THE FEDERAL TRADE COMMISSION'S ACTIVITIES IN THE
AREA OF DECEPTIVE TRADE PRACTICES
JANE SHELLY CROMARTIE
A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY
UNIVERSITY OF FLORIDA
To Bill, who understands.
It is with deep appreciation that I acknowledge the
patient advice and encouragement provided by my Chairman,
Dr. Ralph B. Thompson, throughout the writing of this
I would also like to thank Dr. J. Donald Butterworth
for the direction he has provided during my entire graduate
program and Dr. Jordan B. Ray and Dr. John Vernon for
their critical reading of the manuscript.
TABLE OF CONTENTS
ACKNOWLEDGEMENTS . . . . . . . . ... .iii
ABSTRACT . . . . . . . . . . . vii
I. INTRODUCTION . . . . . . . . 1
The Scope and Purpose of the Study. . . 1
The Failure of Competition and the Need
for Regulation . . . . . . . 4
The Operation of the "Invisible Hand". 5
The Problems with the System . . . 6
The Role of Information .. . 6
The Adequacy of Available Informa-
tion . . . . . . . 9
The Problem of Long-run Efficiency. 10
Business, Competition, and Regulation. 10
The Response of Government . . .. 14
The Adequacy of Government's Response. 17
Justification for the Research. . . .. 20
II. THE PURPOSE OF REGULATION. . . . . ... 25
Market Structure and the Law . . ... 25
Product Differentiation and Market
Structure . . .. . . . . . 29
Methods of Differentiation . . .. 31
Differentiation Through the Product
Variable. . . . . . . .. 32
Differentiation Through the Place
or Distribution Variable. . . ... 32
Differentiation Through the Promo-
tional Variable ........ . 33
Advertising and Product Differentiation . 33
Advertising and Market Structure . .... 41
III. THE ROLE OF THE FEDERAL TRADE COMMISSION IN THE
REGULATION OF DECEPTIVE TRADE PRACTICES . 44
The Establishment of the Commission . .. 44
The Commission's Frustration with Anti-trust. 48
The Raladam Decision and Wheeler-Lea: The
Authority over Deception . . .. ... 51
The Judicial Evolution of the Authority
over Deceptive Practices . .. . . 56
The Internal Operation of the Federal
Trade Commission. . . . .. . . 61
IV. METHODOLOGY AND PRESENTATION OF CASE DATA. . 64
Methodology . ..... .. .. .. .... 64
Information Needed on Federal Trade
Commission Activities . . .. . 64
Sources of Case Data .. . . . . 65
Procedure for Gathering Case Data .. 67
Means of Analysis. . . . . . . 69
Presentation of Case Data . .. . . 71
Total Commission Complaint Activity. . 71
Disposition of Deceptive Practices Com-
plaints. . . . . . . . .. 73
The Appellate Record of Deceptive
Practices Complaints . . . . .. 74
Age of Complaints at Initial Disposition 75
V. ANALYSIS AND CONCLUSIONS . . . . . . 76
Thesis Re-Statement . . . . . ... 76
Analysis of the Dependent Variables ... . 76
Deceptive Practices Complaints . . .. 76
Disposition of Complaints. . . . ... 83
Appeals .. . . . . . .. . 88
Percent of Cases Appealed . . .. 88
Commission's Appellate Success .. 91
Average Age of Commission Cases at the
Time of Initial Decision . . .. ... 91
Conclusions . . . . . . . ... 95
VI. IMPLICATIONS FOR MARKETING AND SUGGESTIONS FOR
FUTURE RESEARCH . . . . . .. ... 99
Implications for Marketing. . . . .. 99
Suggestions for Future Research . . ... 100
A Docket Numbers of FTC Deceptive Practices
Cases, 1938-1970 . . . . . . . .
B Consent Docket Numbers of FTC Deceptive
Practices Cases, 1961-1970 . . . . . .
C Yearly Distribution of Federal Trade Commis-
sion Complaints Docketed . . . . . .
D Percentage Yearly Distribution of Federal
Trade Commission Complaints Docketed . . .
E The Federal Trade Commission's Initial Disposi-
tion of Deceptive Practices Complaints . . .
F Percentage Distribution of Federal Trade Commis-
sion's Disposition of Deceptive Practices
Complaints . . . . . . . . . .
G Appellate Record of Federal Trade Commission
Deceptive Trade Practices Decisions in the
United States Circuit Court of Appeals, 1938-
1970 . . . . . . . . . . .
H Percentage Distribution of Appeals of Federal
Trade Commission Deceptive Trade Practices
Decisions in the United States Circuit Court
of Appeals . . . . . . . . .
I Age of Deceptive Practices Complaints at the
Time of Initial Decision by the FTC. . . .
J Frequency Distribution of Initial Rulings on
Deceptive Trade Practices Complaints . . .
K The Average Age of Complaints at the Time of
Initial Rulings by the Federal Trade Commission.
L Total Yearly Volumes of Advertising and Sales
of Retail Stores (in millions) . . . . .
M Consumer Price Index, 1938-1970, base year 1967.
N Yearly Level of Unemployment, 1938 to 1970 . .
O The Political Composition of the Congress of
the United States, 1938-1970 . . . . .
P Correlation Matrices . . . . . . .
BIBLIOGRAPHY . . . . . . . . . . .
BIOGRAPHICAL SKETCH . . . . . . . . .
Abstract of Dissertation Presented to the Graduate
Council of the University of Florida in Partial
Fulfillment of the Requirements for the
Degree of Doctor of Philosophy
THE FEDERAL TRADE COMMISSION'S ACTIVITIES IN THE
AREA OF DECEPTIVE TRADE PRACTICES
Jane Shelly Cromartie
Chairman: Ralph B. Thompson
Co-chairman: J. Donald Dutterworth
Major Department: Marketing
The study tests the thesis that the deceptive practices
litigation role of the Federal Trade Commission has changed
during the period 1938-1970.
Chapter One focuses attention on conditions which make
an analysis of the regulation of consumer goods markets both
necessary and important. It discusses some of the reasons
for consumer frustrations and examines the manner in which
the Federal Government has responded to consumer pressures
for legislation. This response and continued consumer frus-
tration indicates the need for research concerning the manner
of operation of current deceptive practfics regulations.
Chapter Two surveys the literature concerning the
structural operation of markets, especially with regard to
the impact of product differentiation and promotion, as the
economic models of these relationships provide the basis for
government regulation of business conduct, including the
deceptive trade practices. This chapter provides information
concerning those economic variables which should relate to
conditions favorable to increased deception in promotion,
and therefore affect the need for the regulation of deceptive
Chapter Three examines the evolution of the Federal
Trade Commission's (FTC) authority over deceptive practices
and the operations internal to the Commission used in regula-
Chapter Four describes the methods used to isolate de-
ceptive practices complaint data from the complete Federal
Trade Commission Docket of Complaints published in the Com-
merce Clearing House Trade Regulation Reporter. This data
is broken down into four categories: the number of decep-
tive practices complaints docketed yearly; the disposition
of these complaints by the FTC; the number of these com-
plaints appealed either by the firm involved or the Commis-
sion; the results of the Circuit Courts' review of these
cases, and the age of complaints at the time of initial
disposition by the Commission.
The various categories of complaint data are then
regressed against three sets of variables presented in the
preceding chapters: factors internal to the Commission,
external economic variables, and external political
Internal factors include the deceptive practices liti-
gation budget in constant dollars, the Commission's anti-
trust caseload, the number of complaints filed under other
statutes enforced by the FTC, and a measure of the com-
plexity of the deceptive practices complaints filed yearly.
External economic variables include advertising expen-
ditures expressed as a percentage of retail sales, the
yearly percentage change in the consumer price index, and
changes in the level of market concentration.
The external political variables tested included the
number of Democrats in Congress and changes in the political
party of the President.
The study concludes that the deceptive practices litiga-
tion role of the FTC has changed substantially during the
period under study. Although the Commission's deceptive
practices litigation budget increased substantially, the
level of deceptive practices complaints docketed has de-
clined. Those complaints filed, however, are handled more
efficiently: they are handled more rapidly, with fewer
complaints being dropped or closed.
In addition, the percentage of complaints settled by
constant decree, rather than the more time-consuming cease
and desist order has increased substantially.
Although a higher percentage of the Commission's judge-
ments are being appealed to the Circuit Courts, the courts
have continued to uphold the Commission in the vast majority
The Commission's deceptive practices litigation activi-
ties were shown to have no significant relation to any of
the external economic variables under consideration, however
the impact of changes in the political party of the President
was substantial. In Democratic administrations, there was a
steady decline of complaint activity, while in Republican
years, complaint activity rose steadily.
The Scope and Purpose of the Study
The growth of consumerism in the last decade has
resulted in a great deal of debate concerning those rights
which the consumer has or should have in the marketplace.
As the debate spilled over into the political arena,
seekers of political office at all levels of government be-
gan to realize the vote-getting appeal of advocating in-
creased legislation which would establish, insure, and pro-
tect the rights of the consumer in business transactions.
The result has been a plethora of pro-consumer bills flooding
the legislative agendas, particularly in election years.
Many, if not most, of these bills have been introduced with-
out the benefit of serious study to support their need. In
some cases this has resulted in the passage of legislation
which has diminished, rather than improved, the consumer's
position. This trend has particular significance in light of
the lack of study of the judicial history of the Wheeler-Lea
amendment to the Federal Trade Commission Act, signed into
law March 22, 1938. For many years this has been the
consumer's primary legal protection against deception in the
marketplace, particularly with regard to promotional prac-
This study will concern itself with Wheeler-Lea, its
interpretations and objectives, and is based on the assump-
tion that before additional consumer legislation is passed,
economic objectives and the performance of the existing body
of law should be closely examined to determine those areas
which are adequately covered, and those which are in need of
improvement. If improvements are deemed necessary, the study
of the failures of the existing authority to meet intended
goals should be the best source of information regarding
specific types of improvement needed.
-The Wheeler-Lea Act amended the Federal Trade Commission
Act by expanding the FTCA's condemnation of "unfair methods
of competition" to also cover "unfair or deceptive acts or
practices," and added a direct prohibition against the false
advertisement of food, drugs, devices, and cosmetics. The
net effect of Wheeler-Lea was not only to forbid practices
which are harmful to competitors, but also those which harm
the consuming public, and thereby for the first time, made
"...the consumer, who may be injured by an unfair trade
practice, of equal concern, before the law, with the merchant
or manufacturer injured by the unfair methods of a dishonest
As neither the terms "unfair" or "deceptive" were de-
fined in the act, the result was "...perhaps the broadest of
the prohibitions contained in the federal antitrust and trade
By these means, the law was made purely a passive in-
strument whose role would be left to the interpretation of
the Commission under the watchful eye of the courts, and its
application was to be modified according to structural shifts
in consumer goods markets.
It is the purpose of this dissertation to examine the
Wheeler-Lea Amendment to the Federal Trade Commission Act in
1. Show by example that it is both possible and
valuable to collect and analyze statistical data
concerning the implementation of a piece of
2. Set forth as much of this data as can be gathered
in a simple form.
3. Examine the goals of regulation of promotional
4. Compare the case data with variables both internal
-House of Representatives Reports No.1613, August 19,
1937, concerning Senate Bill 1077, as quoted in Commerce
Clearing House, Trade Regulation Reports (Commerce Clearing
House, 1965), Section 805.29, n. 1648.
2Commerce Clectring House, op. cit., p. 108.
and external to the Federal Trade Commis-
sion which relate to these goals.
5. Explore the implications of this data and
6. Make suggestions for future research in this
In this way the author hopes to determine whether: the
Federal Trade Commission's litigation role in the area of
deceptive trade practices enforcement under Section 5 of the
Federal Trade Commission Act has changed in the years 1938-
The Failure of Competition and
the Need for Regulation
Although the U. S. is a "mixed economy" rather than the
perfectly competitive system that Adam Smith envisioned, our
ideology still asserts that in order to maximize satisfaction
and community utility, we must vigilantly protect the largely
mythical but nevertheless sacred market mechanism from regula-
tory adulteration.3 In theory we hold fast to the idea that
we must not interfere, through any type of regulation, with
the "invisible hand" that guides businessmen to act in such a
way that will ultimately benefit them most, through survival.
