve productivity and actually cutting prices, wouldn't they - and consumers too - be much better off.

Maybe price comparison websites are beginning to force some firms - especially those in the insurance, banking and energy businesses - to sweep away some of the baffling complexity of their pricing structures. Although it seems to me that progress remains slow in that respect. And some of the pricing websites themselves don't seem to me to be as transparent as they might be about their relationships with the companies whose prices they monitor.

The basic point remains. We'd all be much better off as consumers if "what you see is what you get" applied to the advertised prices of all business. And, arguably, consumer-facing businesses themselves would all be forced to become much more efficient. Oh dear, there I go again, speaking like a blithering idiot, as the boss of that retailing conglomerate would probably say.‬‪

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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