Theory explains that this same mechanism, if allowed to
operate unmolested, will protect the interests of consumers
3Robert L. Birmingham, "The Consumer As King: The
Economics of Precarious Sovereignty," Case Western Reserve
Law Review, XX (1969), p. 355.
in the long run, by driving those firms which are least
efficient in meeting their requirements from the marketplace.
The Operation of the
Underlying this competitive system are several assump-
tions concerning the way in which the economy will decide
what things are produced, how they are produced, and for whom:
What things are determined by the dollar votes of consumers,
cast for those products which they feel best meet their needs.
How things are produced is determined by competition among
the various methods of production--those methods which are
least costly replacing the more costly means. For whom things
are produced is determined by the bidding for scarce resources
and the forces of supply and demand--those persons who place
the highest value on those things which can be derived from
the inputs of production are supplied.4 Therefore, if con-
sumers are dissatisfied with the goods or services of a manu-
facturer, in the long run, they will drive this firm out of
business by casting their "dollar votes" for his competitors
who have found a better way to meet their needs, and no regu-
latory means of ridding the market of these inefficient
producers is necessary.
4paul A. Samuelson, Economics (8th cd.; New York:
McGraw-Hill Company, 1970), p. 37-41, passim.
The Problems with the System
The Role of Information.--For such a system to work, the
consumer must be capable of making an informed choice. Ac-
cording to D. F. Turner, former Assistant Attorney General in
charge of the Antitrust Division of the Justice Department,
informed choice requires three things: the consumer must be
aware of the existence of the product; the consumer must know
how the product performs; and the consumer must know how the
product's performance compares with that of other products.5
In other words, if the market mechanism is to perform cor-
rectly, the consumer must have sufficient alternatives so
that he can select those products and services which best
meet his needs6 and he must have information.7
Yet, technological change in many areas has become
"...so rapid that the consumer who bothers to learn about a
commodity or a service soon finds his knowledge obsolete. In
addition, many improvements in quality and performance are
5Donald F. Turner, Speech before Nineth Annual American
Federation of Advertising, Conference on Government Relations,
Washington, D. C., February, 1967, as quoted in Raymond A.
Bauer and Stephen A. Greyser, "The Dialogue That Never Hap-
pens," Harvard Business Review, Vol. 45, No. 6 (November-
December, 1967), p. 2-3.
6Harper W. Boyd, Jr. and Henry J. Claycamp, "Industrial
Self-Regulation and the Public Interest," Michigan Law Review,
Vol. 64 (May, 1966), p. 1239.
7David A. Aaker and George S. Day, "A Guide to
Consumerism," Journal of Marketing, Vol. 34 (July, 1970), p. 13.
below the threshold of perception, and imaginative marketing
often makes rational choice even more of a problem."
Further, "...rising incomes and a cornucopia of new products
have multiplied the number, value, and variety of consumers'
market transactions,"9 leaving precious little time to care-
fully analyze each decision. In the case of established
products, new materials, new operating principles, new func-
tions, new designs, and new packaging have further increased
the difficulty of choosing one brand over another.10 Al-
though John Floberg, Firestone's General Counsel, has somewhat
unrealistically argued that consumers can easily discriminate
among 1,000 different brands of tires,11 the consumer finds
himself confused. The market has become so complex that it
has "...rendered the unaided individual almost defenseless
against modern marketing techniques."12
Consumer Issues '66, A Report prepared by the Consumer
Advisory Council (Washington, D. C.: U.S. Government Printing
Office, 1966), p. 6, as quoted in Dorothy Cohen, "The Federal
Trade Commission and the Regulation of Advertising in the
Consumer Interest," Journal of Marketing, Vol. 33 (January,
1969), p. 40.
9Stern, op. cit., p. 49.
10Louis L. Stern, "Consumer Protection Via Increased
Information," Journal of Marketing, Vol. 31 (April, 1967),
11Ralph Nader, "The Great American Gyp," The New York
Review of Books, Vol. 11 (November 21, 1968), p. 27.
12Birmingham, op. cit., p. 356.
R. H. Holton suggests that the best way to improve the
situation and maximize welfare in many consumer markets is
to provide a more efficient information system.13 Stigler,
however, points to the tendency to forget that information,
like anything else that is scarce, is a valuable resource,
the search for which consumes time, and therefore has a cost.
Information is not free.
In fact, in the current marketplace, "...the consumer
finds the increased cost of search relatively high, as he ex-
pends it among competing sellers, compared with the yield of
additional information that the increased search provides."15
Complete knowledge is seldom possessed, for the simple reason
that it costs more to learn of alternatives than this informa-
tion is worth at the margin.16 "If the information system
were more efficient, however, increased search should yield
more knowledge, and consumers would make fewer purchase
errors."17 In his article, "The Economics of Information,"
13Richard H. Holton, "Forward," Consumerism: Search
for the Consumer Interest, ed. D. A. Aaker and G. S. Day
(New York: The Free Press, 1971), p. xx.
14George J. Stigler, "The Economics of Information in
the Labor Market," Journal of Political Economy, LXX, No. 5,
Part 2 (October, 1962), p. 94.
15Holton, op. cit., p. xx.
16George J. Stigler, "The Economics of Information,"
Journal of Political Economy, LXIX, No. 3 (June, 1961),
17iolton, on. cit., p. xx.
Stigler analyzes the cost of search for information concerning
market price. Although he avoids any consideration of search
for information on the quality of goods, which like price,
must be considered information extremely necessary for in-
formed purchase decisions, he concludes that "when economists
deplore the reliance of consumers on reputation, they im-
plicitly assume that the consumer has a large laboratory,
ready to deliver current information quickly and gratui-
The Adequacy of Available Information.--Then there is
the question of the value of the information which is provided
the consumer by producers to aid him in his search: "When
every detergent gets clothes whiter, brighter, cleaner,
sweeter-smelling than any other; when every brand of beer
'brings a smile every time' (particularly when you're having
more than one); when every toothpaste is better than every
other in preventing tooth decay; when every gasoline makes
your car run better than any other--what is the poor consumer
Magazine writer and critic Marya Mannes, testifying be-
fore the Senate, summed up the frustrations of many consumers
18Stiglcr, "The Economics of Information," p. 224.
19Clarence E. Eldridge, in a Speech before the Associa-
tion of National Advertisers, Kay 11, 1964, as quoted in
E. B. Wei~_, "7 ,er-tising's Crisis of Confidence,"
Advertising Age (June 26, 1967), p. 140.
as follows: "Most of us are simply too busy or too tired or
too harassed to take a computer, a slide rule, and an M.I.T.
graduate to market to figure out what we're buying."20
The Problem of Long-run Efficiency.--Finally, we are
operating with a system which tends toward long-run effi-
ciency, which raises the question of how much social cost
we are willing to allow while waiting for the market mecha-
nism to adjust. In the short run, even theory allows that
it is quite likely that deception will occur because of
"temporary" market failures.21 Bator cites a variety of
"market failures" which he defines as "...the failure of a
more or less idealized system of price-market institutions
to sustain 'desirable' activities (desirable in a maximum
welfare sense) or to estop 'undesirable' activities."22
Business, Competition, and
This all brings us to the problem of corporate concern.
As Boyd and Claycamp point out, businessmen have always
20Jeremy Main, "Industry Still Has Something to Learn
from Congress," Fortune (February, 1967), p. 129.
21For a detailed discussion of the costs inherent in the
market mechanism see Francis M. Bator, "The Anatomy of Market
Failure," The Quarterly Journal of Economics (August, 1958),
22Francis M. Bator, "The Anatomy of Market Failure," The
Quarterly Journal of Economics (August, 1958), p. 351.
argued that competition is the best protector of the consumer
interest,23 but as Bauer and Greyser explain, the businessman
does not view competition in the same way that the consumer
does.24 He sees competition as working whenever sellers are
clearly fighting for a leading place in the market. "But
this does not necessarily mean that this intensive competi-
tion leads to contentment among buyers. Competition among
retailers in the market for automobile tires is famous for
being as intense as in any product market, yet the complaints
about the nature of the competition in the market from the
consumer's point of view have led to the promulgation of tire
standards. Thus we see that intensive competition among
sellers does not, in and of itself, assure market conditions
which are satisfactory to consumers."25
The notion of "consumer sovereignty held by some busi-
nessmen and academicians is highly flattering to consumers,
in that it assumes they are able to choose competently under
what have become exceedingly complex circumstances."26 Stern
has examined the mounting variety of consumer products, and
finds it staggering27 to the extent that the myth of the
23Boyd and Claycamp, op. cit., p. 1239.
24Bauer and Greyser, op. cit., p. 3-4.
2511olton, op. cit., p. xix.
26Bauer and Greyser, op. cit., p. 4.
27Stern, o__ cit., p. 49.
omniscient consumer, who is so discerning he is capable of
being the brutal taskmaster for any firm, has become almost
Consider an advertising campaign which was run by Scott
Paper Company. It described the American housewife as the
...a strange change comes over a woman in the store.
The soft glow in the eye is replaced by a steely
financial glint; the graceful walk becomes a
panther's stride among the bargains. A woman in a
store is a mechanism, a prowling computer...Jungle-
trained, her bargain-hunter senses razor sharp
for the sound of a dropping price...29
Holton argues that competition will do quite well un-
aided to protect the consumer interest only if products are
bought frequently, have characteristics which are readily
comparable either before purchase or immediately afterward,
or are subject to a rate of technological change which is
slow relative to the frequency of purchase.30
At the other end of the spectrum, however, he sees "a
multitude of products": major appliances, automobiles, cas-
ualty and life insurance, repair services, pharmaceuticals,
etc., which fail to meet either one or more of these
28Nader, op. cit., p. 27.
29Ibid., p. 27.
30Holton, op. cit., p. xix.
criteria, and thus make markets quite imperfect, and impair
the consumer's ability for reasoned choice.31
According to Weiss, there is little doubt that large
American corporations are not responsive to their customers.32
He sees both manufacturers and retailers as "turning a deaf
ear" while consumers demand more personal relationships and
security in their purchases. He finds that businessmen have
made the intervention of government inevitable. Business
claims to measure its performance according to its ability to
meet "competition," yet businessmen are unwilling to compete
in the areas about which consumers are dissatisfied--service,
personal relationships, quality--the ability to be heard by
corporate decision-makers.33 They choose rather to "...ex-
pect the identical policies that led to public confrontation
to become accepted by the public through the magic of public
Despite obvious imperfections in the mechanism which
would enable normal market operations to protect consumers
the sanctity of competition has been proclaimed for some
years now by businessmen whenever government has tried to
31Ibid., p. xix.
32E. B. Weiss, "The Corporate Deaf Ear," Business
Horizons (December, 1968), p. 5.
33Ibid., p. 12-13.
34Ibid., p. 12.
intervene on the behalf of the consumer. Recent National
Association of Manufacturers literature defended their posi-
:ion calling for no regulation of advertising practices what-
ever so that "...a free choice marketing system, working
fairly and efficiently in full protection of the consuming
public..."35 will be allowed to operate.
President Johnson, in his message to Congress, February
5, 1964, recognized that the market alone may not provide
sufficient protection for consumers: "...for far too long,
the consumer has had too little voice and too little weight
in government. As a worker, as a businessman, as a farmer,
as a lawyer or doctor, the citizen has been well represented.
But as a consumer, he has had to take a back seat."'36
The Response of Government
On March 15, 1962, President John F. Kennedy sent to the
Congress the first Presidential message on the plight of the
consumer. In his message, the President pointed out to Con-
gress the importance of the consumer in the American economy
and described some of the difficulties which they face:
35National Association of Manufacturers, Should Congress
Federalize Consumerism? reprint of testimony before the Sub-
committee on Legislation and Military Operations, April 28,
1971, p. 23.
36Address by President Johnson, H. R. Doc. No. 220,
88th Conyrcscs, 2nd Session, p. 1 (1964 as quoted in
Birmincgham~ op. ct., p. 356).
The march of technology--affecting, for
example, the foods we eat, the medicines we
take, and the many appliances we use in our
homes--has increased the difficulties of the
consumer along with his opportunities;...the
typical supermarket before World War II stocked
about 1,500 separate food items--an impressive
number by any standard. But today it carries
over 6,000. Ninety percent of the prescriptions
written today are for drugs that were unknown
20 years ago. Many of the new products used
every day in the home are highly complex. The
housewife is called upon to be an amateur elec-
trician, mechanic, chemist, toxocologist, dieti-
cian, and mathematician--but she rarely is fur-
nished the information she needs to perform these
Marketing is increasingly impersonal. Consumer
choice is influenced by mass advertising utilizing
highly developed arts of persuasion. The con-
sumer typically cannot know whether drug prepara-
tions meet minimum standards of safety, quality,
and efficiency. He usually does not know how
much he pays for consumer credit; whether one
prepared food has more nutritional value than
another; whether the performance of a product will
in fact meet his needs; or whether the "large
economy size" is really a bargain.37
For several reasons the Federal Government has shown
itself quite willing to sympathize with consumers of late.
The experience of the tobacco companies and the broadcasting
industry with anti-smoking have taught us that business lob-
byists do not have as much power as was originally feared,
and we may be witnessing the emergence of new legal concepts
which tend to side more with the individual than with
37Consumer Advisory Council, First Report, U. S.
Executive Office of the President (Washington, D. C.: U. S.
Government Printing Office, October 1963), p. 5-6.
industry.38 Also, the vote-getting appeal of pro-consumer
legislation can't be denied, "With every voter also a con-
sumer, talk or action on high prices, shoddy merchandise,
misleading advertising (is) certain to be received sympa-
thetically. Furthermore, the topic (can) be worked nicely
into discussions of the problems of poverty. With the Viet
Nam war, the space program and other high priority demands
on Federal funds generating such enormous demands, consumer
issues were especially appealing since the remedies, e.g.,
the introduction of Federal standards for automobile tires,
were, for the most part, cheap.39 As a result, more con-
sumers have begun to see the government as a more sympa-
thetic, if not more helpful institution, therefore the
prospect for government-directed arbitration procedures to
settle complaints is increased.40
This situation has caused a great deal of concern among
businessmen and caused one alarmed food maker to exclaim
publicly that "consumerism is rampant!"41 His statement is
not as exaggerated as it may first appear. Business Week
38Stanley E. Cohen, "'Giant Killers' Upset Notions That
Business 'Clout' Runs Government," Advertising Age, Vol. 41
(July 14, 1969), p. 73.
39Holton, op. cit., p. xviii.
40Weiss, "The Corporate Deaf Ear," p. 15.
41Main, op. cit., p. 128.
estimated that over 400 pieces of consumer legislation were
pending in Congressional committees at the end of 1969,42 and
as long as politicians remain vote conscious and voters re-
main consumer conscious, there is no reason to believe this
activity will cease.
The Adequacy of Government's
There has been, however, some argument that the consumer
legislation turned out over the past few years is not of any
great quality. "For example, there is evidence that the
truth-in-lending bill will not achieve its original goals,
partly because of lack of understanding of the problem and
partly because of inadequacies and confusion in the enacted
legislation."43 Similarly it is dismaying that after two
years experience with the truth-in-packaging bill, it is being
referred to as "one of the best non-laws in the book."44
Kripke states that recent Federal effort in the area of
consumer credit reform, at least, has, because of lack of
understanding of the problem on the part of Congress,
42"Nixon Shops for Consumer Protection," Business Week
(November 1, 1969), p. 32.
43"A Foggy First Week for the Lending Law," Business
Week (July 5, 1969), p. 13, cited by Aaker and Day, op. cit.,
44Stanly E. Cohen, "Packaging Law is on Books, But Ills
It Aimed to Cure are Still Troublesome," Advertisinq Age, Vol.
41 (September 1, 1969), p. 10.
accomplished very little compared to what could have been
done with the energy expended,45 and Betty Furness, consumer
advisor to President Johnson, has charged that some of the
laws enacted by Congress under promising consumer-protection
titles come close to being "name-only" bills.46 She adds
significantly that "such laws deceive consumers into be-
lieving they have been given more protection than they
actually have. The industry intended for regulation may have
gained more protection than the consumer. With a law on the
books, there will be less public pressure on the Congress,
and it will be quite some time before Congress can get up the
steam to amend and strengthen the law."47
Holton charges that:
...policy solutions may come tumbling out of
the legislative mill before the researcher has
had time to do his homework.....The researcher
alone cannot be held responsible for this. Even
if he were interested before the problem sur-
faced as a major public issue, his possible sources
of research funding might not be moved until the
topic appeared in the policy spotlight. If we
do the basic research needed for optimum policy
design in the social sciences with the same care
that the basic R & D precedes a manned lunar
45Homer Kripke, "Gesture and Reality in Consumer Credit
Reform," New York University Law Review, Vol. 44 (March,
1969), p. 51.
46Betty Furness, "The Time is Now," Trial Magazine
(August-September, 1968), p. 17, as quoted in Kripke, op. cit.,
47Ibid., p. 52.
flight, Congress might be more pleased with
the results of its legislative handiwork in the
field of social policy, including the general
field of 'consumerism'.48
There can be little doubt that a problem exists, and
that neither business nor government has provided any real
solutions. According to a confidential nationwide survey by
the Opinion Research Corporation, seven out of ten Americans
think that the present federal legislation is inadequate to
protect even their health and safety; the majority also be-
lieve that additional laws are needed to give shoppers full
value for their money.49
Businessmen have finally recognized the fact that
Washington will not go away,50 so the question now becomes
how to improve the quality of regulation. As shown above,
the role of information is crucial. It appears that if the
consumer were presented with a full disclosure of pertinent
facts concerning products, it would be a major step in ena-
bling him to protect himself51 and come much closer to
maximizing his utility.52
48Holton, op. cit., p. xviii.
49Nader, op. cit., p. 27.
50Editorial, Advertising Age, May 1, 1967, p. 16.
5-Dorothy Cohen, "The Federal Trade Commission and the
Regulation of Advertising in the Consumer Interest," Journal
of Marketing, Vol. 33 (January, 1969), p. 40.
52Birmingham, op. cif., p. 357.
This writer will now proceed on the assumption that
government regulation to ensure full disclosure of facts
which are pertinent to making a free choice among alterna-
tives in the marketplace will not impede the workings of the
market, or harm business, but as Birmingham found, will
"...increase welfare by tending to correct imperfections in
the market mechanism,"53 which, as it currently operates,
are resulting in a "...needless sacrifice of welfare."54
Justification for the Research
It is important to emphasize at this point that the
goal, from this writer's standpoint, is to ensure that the
consumer is supplied with sufficient and accurate information
to make purchase decisions. The question of whether his
decisions are "rational" or wise once given this information
is beyond the scope of this discussion.
If the government is to act, the problem becomes how?
The literature has established that in at least two cases,
Truth-in-Lending and Truth-in-Packaging, the legislative
response to the problem has been a questionable one, and that
there is a great possibility that Congress had not done suf-
ficient legislative research in order to rush passage of
53Ibid., p. 377.
54Ibid., p. 365.
certain legislation in order to calm consumer groups and.
It would seem, then, that before any additional con-
sumer legislation is enacted or any new agencies are
created, government must examine why those agencies which
are currently entrusted with protection of the consumer
interest have failed. If the shortcomings of current regu-
lation are exposed in a specific manner, then, and only then
can Congress correct their deficiencies.
'The federal government has an agency whose role it is to
deal with deceptive practices in the consumer field.55 The
Federal Trade Commission (FTC) receives its authority from a
series of laws passed from 1914 to the present, and "...op-
erates under the legally and economically acceptable premise
that the consumer is to be assured full and accurate informa-
tion which will permit him to make a reasoned choice in the
Critics, beginning with Gerard Henderson in 1924,5 and
including more recently a commission of the American Bar
55Kripke, op. cit., p. 10.
56Dorothy Cohen, op. cit., p. 40.
57Gcrard Carl Henderson, The Federal Trade Commission
(New Haven: Yale University Press, 1924).
Association (1969),58 Ralph Nader (1969),59 and Wagner of
Hoffstra University (1970),60 have exhaustively examined
the FTC from an administrative point of view and found it
severely lacking. None of these critics, however, have
examined the Commission with regard to its legal capacity to
protect the consumer interest. This paper will not seek to
evaluate the financial or personnel status of the FTC, as
those aspects have already been amply investigated. It will
seek to examine the interpretation and enforcement of the law.
.As the Commission can go no farther in protecting the
consumer's welfare than its statutory tools will allow, it
seems that a determination of the adequacy of the present law
which the Commission administers must be the first step in
evaluating the Commission. Only then can we really know if
the need exists for new laws or a new Commission. Charles
Sweeny, Chief of the FTC's Bureau of deceptive practices, has
said that "the present Commission is more deeply determined
5American Bar Association, Report of the ABA Commission
to Study the Federal Trade Commission, September 15, 1969
(Chicago, Ill.: American Bar Association, 1969).
5Edward F. Cox, Robert C. Fellmeth, and John E. Schultz,
Naders Raiders Report on the Federal Trade Commission (New
York: Grove Press, Inc., 1969), p. 215.
6Susan Wagner, The Federal Trade Commission (New York:
to combat consumer deception than any Commission I have
known in my 30 years of service."61 Now the question is, do
they have the authority?
-/The major law under which the FTC operates is the Fed-
eral Trade Commission Act passed by Congress in 1914. The
consumer protection section was added to that law in 1938
through passage of the Wheeler-Lea Act which made "unfair
and deceptive trade practices...unlawful."
This introduction has focused attention on the condi-
tions which have made it both necessary and important to
analyze the regulation of consumer goods markets. It has
cited examples of the impulsive manner in which the federal
government has responded to consumer frustrations, indicating
the need for research concerning the manner of operation of
current deceptive practices regulation.
Chapter Two contains a survey of the literature concern-
ing the structural operation of markets, especially with re-
gard to the impact of product differentiation and promotion.
The economic models of these relationships provide the basis
for government regulation of business conduct, including the
deceptive trade practices. It is this chapter which provides
information concerning those economic variables which should
relate to conditions favorable to increased deception in
61"Druggist May be Liable for Brand Copy in his Ads,"
Advertising Ago, Vol. 36 (June 7, 1965), p. 1.
promotion, and therefore affect the need for the regulation
of deceptive trade practices.
Chapter Three examines the development of the Federal
Trade Commission (FTC) and traces the evolution of its author-
ity and the operations internal to the Commission used to
regulate deceptive trade practices under Section 5 of the
Federal Trade Commission Act.
Chapter Four begins with a description of the methodology
used to collect the FTC's deceptive practices complaint data
and the procedure used to analyze fluctuations in this data
through comparison with the political influence suggested in
Chapter One, the economic factors suggested in Chapter Two,
and the internal operation of the Commission outlined in
Chapter Five contains the analysis of the data and con-
clusions drawn from the analysis.
Chapter Six relates the results of this study to the
needs of marketing students and practitioners and makes sug-
gestions for future research which would further clarify the
relationships suggested in Chapter Five.
THE PURPOSE OF REGULATION
Market Structure and the Law
Economists are quite clear in their explanation of the
importance of the study of market structure to the attainment
of a nation's major economic goals: The structure of an in-
dustry determines behavior of firms within that industry which
in turn determines whether that industry performs well or
poorly with regard to the nation's goals. If those features
of market structure which regularly cause poor market perform-
ance can be isolated, public policy (or legislative policy)
can be used to correct these structural problems and thereby
improve the level of performance.1
The study of industrial organization centers around the
structure of markets and the effects of certain market struc-
tures on the conduct and ultimately the performance of some
group of firms comprising an industry. The purpose of market
structure analysis as explained by Caves is to spot some
1Richard Caves, American Industry: Structure, Conduct,
Performance (2nd ed.; Englewood Cliffs, New Jersey: Prentice
Hall, Inc., 1967), p. 17.
feature of market structure which regularly causes poor
market performance, and find the key to designing policies
to change the environment (structure) which will raise the
level of performance.2
Bain defines market structure as "...those characteris-
tics of the organization of a market which seem to influence
strategically the nature of competition and pricing within
the market."3 It consists of those "economically significant
features of a market," primarily:
1. Degree of seller concentration.
2. Degree of buyer concentration.
3. Degree of product differentiation.
4. The condition of entry to the market.
Although students of industrial organization caution
that to end the list with these four aspects of market struc-
ture is somewhat arbitrary, it is the consensus that if these
four elements are not the only elements, they are at least
the most important elements of market structure.
The federal anti-trust legislation is an excellent
example of the implementation of market structure concepts.
As a matter of national economic policy, monopolies are
2Caves, op. cit., p. 17.
3Joe P. Bain, Industrial Organization (New York: John
Wiley & Sons, Inc., 1959), p. 7.
generally unacceptable. Competition is said to be the goal,
and "the primary tool employed to analyze and evaluate compe-
tition in any industry is the price theory which arose from
the norm of perfect competition."4
The government perspective has been summed up by Colwell
in his discussion of the relationship between economic theory
and the Supreme Court's interpretations of anti-trust legis-
A decentralized market structure, characterized by
many participants, will induce competitive conduct,
and this in turn will yield the best market performance.5
Clearly government officials as well have accepted the
causal relationship between market structure, conduct, and
performance. The merger guidelines issued by the Department
of Justice, May 30, 1968, stress that market structure is the
focus of the Department's merger policy because markets which
have a small number of large sellers tend:
...to discourage vigorous price competition by
the firms in the market and to encourage other
kinds of conduct, such as the use of inefficient
methods of producing or excessive promotional ex-
penditures, of an economically undesirable nature.6
4Lewis W. Stern and John R. Grabner, Jr., Competition in
the Marketplace (Glenview, Illinois: Scott, Foresman and Com-
pany, 1970), p. 6.
5B. Joe Colwell, "One of the Congeries of Anticompeti-
tive Practices...," The Southern Economic Journal, Vol. 33,
No. 4 (April, 1967), p. 546-547.
6U.S. Department of Justice, Merger Guidelines (Washing-
ton D.C.: U.S. Government Printing Office, May 30, 1968),
This position was further stressed by a former Director
of the Bureau of Economics for the FTC, Willard F. Mueller:
...available empirical evidence indicates that
such structural characteristics as the height of
entry barriers facing potential competitors, the
degree of product differentiation and the level of
market concentration always are of some importance
and often are of decisive importance in determining
It can be assumed, therefore, that the thrust of Federal
anti-trust and trade regulation, both in its inception and
application has been to correct certain "structural defi-
ciencies" within industries which have led them to perform
in such a way that economic efficiency was no longer assured
by a laissez faire governmental posture.8
In the case of the Sherman Act, the Clayton Act, the
original FTC Act, and the Cellar-Kefauver Act, the structural
target has been to prevent excessive market concentration or
barriers to entry through merger, collusion, tying arrange-
ments and those acts and practices which serve to damage com-
petition and/or competitors. The Robinson-Patman Act seeks
7"The FTC and Current Marketing Interfaces," American
Marketing Association, 1967 Winter Conference Proceedings,
Series No. 26 (Washington, D. C.: December 27-29, 1967),
8An exception to this rule has been the Robinson-Patman
Act, which in a number of instances has been interpreted by
the courts and enforced by the FTC in such a way as to be
clearly anti-competition. See Marshall C. Howard, Legal
As[~ cL.. o 'i. ;(inr (i.ew York: I'oraw-Hi ] .1, nc., Ij ) ,
Chapter 3, passim.
essentially to prevent price-fixing and discriminatory dis-
count practices within channels of distribution to competing
firms, and thereby discourages pricing tactics which would
also provide barriers to entry into a market or allow some
firms to gain excessive market power and size through supe-
rior bargaining position.
The Wheeler-Lea Act, while it is very firmly based on
market structure theory, is not an anti-trust statute in the
same sense as are the aforementioned pieces of legislation.
The Sherman Act, Clayton Act, Robinson-Patman Act, and Cellar-
Kefauver Act are directed toward combination and price compe-
tition, or structural and conduct variables on the supply side
of the market. The Wheeler-Lea amendment, on the other hand,
is directed toward a class of conduct, specifically promotion,
as a means of product differentiation, which is both a cause
and effect of both certain structural characteristics, as well
as certain imperfections on the demand side of the market for
goods and services. While other anti-trust legislation is
aimed at combination and unacceptable methods of price compe-
tition, the Wheeler-Lea Act is directed at nonprice competi-
tion, specifically product differentiation through promotion.
Product Differentiation and Market Structure
Product differentiation, an "...imperfection in the
substitutability--to buyer--of the outputs of competing
sellers in an industry..."9 is one of the major elements of
market structure. In the case of an industry whose market
structure is purely competitive, by definition, the products
of firms within that industry will not be differentiated at
all and will have cross elasticities of demandl0 which are
extremely large. In other words, an increase in the price of
one product in such an industry will result in a total loss
of sales of that product as all buyers shift to one of its
This results in a situation which, to the businessman,
is highly unacceptable. It means that he has no control over
his price variable, but is left to the mercy of the supply
and demand situation of his industry, which he cannot affect,
to determine what price he may charge for his product. To
remove himself from this type of market, the businessman
seeks to "differentiate" his product. According to
A general class of product is differentiated if
any significant basis exists for distinguishing
9Bain, op. cit., p. 211.
10The cross elasticity of demand for two or more
products describes the responsiveness of the sales volume
of one product to a change in the price of another product.
If the price of product A drops significantly and the volume
of product B remains essentially unchanged, this would in-
dicate that in the eyes of the markets for those products,
they are poor substitutes for one another, and that the de-
gree of differentiation between the products is great.
the goods (or services) of one seller from those
of another. Such a basis may be real or fancied,
so long as it is of any importance whatever to buy-
ers and leads to a preference for one variety of
the product over another. Where such differentia-
tion exists, even though it be slight, buyers will
be paired with sellers, not by chance and at random
(as under pure competition) but according to their
As this preference builds, other goods become less per-
fect substitutes for the businessman's good, rendering the
relevant range of his demand curve less and less responsive
to his own price changes, and less responsive to the price
changes of others in his industry allowing him greater con-
trol over price variable, his profits, and his destiny. As
Alderson points out:
No one enters business except in the expectation of
some degree of differential advantage in serving
his customers, and competition consists of the con-
stant struggle to develop, maintain, or increase
Methods of Differentiation
Product differentiation may be achieved through a number
of non-price means, which can be described according to
McCarthy's marketing mix concept.13
llEdward Chamberlin, The Theory of Monopolistic Competi-
tion (1st ed.; Cambridge, Massachusetts: Harvard University
Press, 1933), p. 56.
12Wroe Alderson, Marketing Behavior and Executive Action
(Chicago: Richard D. Irwin, Inc., 1957), p. 106.
13E. Jerome McCarthy, Basic Marketing (4th ed.; Home-
wood, Illinois: Richard D. Irwin, Inc., 1971), passim.
Differentiation Through the Product Variable.--This type
of differentiation may be achieved through modifications in
the good or service itself or through variations in the
"total product" concept.14 Modifications of the good or
service itself may take the form of packaging changes (i.e.,
the aerosal container) or branding changes15 (i.e., General
Electric's usage of both the GE and Hotpoint brands) or an
actual design change (i.e., Ford's Pinto as opposed to the
Torino line) or any combination of these. In the case of
changes in the "total product," these become more difficult
to enumerate, as they may be highly subjective on part of the
consumer, and may include aspects of the other variables men-
tioned in this section; but for the purpose of illustration
we may include here such things as guarantees and warranties,
service facilities, a return policy, etc.
Differentiation Through the Place or Distribution Vari-
able.--This type of differentiation may be achieved through
the number and kind of retail outlets which make the product
available, the hours which they remain open, the quality of
the sales personnel, the location of the outlets with regard
14For a detailed explanation of the "total product" con-
cept, see E. Jerome McCarthy, Basic Marketing (4th ed.; Home-
wood, Illinois: Richard D. Irwin, Inc., 1971), p. 250-253.
15It should be pointed out here that in some instances,
branding must be considered promotion. See subsequent
to the location of persons in the market, a free delivery of
goods, catalogue sales, telephone ordering, etc.
Differentiation Through the Promotional Variable.--Promo-
tion relates the product differentiation in two ways, one of
which is direct and one of which is indirect. The indirect
relationship comes about through promotion's informative role:
it is the role of promotion to inform the market of the advent
or existence of the product differentiations which have been
made through the product and place variables. The direct re-
lationship of promotion to product differentiation comes about
through the use of promotion itself as a means of setting a
product apart, through persuasion that the product is different
in some way, or the use of promotion to create some "image" for
the product, which in turn is related to the people who buy the
product (i.e., the English Leather ad in which a voluptuous
lady says, "All my men use English Leather. All of them.").
Branding may fall into this category as well, especially
when a single product is sold under one name to one group or
market, and under another name to another market as in the
case of unscented hairspray for men and women.
Advertising and Product Differentiation
Advertising,16 like personal selling and sales promotion,
is a type of promotion. As the Wheeler-Lea amendment has come
16Advertising is defined as any paid form of nonpersonal
presentation of goods, services, or ideas to a group by an
to be used primarily as a promotion-regulating statute, and
advertising is the most visible type of promotion in consumer
goods markets, the remainder of this study will focus on ad-
vertising as a prototype of the promotion area.
Advertising theoretically may perform two separate tasks:
it may provide information about the existence of products and
their usage, and it may serve as a means of product differen-
tiation. Economists consider the informative role of advertis-
ing to be distinct from its role as a means of product differ-
entiation. They see informative advertising as necessary even
in purely competitive markets, as pure competition, by defini-
tion, assumes that buyers have perfect information regarding
product alternatives, especially with regard to the homo-
geneity of products within an industry.
Economists accept as necessary to efficient market op-
erations in all markets that advertising which supplies pur-
chasers with basic product information, information which can-
not be supplied in other ways, and information which gives
instructions for the use of products.17
identified sponsor. See Beckman and Davidson, Marketing (8th
ed.; New York: The Ronald Press Company, 1967), p. 566.
17See Telsor, "Advertising and Competition," The Journal
of Political Economy, December, 1964, for discussion on why
advertising is not contradictory to competition. See Stern
and Grabncr, Competition in the Marketalace (Glenview,
Illinois: Scott, Foresman and Company, 1970), p. 61-63,
for discussion on the difference between the economic and
marketing view of advertising.
Generally this is the type of advertising which
Borden18 describes as that which influences "primary demand"
or the demand for the product class (or industry output) as
a whole. This type of advertising seeks to shift the in-
dustry's entire demand curve to the right, allowing all firms
in the industry to sell more at all prices, with the result
that each firm gets a share of the greater demand.
D = Initial demand
D2 = Increased demand
However, advertising may be, and is, also used to affect
the demand curve of an individual firm within an industry
(selective demand) without affecting the industry's demand.
It is this type of advertising that economists deem wasteful.
The rational is that as this type of advertising merely re-
allocates demand shares among firms in an industry, and costs
18Neil H. Borden, The Economic Effects of Advertising
(Chicago: Richard D. Irwin, 1947), Chapter 16 passim.
in the industry are increased without producing a correspond-
ing increase in the industry's output, creating waste.
Further, economists feel that this "persuasive" advertising
interferes with consumers' ability to exercise freedom of
choice, and only serves to confuse them.
It is this kind of advertising which becomes a form of
product differentiation, in a direct sense, and it is this
type of advertising which is by far most prevalent.
As Telsor points out, in the case of homogeneous prod-
ucts or poorly differentiated products, when advertising will
increase the industry's demand rather than that of a single
firm, there is very little incentive for a firm to advertise
in any great amount unless they have some degree of monopoly
power. "...A sponsor of advertising would expect to obtain
only a fraction of the fruits of his advertising,"l9 and the
remainder of the "fruits" would be distributed, at his ex-
pense, among the competitors.
If it pays for a producer to advertise, then it
is very likely that he sells a differentiated
product. This holds true almost by definition,
since an undifferentiated product is one whose
consumers cannot perceive any differences among
brands. Growers of many kinds of fruits find it
does not pay to advertise the product of their
own orchard under a brand name. But they often
do bank together and advertise their crop co-
operatively. They may be able to swing consumers'
19Lester D. Telsor, "Advertising and Competition," Thl
Journal of Political Economy, LXXII, No. G (December, 1]TS,
preferences away from grapefruit to lemons, but
one lemon continues to look like another, no
matter what anybody says.
--- Going Price
D = Demand curve facing the seller of an undifferen-
D2 = Demand curve facing the seller of a differentiated
As Vernon put it:
The degree of product differentiation achieved
depends on both the inherent differentiability
of the product and the actions of the sellers.
At the risk of oversimplifying, we can show the
conceptual relationship between differentiability
and differentiation graphically using advertising
(which is only one way to achieve differentiation):
20Caves, op. cit., p. 20.
The curve reflects the view that there are
probably diminishing returns to advertising in
creating product differentiation. At higher
levels of advertising, the degree of differen-
tiation approaches the horizontal line labeled
"differentiability." The greater the differen-
tiability of a product, the higher the horizontal
line will be above the horizontal axis.21
Bain stressed that without product differentiation, ad-
vertising is ineffective, and therefore he stresses that
where advertising is effective, it is a sure sign that prod-
uct differentiation has occurred.22 He goes on to state that
because of the nature of buyers, product differentiation is
21John M. Vernon, Market Structure and Industrial
Performance: A Review of Statistical Findings (Boston:
Allyn and Bacon, Inc., 1972), p. 68-69.
22Bain, op. cit., p. 216.
more likely to develop in consumer goods industries"2 and will
tend to increase in volume as consumer goods become more
intricate and complex, thus making buyers more poorly in-
He further pointed out that the strong product differ-
entiation in consumer goods industries "...is largely created
by advertising, the opportunities for physical product dif-
ferentiation (design and quality) being rather limited."25
Further, Bain felt that the persuasive role of adver-
tising was dominant and growing:
...a substantial portion of observed promotional
activities and costs have, to all appearances, a
dominantly persuasive orientation, and this rela-
tive emphasis is generally greater as selling
costs are larger in proportion to sales.26
Table 2.1, which compares the conditions for pure compe-
tition with Bains' "sources of product differentiation" and
Borden's "conditions favorable to effective advertising"
illustrates the relationship of effective advertising to suc-
cessful product differentiation and shows which competitive
conditions are effected by these requirements.
23A study administered by Bain showed that "...practi-
cally all industries with any high advertising costs (5% or
more of sales revenue) are industries producing consumer
24Ibid., p. 219.
251bid., p. 391.
26Ibid., p. 389.
Advertising and Market Structure
Theory states, and some empirical evidence indicates,
that advertising effects market structure in the following
Barriers to Entry
These relationships are developed as follows:
Industrial organization economists agree, as discussed
earlier in this chapter, that advertising is a method of prod-
uct differentiation. A number of economists hypothesize in
turn, as did Bain, that product differentiation is a signif-
icant barrier to entry:
Product differentiation advantages of established
firms loom larger than any other source of bar-
riers to entry, and especially large as a source
of high and very high barriers.28
27Vernon, op. cit., p. 76.
28Bain, op. cit., p. 250.
In keeping with Bains' analysis, Comanor and Wilson list
three ways by which "product differentiation via advertising"
affects entry barriers:
1. High prevailing levels of advertising create addi-
tional costs for new entrants which exist at all
levels of output.
Costs of penetration are likely to increase as out-
put expands and customers more inert or loyal need
to be reached. This effect of advertising creates
an absolute cost advantage for established pro-
ducers, since they need not incur penetration costs.
2. Economies of scale in advertising also result when
the cost per advertising message declines as the
number of messages supplied increases.
If advertising in a particular industry is charac-
terized by economies of scale...an entrant will
suffer an additional cost disadvantage if he enters
at a relatively small scale.
3. If economies of scale exist...in advertising, the
need to obtain funds for advertising will give
rise to capital requirements over and above those
needed for physical plant and equipment. Further-
more, this investment in market penetration will
involve a particularly risky use of funds since
it does not generally create tangible assets
which can be resold in the event of failure. The
required rate of capital will therefore be high.
In an empirical study described in the same
article, they present data supporting their
hypothesis that these barriers actually exist.29
Kaldor supports Comanor and Wilson in their contention
that increasing returns to advertising lead directly to
29William S. Comanor and Thomas A. Wilson, "Advertising,
Market Structure, and Performance," The Review of Economics
and Statistics, XLIX, No. 4 (November, 1967), p. 425-426.
increasing concentration and points out that according to
market structure theory, increasing concentration will
result in increased market power.0
Therefore, if governmental agencies accept the theo-
retical framework of market structure, and market structure
analysis indicates that advertising increases should bring
about unfavorable changes in market conduct and structure,
then there should be some relationship between advertising
volume shifts and the activities of the Federal Trade Com-
The obvious limitations to this relationship would be
the legislative jurisdiction, intent, and the financial
capabilities of the Commission itself. This question will
be treated in Chapter Three, The Role of the Federal Trade
30Nicholas Kaldor, "The Economic Aspects of Advertis-
ing," The Review of Economic Studies, Vol. 18, 1950-51,
passim. In contrast, Telsor, in an empirical study
(op. cit., passim) found no significant inverse relation-
ship between advertising and competition. Comanor and
Wilson, however, refute his findings using the same data,
but different conceptual and statistical approaches
(Comanor and Wilson, Ibid., passim).
THE ROLE OF THE FEDERAL TRADE COMMISSION IN THE
REGULATION OF DECEPTIVE TRADE PRACTICES
The Establishment of the Commission
The Federal Trade Commission (FTC) was organized in 1915
under the authority established by the passage of the Federal
Trade Commission Act of 1914. The Federal Trade Commission
Act, along with the Clayton Act, both organized in President
Wilson's Message to Congress of January 20, 1914, and were
the direct result of the Sherman Act's inability "...to cope
with the problem of increased private concentration of
economic power, and the rise of what has been called
'Progressivism'--in the Republican Party under the leader-
ship of Theodore Roosevelt and in the Democratic Party under
that of Woodrow Wilson..."l
The "Rule of Reason" and the apparent hostility of the
courts to the Sherman Act led the government to seek a new
1H. H. Liebhafsky, American Government and Business
(New YorK: John Wiley and Sons, Inc., 1971), p. 214.
approach to the enforcement of antitrust laws.2 This search
resulted in an attempt at the commission approach to regula-
tion, and the FTC.
-The FTC Act set up the Commission as a separate, spe-
cialized agency which would participate full-time in the
prevention of "unfair methods of competition."3 It was
"...presumably a body of specialists who might best be able
to handle the economic and technical questions in antitrust
matters."4 The opinion of Congress was that "...the anti-
trust laws lacked 'certainty,' a deficiency that the FTC
could remedy by advising businessmen on the legality of pro-
posed business activities, as well as (handling) enforce-
Because the FTC Act not only refined the Sherman Act,
but also established a commission of "experts" to decide
which business practices should be considered "unfair," the
prohibitions of the FTC Act were deliberately aimed against
a class of conduct, rather than specific acts or practices
2Earl W. Kintner, A Primer on the Law of Deceptive
Practices (New York: The Macmillan Company, 1971), p. 15.
3Federal Trade Commission Act of 1914, in U.S., United
States Code Annotated, Title 15, Section 45, p. 465; 486.
4Marshall C. Howard, Legal Aspects of Marketing (New
York: McGraw-Hill Book Company, 1964), p. 6.
5Edward F. Cox, Robert C. Fellmeth, and John E. Schulz,
Naders Raiders Report on the Federal Trade Commission (New
York: Grove Press, Inc., 1969), p. 215.
as were written into the Clayton Act, which was before
Congress at the same time.
According to Justice Brandeis:
Instead of undertaking to define what practices
should be deemed unfair as had been done in earlier
legislation, the act left the determination to
the commission. Experience with existing laws had
taught that definition, being necessarily rigid,
would prove embarrassing, and, if rigorously ap-
plied, might involve great hardship. Methods of
competition which would be unfair in one industry,
under certain circumstances, might, when adopted
in another industry, or even in the same industry
under certain circumstances, be entirely un-
Furthermore, an enumeration, however compre-
hensive, of existing methods of unfair competition
must necessarily soon prove incomplete, as with
new conditions constantly arising novel unfair
methods would be divised and developed.6 r
Hence the five Commissioners were assigned the task of
presiding over an agency which would prevent "unfair methods
of competition" and would serve as investigator, prosecutor,
and judge, subject to the review of the Federal courts. The
courts found this a satisfactory means of regulation, and
explained the workings of the Commission as follows:
With the increasing complexity of human
activities many situations arise where govern-
mental control can be secured only by the "board"
or "commission" form of legislation. In such
instances Congress declares the public policy,
fixes the general principles that are to control,
and charges an administrative body with the duty
of ascertaining within particular fields from time
to time the facts which bring into play the
principles established by Congress. Though the
6Kintner, op. cit., p. 16.
action of the commission in finding the
facts and declaring them to be specific of-
fences of the character embraced within the
general definition by Congress may be deemed
to be quasi legislative, it is so only in the
sense that it converts the actual legislation
from a static into a dynamic condition. But
the converter is not the electricity. And though
the action of the commission in ordering desistance
may be counted quasi judicial on account of its
form, with respect to power it is not judicial,
because a judicial determination is only that
which is embodied in a judgement or decree of a
court and enforceable by execution of other
writ of the court.7
The constitutionality of the commission method of regulation
was handled by the courts as well:
The authority given the commission to determine
what methods of competition a given trader employs,
and, provisionally, to determine whether such
methods are unfair, subject to right of review by
the courts, does not confer on the commission
judicial powers, or invalid executive or adminis-
trative authority, contrary to U.S.C.A. Constitu-
tion Articles 1, 2, 3, in view of the fact that the
commission's determination is not only subject to
review, but is enforceable only by the courts.8
Though the sponsors of the original act foresaw a trust-
busting agency, and intended the public interest to be pro-
tected through the indirect means of protection of
competition, the Commission as early as its Second Annual
Report stated: "Unfair competition, like 'fraud,' 'due
care,' 'unjust discrimination,' and many other familiar
7Sears, Roebuck and Company vs. FTC, 258 F. 307 (1919).
8National Harness Manufacturers Association vs. FTC,
268 F. 705 (1920).
concepts in the law, is incapable of exact definition, but
its underlying principle is clear--a principle sufficiently
elastic to cover all future unconscionable competitive
practices in whatever form they may appear, provided they
sufficiently affect the public interest.9 They went on to
assert that in scme cases they felt justified in going beyond
the strict requirement of damage to competition, "...as in
certain cases of misbranding and falsely advertising the
character of goods where the public was particularly liable
to be misled..... 0 In fact, the first two cease and desist
orders issued by the Commission attacked false and mislead-
ing advertising practices.
The Commission's Frustration with Anti-Trust
Early in its history, however, the Commission became
frustrated in its attempt to fulfill its primary function of
supplementing the Sherman Act. In 1920, in its.first case
before the Supreme Court, the FTC vs. Gratz, the Commission
tried to apply its authority to a company which was requiring
purchasers of one of their products to also purchase a pro-
portionate amount of another of their goods. It was a
classic case of a tying arrangement. The Supreme Court
determined, however, that with regard to anti-trust, the
words "unfair methods of competition" could not be defined
9Federal Trade Comni.svion, Annuial pP.L 16.16, p. G.
10Ibid., p. 6.
by the Commission as Congress had intended; this chore must
rather fall to the courts. The charges had been brought
under both Section 3 of the Clayton Act and Section 5 of the
FTC Act. The Clayton charge was thrown out on a lack of
evidence, and of the "unfair competition" charge, the Supreme
This section does not apply to practices never
heretofore regarded as opposed to good morals,
because characterized by deception, bad faith,
fraud, or oppression, or as against public policy,
because of their dangerous tendency unduly to
hinder competition or create monopoly.11 l
This decision temporarily curtailed the activity of the
FTC, because, in effect, the Court had ruled that they had
jurisdiction only over questions of monopoly or combination
--the same charges handled by the Justice Department under
the Sherman Act. The case of the FTC vs. Paramount Famous-
Lasky Corporation in 1932 shows just how literal this doc-
Standard applicable to determine whether given
acts amount to "unfair methods of competition" is
standard established by Sherman Anti-Trust Act,
sections 1-7 of this title, and by courts in
construing such Act.
As early as 1922, however, the Supreme Court had
approved a Commission order to cease and desist from
llFTC vs. Gratz, 40 S. Ct. 572 (1920).
12FTC vs. Paramount Famous-Laskv Corporation, 57 F. 2d
deceptive advertising in the Royal Baking Company case.13
The Commission's frustrations with anti-trust, as il-
lustrated by first the Gratz case and subsequent decisions,
and their apparent success with deceptive advertising cases,
encouraged them to channel their efforts in a more productive
direction, away from anti-trust, and it has been estimated
that as early as 1925, 75 percent of all cease and desist
orders issued by the Commission each year were directed
against false and misleading advertising.14
SBy 1931, the Commission had issued 82 orders of which
only 43 were upheld either entirely or substantially by the
courts, whereas of the 29 orders involving false advertising,
22 were upheld,15 and the Commission's jurisdiction over
false advertising seemed to be established beyond a doubt.
It is important to note that this was not the function
which the proponents of a trade commission had envisioned
for the FTC, but rather a circumstance brought about by the
continued hostility of the courts toward the FTC developing
an independent and viable role in anti-monopoly cases.
13Royal Baking Company vs. FTC, 281 F. 744 (1922).
14Kintner, op. cit., p. 17.
15Susan Wagner, The Federal Trade Commission (New
York: Preager, 1971), p. 30.
The Raladam Decision and Wheeler-Lea:-
The Authority over Deception
However, although the Commission had taken jurisdiction
over advertising practices more with regard to protecting
the public interest than competition or competitors, and had
been upheld in 22 advertising cases before 1931, none of
which was grounded specifically on damaged competition, in
1931, the Supreme Court squarely faced the issue of competi-
tion in the Raladam Case. The FTC Act read that the Commis-
sion had the authority to declare "unfair methods of competi-
tion" to be unlawful and that the Commission should act when
"...a proceeding by it in respect thereof would be to the
interest of the public...", and in the Raladam case, the
Supreme Court chose finally to take the statute literally.
They ruled that the FTC had no jurisdiction over false ad-
vertising unless they could first prove that that advertising
damaged competition or a competitor, and only then did the
public interest become an issue.
It is obvious that the word "competition"
imports the existence of present or potential
competitors, and the unfair methods must be such
as injuriously affect or tend thus to affect the
business of these competitors--that is to say,
the trader whose methods are assailed as unfair
must have present or potential rivals in trade
whose business will be, or is likely to be,
lessened or otherwise injured. It is that con-
dition of affairs which the Commission is given
power to correct, and it is against that condi-
tion of affairs, and not some other, that the
Commission is authorized to protect the
public. Official powers cannot be extended
beyond the terms and necessary implications of
.In other words, the Commission could protect the public
interest from false and deceptive practices only if these
practices also damaged competition. "Consequently if a
person had a monopoly in a certain field, so that there was
no competition, his acts, no matter how deceptive or mislead-
ing and unfair to the consuming public, could not be re-
strained. Similarly, if all competitors were participating in
the same unfair method, the Commission was powerless to act
for the consumer's protection."17 Raladam left the consumer
"...virtually unprotected by weakening if not actually nul-
lifying the powers expressly delegated to the Commission for
the protection of the public and the consumer."18
As a portion of their ruling in the Raladam case, the
Supreme Court had suggested that "if broader powers be
desirable they must be conferred by Congress. They cannot
be merely assumed by administrative officers; nor can they hb
16FTC vs. Raladam Company, 51 S. Ct. 587 (1931), as in
Commerce Clearing House, Trade Regulation Reports (Commerce
Clearing House, 1942), Section 6125.181, p. 6139.
17Commerce Clearing House, Trade Regulation Reports,
Section 7000, December 5, 1966, p. 11011.
ScICo;rin cr- Clearinqg House, Ticddc '",
(Commerce Cleai-ing !Hour, 1r96) Sccztn 805.29, p. 16.-i.
created by the courts in the proper exercise of their
judicial functions,"l9 so the Commission appealed to Con-
gress, as the Court had recommended.
By August, 1937, a Committee in the House of Represen-
tatives issued the following report on an amendment to the
FTC Act which would rectify the situation:
The words "unfair methods of competition" in
section 5 have been construed by the Supreme
Court as leaving the Commission without jurisdic-
tion to issue cease and desist orders where the
Commission has failed to establish the existence
of competition. In other words, the act is
construed as if its purpose were to protect com-
petitors only and to afford no protection to the
consumer without showing injury to a competitor...
By the proposed amendment to section 5, the Com-
mission can prevent such acts or practices which
injuriously affect the general public as well as
those which are unfair to competitors. In other
words, this amendment makes the consumer, who may
be injured by an unfair trade practice, of equal
concern, before the law, with the merchant or
manufacturer injured by the unfair methods of a
This amendment will also enable the Commission
to act more expeditiously and save time and money
now required to show actual competition and the
injurious effect thereon of the unfair methods in
President Roosevelt responded in the following speech to
Congress in January, 1938, regarding the situation as it
existed following Raladam:
19Raladam, op. cit., p. 6139.
20House of Representatives Report No. 1613, August 19,
1937, concerning Senate Bill 1077, as quoted in Commerce
Clearing House, 3965, op. cit., Section 805.29, p. 1648.
The overwhelming majority of businessmen and
bankers intend to be good citizens. Only a small
minority have displayed poor citizenship by en-
gaging in practices which are dishonest or defi-
nitely harmful to society.
If attention is called to or attack made on
certain wrongful business practices, there are
those who are eager to call it "an attack on all
business." That, too, is willful deception that
will not long deceive.
Let us consider certain facts:
There are practices which most people believe
should be ended: They include...price-rigging and
collusive bidding in defiance of the spirit of the
anti-trust laws by methods which baffle prosecu-
tion under present statutes.
They include high-pressure salesmanship..., the
use of patent laws to enable larger corporations
to maintain high prices and withhold from the public
the advantages of the progress of science....
Another group of problems affecting business,
which cannot be termed specific abuses, gives us
food for grave thought about the future. Generally
such problems arise out of the concentration of
economic control to the detriment of the body
In many instances such concentrations cannot be
justified on the ground of operating efficiency,
but have been created for the sake of securities
profits, financial control, the suppression 'of
competition and the ambition for power over others.
Government has a final reFponsibility for the
well-being of its citizenship. If private co-
operative endeavor fails to provide...relief for
the unfortunate, those suffering hardship from no
fault of their own have a right to call upon the
government for aid; and a government worthy of its
name must make fitting response.21
On March 22, 1938, President Roosevelt signed the Wheeler-
Lea Bill, making "unfair methods of competition and unfair or
21Franklin D. Roosevelt, in a Speech before Congress,
JanuAl.y 3, 1948, as quoted in the Nc: York TiiLE, Jan)uary 4,
193S, p. 16.
deceptive acts or practices in commerce" unlawful. (My
emphasis) On May 21, 1938, it became law.
In an interview with the New York Times, Gilbert H.
Montaque, chairman of the committee on the FTC and anti-trust
laws of the Merchants Association of New York questioned the
latitude that the Commission would have in interpreting the
new law, and pointed out that the Supreme Court must play a
major role as they had in the past, however, "...the task of
establishing in the first instance a common-sense adminis-
tration of these amendments rests squarely on the Conmmis-
sion."22 The National Retail Dry Goods Association commented
that "...it will probably be some time before sufficient
administrative law will be developed to finally determine
the line of demarcation between false advertising and
'imaginative' or so-called 'glamour advertising'."23
Businessmen were right. The value of the new law did
depend on the interpretations of the courts, as had the old
law, but this time the Commission was more successful. In
1941, for example, the Third Circuit Court of Appeals
...wherein the court recognized the Commission's
jurisdiction in cases of unfair trading regardless
22"News and Notes of the Advertising World," New York
Times, March 24, 1938, p. 39.
2 "Stores Warned on Ads," New York Times, Marclr 1F,
1938, p. 37.
or whether or not it is the public in general or
a particular class of competitors whose interest
demands the suppression of the practice complained
of. This recognition of public interest was ap-
proved by Congress in 1938 with the enactment of
the Wheeler-Lea Act. '
The failure to mention competition (in the phrase
unfair or deceptive acts or practices in commerce)
shows a legislative intent to remove the procedural
requirement set up in the Raladam case and the Com-
mission can now center its attention on the direct
protection of the consumer where formerly it could
protect him only indirectly through the protection
of the competitor.24
The Judicial Evolution of the Authority
over Deceptive Practices
Consistently the courts upheld the Commission's author-
ity under the amended Section 5 to protect the public inter-
est without the requirement of any damage to competition.
The Supreme Court had already, in the FTC vs. Klessner, held
that "In determining whether a proposed proceeding will be
in the public interest the Commission exercises a broad
discretion,"25 and now they proved quite willing to let the
Commission, rather than the courts, determine just what
kind of practices would damage it:
After giving weight as is to be accorded the
experience of the Commission, the Court finds
24Pep Boys--Manny, Moe and Jack, Inc., vs. FTC, 122 F.
2d 158 (1941), as cited in Commerce Clearing House, op. cit.,
1965, Section 805.291, p. 1648-1649.
25FTC vs. Klessner, 280 U.S. 19 (1929).
that the Commission's conclusions of law as to
unfairness of practices cannot be said to be
The courts also specified the authority of the FTC in
consumer protection under the amended Act by establishing
some basic rules:
1. It is not necessary for actual deception to take
place before the FTC has jurisdiction:
Bockenstette vs. FTC
It is unnecessary for Commission to find that actual
deception resulted.... 27
Charles of the Ritz Distributors Corporation vs.
...actual deception of the public was not required
to be shown.28
Vacu-Matic Carburetor Company vs. FTC
...cease and desist order was predicated on a find-
ing that representations merely had the tendency
and capacity to deceive.29
2. It is not necessary that the Commission prove knowl-
edge of deception on the part of the businessman:
26Hastings Manufacturing Company vs. FTC, 153 F. 2d 253,
(1946), certiorari denied 328 U.S. 358.
27Bockenstette vs. FTC, 134 F. 2d 369 (1943).
28Charles of the Ritz Distributors Corporation vs. FTC,
143 F. 2d 676 (1944).
29Vacu-Matic Carburetor Company vs. FTC, 157 F. 2d
L & C Mayers Company vs. FTC
A trader's representation may be unlawful under
this section although made innocently.30
Koch vs. FTC
...misrepresentation...does not depend upon good
or bad faith of advertiser.31
3. The intent of a businessman in deceiving the public
Gimbel Brothers vs. FTC
...deliberate effort to deceive is not necessary to
make out a case....32
Ford Motor Company vs. FTC
...the question does not depend upon the purpose of
the advertisement nor upon the good faith or bad
faith of the advertiser.33
4. Nothing less than the most literal truthfulness is
sufficient, and this truth must be clear enough so
that "wayfaring men though fools shall not enter
Charles of the Ritz Distributors Corporation vs.
(Act was not)...made for the protection of experts,
but for the public--that vast multitude which in-
cludes the ignorant, the unthinking and the
30L & C Mayers Company vs. FTC, 97 F. 2d 365 (1938).
31Koch vs. FTC, 206 F. 2d 311 (1953).
3Gimbel Brothers vs. FTC, 116 F. 2d 578 (1941).
33Ford Motor Company vs. FTC, 120 F. 2d 1.75, certiorari
denied, 62 S. Ct. 130.
3Charles of the Ritz, op. cit.
(the)...fact that a false statement may not be
false to those who are trained and experienced does
not change its character, nor take away its power
to deceive others less experienced.35
Parker Pen Company vs. FTC
Commission must protect casual or negligent reader
as well as vigilant and more intelligent and dis-
5. Even the literal truth may in some cases be insuffi-
cient to protect the public from deception:
P. Lorillard Company vs. FTC
To tell less than the whole truth in an advertisement
is a well-known method of deception, and he who de-
ceives by resorting to such methods can not excuse
the deception by relying upon the truthfulness per se
of the partial truth by which the deception has been
Bennett vs. FTC
...deception may result from use of statements which
are not technically false or which may be literally
true, and words will be taken to mean what they are
intended and understood to mean.38
Kalwajty vs. FTC
A statement may be deceptive within meaning of this
section, even if constituent words thereof may be
literally or technically construed so as not to
constitute a misrepresentation.39
36Parker Pen Company vs. FTC, 159 F. 2d 509 (1947).
37P. Lorillard Company vs. FTC, 186 F. 2d 52 (1950).
38Bennett vs. FTC, 200 F. 2d 362 (1952).
39Kalwajty vs. FTC, 237 F. 2d 654 (1956), certiorari
denied,77 S. Ct. 591.
6. If an advertisement can be read to have two mean-
ings, and one of them is false, and misleading,
this ad has the capacity to deceive and is unlawful:
General Motors Corcoration vs. FTC
...advertising tended to mislead and deceive sub-
stantial part of purchasing public into belief that
defendant's "six per cent" finance plan contemplated
simple interest charge of six per cent, per annum
on unpaid balances....40
A. P. W. Paoer Comrany vs. FTC
That more careful observers were not misled by use of
words "Red Cross" and Greek red cross emblem on
toilet tissues and paper towels is immaterial in
determining violation of this section....41
From the above, it becomes easy to see the tremendous im-
pact of the courts in defining and broadening the role of the
FTC with regard to the protection of the public interest.
"Just as they had effectively prohibited the FTC's be-
coming a powerful trust-busting agency, they strongly rein-
forced the Commission's ability to protect the public interest
from unfair or deceptive trade practices. The Commission's
role was finally determined not,by its early proponents, or
even by Congress, but rather by the Courts. How, otheor'.ic:Z,
when the Commission's role was legislatively established by
40General Motors Corooration vs. FTC, 114 F 2d 33 (1940),
ccrtLoari denied, 61 S. Ct. 550.
1.ffirm 1 Cr> rc. Ct. 932.1
-T 41 4 ,
what has been called a law. whose provisions, are "broad,
The Internal Operation of the
Federal Trade Commission
As shown in Diagram 3.1, once the FTC issues a formal
complaint charging violation of some st.;tute, it may be dis-
posed of in one of three ways:
S1. The complaint may be dropped, closed, or rescinded.
2. The complaint may result in the signing of a consent
order, in which the company charged agrees to stop
the practice complained against, without admitting
3. The complaint may result in the issuance of a cease
and desist order, the Commission's strongest ruling,
equivalent to trial and conviction on the charge,
which carries with it a maximum civil oenaltv of
$5,000 per day for each day that the practice con-
tinues beyond the judgement.
Not all of the applications for complaint .received by the
Commission reach the formal complaint stage, however. At
present, the Federal Trade Commission has legislative juris-
diction over, three types of activity: that which viol.tCs
anti-trust statutes under the Commission's control, that which
violates the deceptive trade practices provisions of the
Federal Trade Commission Act as amended by Whcolcr-Lca, and
that which violates any of the other individual statutes which
the FTC is charged with enforcing, including the WVool, Fur,
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and Textile Labeling Acts, the Truth-in-Lending Act, and
the Truth-in-Packaging Act.
Due to this broad responsibility, the Commission yearly
receives large numbers of applications for complaint from
business, consumers, and the Commission staff. Those which
result in formal action, therefore, must be selected, not
only on the basis of legal constraints and the size of the
litigation budget allotted yearly by Congress, but also at
the discretion of the Commission. The impact of these
factors will be analyzed in Chapter Five.
METHODOLOGY AND PRESENTATION OF CASE DATA
Before attempting an analysis of the application of the
Federal Trade Commission Act, it is first necessary to deter-
mine what the Federal Trade Commission's activities in the
deceptive practices area have been. The law is passive, re-
quiring action by the Federal Trade Commission for both
interpretation and enforcement, and only after this action
has occurred does the federal court system come into play to
evaluate and examine the Commission's actions under the
Federal Trade Commission Act. It is at this point that the
adequacy of the legislation is tested. For these reasons,
the primary source for any examination of deceptive practices
enforcement under Wheeler-Lea are the records of the Federal
Trade Commission and the appellate responses to the Federal
Trade Commission's activities.
Information Needed on Federal
Trade Commission Activities
For the purpose of this study, it was necessary to
develop several types of information concerning the deceptive
practices activities of the Commission:
1. A complete listing of all complaints filed by the
Federal Trade Commission.
2. Some means by which those complaints handled under
the deceptive practices provision of the Federal
Trade Commission Act could be distinguished from
the anti-trust activities of the Federal Trade
3. The response of the Federal Trade Commission to
4. Some means of "aging" these deceptive practices
complaints, since the Commission has very limited
injunctive powers, and deceptive practices are al-
lowed to continue until some ruling is made. This
factor is also important, as the age of the com-
plaint may bear on the circuit courts' handling
5. An appeals record of Federal Trade Commission de-
ceptive practices cases to determine how Federal
Trade Commission jurisdiction and interpretations
under Wheeler-Lea have held up in the federal
Sources of Case Data
Upon examination of the literature, it was determined
that there are essentially five public sources of Federal
Trade Commission case information:
1. The Federal Trade Commission Annual Report, espe-
cially the more complete Documents Edition
which is sent to those libraries which serve as
federal government depositories.
2. Federal Trade Commission Decisions, the official
report of the Commission's litigation, which is
1Diagram 3.1 shows the relationship of Federal Trade
Commission decisions to the federal court system, and the
ways in which cases move to ultimate resolution.
published by the U. S. Government Printing Office,
in cooperation with the Federal Trade Commission.
3. Federal Trade Commission Statutes and Decisions,
a somewhat less complete record of the Commission's
activities, which is bound together with the complete
text of the statutes under which the Commission op-
erates. This too is published by the U. S. Govern-
ment Printing Office in cooperation with the Federal
4. The Commerce Clearing House publication, Trade
Regulation Reporter, Volume III; section entitled,
"Federal Trade Commission Docket of Complaints."
5. United States Code, Annotated, Title 15, Section 45.
This source contains brief excerpts from certain
"landmark" decisions of Commission cases which have
served to clarify the terms of the legislation under
which they were rendered, gave judicial interpreta-
tion of the role of the Commission, and set precedent
for later decisions.
Of the above sources, the one which was most usable and
best met the informational requirements of this study was the
"Federal Trade Commission Docket of Complaints" as published
in the Commerce Clearing House Trade Regulation Reporter.
This source contains a chronological listing of all com-
plaints docketed under all statutes enforced by the Federal
Trade Commission, the statute under which the complaint was
made, the type of charge,2 the date of issuance of the com-
plaint, the Federal Trade Commission's method of resolving
the complaint, date of resolution, and the appellate record,
2Due to the fact that the Federal Trade Commission pub-
lishes no separate record of unfair and deceptive practices
Procedure for Gathering
Upon securing the Docket of Complaints, the deceptive
practices cases were separated from the rest.
First, all cases brought under statutes other than the
Federal Trade Commission Act were listed by docket number
and removed from the cases under study.
Next, those cases listed as violations of the Federal
Trade Commission Act were broken down into three categories
--Restraint of Competition, Deceptive Practices, and
"Other", in the following manner:
Restraint of Competition cases include complaints
2. Conspiracy to monopolize
3. Price fixing
4. Tying agreements
5. Illegal payment, or solicitation of brokerage fees
cases, this feature was particularly valuable. This
designation made it possible, though time-consuming, to
separate the cases into three categories:
a) Deceptive practices cases prosecuted under Wheeler-
b) "Special" deceptive practices cases brought under
the Wool, Fur and Textile Labeling Acts, the Flammable
Fabrics Act, Truth in Lending, and Truth in Packaging.
c) Anti-trust cases.
Thus, it was possible for the author to separate the
cases without any need on her part to make interpretive
judgements of legal terminology.
7. Price discrimination
8. Illegal acquisitions
Deceptive practices cases include complaints charged
under the Federal Trade Commission Act, and charging any
form of false advertising and/or misrepresentation. A list-
ing of the docket numbers of all deceptive practices cases
can be found in Appendix A of this study.
The "Other" category consists of a separate listing of
cases docketed in later years under the Wool Labeling Act,
Fur Labeling Act, Textile Labeling Act, Flammable Fabrics
Act, and Truth in Lending Act. This category is necessary
for the purpose of comparison, as these laws protect against
deceptive practices in particular industries which were pre-
viously included among the general prosecutions of deceptive
practices under the Federal Trade Commission Act. During the
time period under study, 1938-1970, no cases were docketed
under the Truth in Packaging Act.
Once the docket numbers of the deceptive practices cases
were determined, each case was "aged", by determining the
passage of time between issuance of the complaint and the
Commission's initial disposition, and the types of disposi-
tion were tabulated. Next, the appellate record of each case
was also examined and tabulated. The result is the following
group of tables and graphs which describe the Federal Trade
Commission's deceptive practices activities for the first
thirty-three years of Wheeler-Lea.
Means of Analysis
In Chapter Five these fluctuations will be analyzed in
the following manner:
The case data, as presented in Chapter Four, is divided
into four categories:
1. The number of deceptive trade practices complaints
2. The initial disposition of these complaints by the
3. The appellate record of the Commission's judgements
of these complaints in the Federal courts.
4. The length of time required by the Commission to
dispose of deceptive practices complaints
The analysis will consist of an explanation of the
fluctuation of activity in these categories through their
associations with three sets of factors, internal, external
economic, and external political, which Chapters One-Three
have suggested ought to be important.
Factors internal to the Commission include:
1. The FTC's Deceptive Trade Practices Litigation
Budget, deflated by the Consumer Price Index, and
expressed in constant, 1967 dollars.
2. The FTC's Anti-trust Caseload. It is suggested that
in years when there is a heavy emphasis on anti-
trust, less of the Commission's scarce resources,
time, personnel, etc. would be available to combat
3. The Commission's "Other" Caseload, which is com-
posed of complaints alleging violation of the Wool,
Fur, or Textile Labeling Acts, the Flammable Fabrics
Act, or the Truth in Lending Act. This factor may
be important for the same reasons as the Anti-
4. The complexity of the complaints in the deceptive
practices area which the Commission has filed in a
given year. As a proxy for this variable, this
study will use the percent of complaints from a
given year which went on into the appellate courts.
In addition to these internal factors, Chapter Three
suggests some external economic variables which might effect
deceptive practices activity:
1. Advertising expenditures expressed as a percentage
of retail sales. Comanor and Wilson, and Bain,
among others, suggest that as advertising expense
increases in proportion to sales, the amount of
persuasive advertising increases, thus they feel
that the probability of deceptive advertising also
2. The yearly percentage change in the Consumer Price
Index. This is used as a reflector of increasing
or decreasing prices for consumer goods.
3. The level of unemployment. This is used as a proxy
for changes in market concentration, as in periods
of rising unemployment, we would expect smaller
firms to fail, thereby increasing concentration
Beyond these two groups of factors, it has been sug-
gested that the FTC responds to political pressure, so two
political variables have been introduced:
1. The number of Democrats in Congress. It was thought
that this factor might effect the Commission
directly through their budget, and indirectly
through philosophical atmosphere, since the Demo-
cratic party claims to be more friendly to con-
sumers, and less friendly to big business than the
2. The party of the President.
Presentation of Case Data
Total Commission Complaint
. The yearly breakdown of the Federal Trade Commission's
Docket of Complaints from 1938-1970 (Appendix C) shows that
in the first years of the Federal Trade Commission's decep-
tive practices authority, the number of deceptive practices
complaints filed by the Commission was relatively large, and
composed quite a significant majority of the Commission's
activities, fluctuating at a rate which closely paralleled
fluctuations in total complaint issuance. In the 1940's,
when the Commission's total complaint activities dropped
sharply due to its additional war-related responsibilities,
the number of deceptive practices cases dropped proportion-
ally, but as the total number of complaints recovered slowly
into the mid-1950's, deceptive practices did not keep pace.
Beginning in 1954, the Commission's total complaint activi-
ties began a significant yearly increase culminating at an
all-time high in 1960. This burst of activity was not sus-
tained, however, and with the exception of a brief surge in
1962-1963, the total number of complaints dropped off, and
has continued to fluctuate around a level approximately equal
to one third that of their peak 1960 activity.
The yearly distribution of complaints docketed, when
expressed on a percentage basis (Appendix D) shows how. decep-
tive practices activity fared proportionately as total com-
plaints fluctuated. After maintaining a fairly steady rate
of about 80 percent from 1938 until 1946, in the late 1940's
the level of deceptive practices complaints dropped rather
substantially to a low of 46.7 percent in 1947, as the Com-
mission shifted a greater portion of its efforts into the
restraint of competition area. This trend did not continue,
however, and from 1948 throughout the early 1950's, the is-
suance of deceptive practices complaints revived somewhat,
and sustained a level well in excess of 50 percent of total
complaints, though this level was not as high as it had been
in the initial years. Entering the second half of the
decade, however, deceptive practices activity decreased again
and since 1955, with the exception of one year, continued at
a rate less than 50 percent of the Commission's complaints,
fluctuating between a low of 27 percent in 1965 and a high of
47.2 percent in 1957, with an average rate of activity in the
1960's of between 35-40 percent. In contrast with the period
of the late 1940's, when deceptive practices complaints were
replaced by the Commission's increased interest in restraint
of trade cases, from 1953-1970, the Commission showed a
rising interest in cases in the "Other" category, thus de-
tracting their efforts away from deceptive practices.
This "Other" category is composed of Wool and Fur
Labeling cases, with a small group of Textile and Flammable
Fabrics cases, and a sprinkling of Truth in Lending cases
(less than ten in total). The Wool, Fur, and Textile Label-
ing cases, forming the great bulk of this group, are viola-
tions of statutes which, like Wheeler-Lea, deal with misrep-
resentation and false advertising. They are spinoffs of
Wheeler-Lea, dealing with specific industries, and they are
related to the statute under study in that cases of this
type, prior to the passage of specific legislation, were
prosecuted in what seemed to be a very successful manner
under the Federal Trade Commission Act, although not in the
same large numbers.
Disposition of Deceptive
Numerical data concerning the initial disposition of
deceptive practices complaints by the Commission (Appendix E)
do not indicate that any difficulty was encountered in re-
solving complaints once issued. Both the number and rate of
complaints closed or dropped is much lower in more recent
years. This same data expressed as percentages (Appendix F)
do indicate, however, a dramatic drop in the usage of cease
and desist orders, accompanied by a proportional increase in
the consent procedure as a means of disposing of deceptive
practices complaints. This is most probably an efficiency
measure on the part of the Commission staff, as a consent
order has the same force under law, once it is accepted by
the defendant, as a cease and desist order, yet the proce-
dure for reaching a consent order is much less time-consuming
than that necessary to hand down a cease and desist. For
example, in the case of those complaints listed in Appendix
B, the Consent Docket, the date of issuance of the complaint,
and the date on which the consent decree was accepted, is one
and the same.
The fact that consent orders require voluntary accept-
ance by the defendant in deceptive practices cases raises
the possibility that the tremendous increase in the use of
consent orders indicates the increased, rather than dimin-
ished, recognition by the business community of the Federal
Trade Commission's authority under Wheeler-Lea to regulate
The Appellate Record of Deceptive
On the basis of Appellate Court data (Appendix G), the
Commission's record on review of deceptive practices cases
looks extremely good, and shows no lack of ability on the
part of the Commission to sustain its deceptive practices
rulings in the Federal Courts. In fact, though the data show
a slight increase in the percent of deceptive practices cases
which were appealed, they do not indicate any drop in the
percentage of favorable rulings (Appendix H).
Age of Complaints at
According to a distribution of the age of deceptive
practices complaints at the time of the Commission's initial
decree (Appendix I and J), the majority of cases are proc-
essed much more rapidly in later years than in earlier years.
Therefore, if the length of time needed to process a complaint
is any indication of difficulty under the statute, this dif-
ficulty more likely occurred in the early years of use, while
the courts were clarifying the terms and interpretations of
the statute. This possibility is also borne out by the de-
crease in complaints dropped or closed in recent years.
ANALYSIS AND CONCLUSIONS
The Federal Trade Commission's litigation role in the
area of deceptive trade practices enforcement under Section
5 of the Federal Trade Commission Act has changed in the
Analysis of the Dependent Variables
Deceptive Practices Complaints
The presentation of case data in Chapter Four illus-
trates a sizable amount of fluctuation in the Federal Trade
Commission's (FTC) handling of anti-deceptive practices lit-
igation throughout the period 1938-1970. These fluctuations
are compared below with variations in the internal, external
economic, and political factors.
The first dependent variable under consideration is the
number of deceptive practices complaints issued by the FTC.
When compared with the three categories of independent
variables, the following associations are shown to exist:
The number of deceptive practices complaints filed yearly is
shown to vary directly with the level of Anti-trust com-
plaints, and the level of "Other" complaints, while it
varies inversely with the level of difficulty. In the case
of the remaining internal factor, the deceptive practices
litigation budget, the relationship is also inverse, or
negative, rather than positive as has been suggested in the
literature, indicating that on the whole, as the deceptive
practices litigation budget increased, the number of decep-
tive practices complaints docketed went down. These four
variables, when regressed against the number of deceptive
practices complaints, generate an R2 of .8777.
It appears that the level of deceptive practices com-
plaints filed fluctuates independently of any of the external
economic variables under consideration: advertising as a
percent of retail sales, the change in the consumer price
index, and the level of industry concentration.
REGRESSION COEFFICIENTS OF THE RELATIONSHIPS
BETWEEN THE NUMBER OF DECEPTIVE PRACTICES
COMPLAINTS AND THE INDEPENDENT VARIABLES
AT Other Number Percent
Coin- Com- Ap- Ap-
Year Budget plaints plaints APS CPI peals pealed
plaints .038 -.279 .720 .498 .410 -.214 .449 -.145
On the basis of analysis of fluctuations in the number
of deceptive practices complaints issued by the Commission in
a given year, there are several contradictions with what
the literature indicated might be expected. For example,
consumerists and the FTC have indicated that in the area of
deceptive practices enforcement, the FTC's budget is inade-
quate to the task. However, the small relationship shown
between deceptive practices litigation budget and the level
of deceptive practices complaints filed is a negative rather
than a positive one. In addition, writers in the history of
consumer movements have indicated that consumer complaints
become more numerous in periods of rising prices. Yet the
FTC's activity shows no relation to changes in the Consumer
The industrial organization economists quoted in Chapter
Two argue, both on the basis of theoretical manipulations and
empirical data, that the level of persuasive advertising, and
therefore the level of deceptive advertising, fluctuate in
conjunction with changes in market structure variables. If
this is in fact true, the FTC's enforcement record does not
reflect it, since no relationship between trends in the
FTC's level of deceptive practices complaints and the market
structure indicators used was evident.
Figures 5.1, 5.2, and 5.3 reveal the impact of the
external political situation on the activities of the FTC.
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There is a distinct, linear, negative trend in the number
of deceptive practices complaints from 1938 to the early
1950's, during the terms of Presidents Roosevelt and Truman,
both Democrats. The association then stabilizes briefly in
the early 1950's. However, from 1952 until 1960, through-
out the term of President Eisenhower, Republican, there is
once again a steady, linear increase, culminating in a peak
of activity in 1960. The yearly number of complaints then
begins a steady decline during and throughout the Democratic
Administrations of Presidents Kennedy and Johnson. In 1968,
it begins to climb again with the election of President
The impact of this finding becomes more important when
the anti-trust activity, and "Other" activity are examined
in a similar manner. Anti-trust activity shows the same
type of fluctuation. The number of complaints decreases
from 1938 until the late 1940's, a period of relative
stability until 1952, a steady increase until 1960, followed
by an almost constant drop in activity until 1968, when it
seems to stabilize at a low level.
"Other" complaints follow the same trend as anti-trust
and deceptive practices activity. They decrease until the
late 1940's, stabilize until 1952, increase from 1952 to a
peak in 1960, decrease from 1960 to around 1968, and then
begin to increase again. The sizable total increase in
"other" complaints in the mid-1950's may be explained by
the addition of new, separate areas for complaint: Fur
Labeling in 1954, Flammable Fabrics in 1955, and Textile
Labeling in 1961.
The fact that the FTC's work in anti-trust, "other",
and deceptive practices increases and decreases almost simul-
taneously indicates rather clearly that activity in one area
does not detract from activity in another area. Rather all
activities of the Commission may be affected in a similar
Disposition of Complaints
Figure 5.4 illustrates the Commission's shift in
emphasis from the cease and desist order to the consent
order. Whereas from 60-90 percent of all complaints issued
before 1953 resulted in cease and desists, after 1956, from
65-88 percent of all complaints issued were resolved by
consent order, indicating a clear shift in the Commission's
This shift in policy reflects changes in both the at-
titude of the Commission and of business. First, this indi-
cates that the Commission had begun to see its role as more
interpretive than punitive, as the consent order, while it
is as binding as a cease and desist order, carries no fine
and requires no admission of guilt. In addition, the consent
INTERNAL COMPLAINT DISPOSITION
BY THE FEDERAL TRADE COMMISSION
CEASE AND DESIST
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.,,2 \ I
\ V CONSENT
40 45 50 55 60
order is voluntarily accepted by the firm in question, making
it a time-saving measure, as the burden of proof placed upon
the Commission staff is not as great as in the case of the
cease and desist order. Finally, the apparent willingness
of business to voluntarily accept consent orders indicates
that firms have recognized the authority of the FTC to pro-
hibit certain types of promotional activities.
The percentage of complaints dropped, rescinded or
closed also is of importance, since these essentially
represent the loss of cases decided internally. The only
alternative to a case being dropped or closed is some type
of "guilty" judgement, either a cease and desist, or consent
order. Figure 5.5 shows that the percentage of cases dropped
or closed increased from 1938 throughout the war years of the
early 1940's as the Commission was called upon to perform
additional defense-related activities. In 1947, it began to
drop substantially, reaching an all-time low of 3.4 percent
in 1953, followed by a period of increase in the second half
of the 1950's, and then generally decreasing throughout the
Regression analysis of the percent of complaints dropped
or closed shows an overall negative trend, indicating that
over time, the Commission's ability to lodge a "guilty" ver-
dict of cease and desist or consent has increased relative
to the number of complaints filed. Regression also shows an
RELATIONSHIPS BETWEEN THE NUMBER OF DECEPTIVE PRACTICES
COMPLAINTS DROPPED OR CLOSED AND THE INDEPENDENT VARIABLES
Year Budget Appealed Appeals
Dropped/closed -.657 -.478 .072 -.231
Complaints Complaints DPS DPN Age
Dropped/closed -.614 -.128 -.215 -.088 .745
inverse relationship (=-.6573) between the percentage of
cases dropped or closed and the budget. Finally, there is
an inverse relationship between the percentage dropped or
closed and the number of complaints filed each year.
The largest positive correlation shown (r=.7453) was
between the percent of complaints dropped or closed, and the
average age of complaints at the time the Commission handed
down a ruling. This reveals that in the years during which
the Commission handled complaints more rapidly, fewer re-
sulted in being dropped or closed.
The remaining negative relationship, although very
slight (=-.2311), was between the percent of cases dropped
or closed and the percent of cases which went on to be ap-
pealed. Thus it appears that, to a small extent, when fewer
complaints are dropped or closed by the Commission, more of
the Commission's decisions are appealed into the Federal
Diagram 3.1 shows that if business is not satisfied with
an FTC decision, they may seek redress through the U. S.
Circuit Court of Appeals.
Percent of Cases Appealed.--The percentage of decisions
appealed, as shown in Figure 5.6, generally shows what ap-
pears to be a fairly random scatter. The percent of cases
appealed in most years range from 10-25 percent of all cease
and desist and consent orders issued for that year. However,
from 1965 to 1970, when the Commission's complaint load was
lower than at any time since World War II, the average per-
cent of judgements appealed is higher, on the average, than
for any other period in the FTC's history. This change is
also demonstrated by the 1965-1970 average, equaling 22.0
percent, while the average for all other years, excluding
1964, equals 12.27 percent.
To explain the activity in the percent of deceptive
practices decisions appealed, this percentage was regressed
against a number of factors, both internal and external
economic, to determine which of these factors, if any, had
any association with the percent appealed. The factors
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