Unfair Trade Practice

An unfair trade practice refers to any unauthorized activity or deceptive method employed by businesses that harm consumers, competitors, or violate public policy. These practices are opposed and regulated under various national and international laws to promote a fair marketplace. Unfair trade practices may disadvantage competitors, mislead consumers, and distort market dynamics. They are often categorized under anti-competitive strategies, misleading advertisements, or other unethical commercial behaviors.

Definition

Unfair trade practices encompass a broad spectrum of activities considered deceitful, fraudulent, or unethical. These activities exploit consumers’ trust, making it difficult for them to make informed decisions. The Federal Trade Commission (FTC) in the United States defines an “unfair trade practice” as:

A practice that causes or is likely to cause substantial injury to consumers.
The injury is not reasonably avoidable by consumers themselves.
The injury is not outweighed by benefits to consumers or to competition.

Other nations have similar definitions and regulatory frameworks intended to curb the prevalence of unfair trade practices in their markets.

Deceptive Methods

1. Misleading Advertising

This involves providing false, exaggerated, incomplete, or misleading information about a product or service. Misleading advertisements can take various forms:

False Claims: Advertising a product as having features or benefits it does not possess.
Hidden Fees: Promoting a product without disclosing additional costs that a consumer might incur.
Bait and Switch: Advertiser lures customers with an attractive offer and then persuades them to purchase a more expensive product once they are in the store or on the website.

2. Predatory Pricing

Predatory pricing entails setting prices excessively low to eliminate competitors from the market and create monopoly-like conditions. It usually involves selling products below cost for an extended period, causing financial strain on existing or new competitors:

Below-Cost Pricing: Selling products at a loss with the strategic intent to drive competitors out.
Recoupment Strategy: After competitors are eliminated, raising prices significantly to recover losses.

3. Exclusive Dealing and Tying Arrangements

Exclusive dealing occurs when a supplier insists that the dealer only buys their goods and not those of competitors. Tying arrangement is when a customer is forced to buy a secondary product as a condition of purchasing a desired primary product:

Exclusive Contracts: Contracts obliging businesses to buy only from the supplier, restricting market competition.
Bundling: Requiring customers to buy combined products instead of individually, reducing consumer choice.

4. Misrepresentation and Fraud

Misrepresentation involves deliberately providing incorrect or misleading information about the nature, quality, or state of a product:

Product Quality: Misleading customers about the quality, origin, or ingredients of the product.
False Endorsements: Using fake testimonials or endorsements to enhance credibility falsely.

5. Counterfeiting and Trademark Infringements

This entails producing or selling imitation products without authorization, often leading to consumer deception and potential harm:

Fake Goods: Selling counterfeit products as genuine, impacting brand reputation and consumer trust.
Trademark Violation: Unauthorized use of another brand’s name, symbol, or trade dress to mislead consumers.

Examples

1. Volkswagen Emissions Scandal

Volkswagen Group, a well-known automobile manufacturer, was found guilty of fitting software in diesel engines to cheat on emissions tests. Known as “Dieselgate,” this scandal uncovered that millions of vehicles worldwide emitted higher-than-approved levels of pollutants:

Deceptive Software: The installed software detected when cars were undergoing emissions tests and altered performance to meet regulatory standards.
Environmental Impact: Caused far-reaching environmental harm and led to a loss of public trust in the brand.
Legal Consequences: Resulted in billions of dollars in fines and lawsuits.

2. Wells Fargo Account Scandal

Between 2011 and 2016, Wells Fargo employees created millions of fake accounts to meet sales targets and earn bonuses. Customers were unknowing victims, resulting in unauthorized fees and damaged credit scores:

Unauthorized Accounts: Employees created fake accounts without customer consent.
Customer Harm: Lead to unexpected charges, services activation, and impacted credit scores.
Government Penalties: Significant fines and regulatory actions were imposed on Wells Fargo.

3. Martin Shkreli and Price Gouging

Martin Shkreli, former CEO of Turing Pharmaceuticals, became infamous for hiking the price of a life-saving drug, Daraprim, by over 5,000% overnight. This extreme price increase rendered the medication unaffordable for many:

Exorbitant Price Hike: Increased the price of Daraprim from $13.50 to $750 per tablet.
Public Backlash: The price hike sparked widespread outrage and discussions on pharmaceutical industry practices.
Regulatory Scrutiny: Resulted in various legal actions and regulatory reviews.

4. Enron Accounting Scandal

Enron Corporation, once a top American energy company, employed deceptive accounting practices to hide its true financial health. Known as one of the biggest corporate frauds in history, it led to the company’s bankruptcy in 2001:

Off-Balance-Sheet Entities: Used special purpose entities (SPEs) to hide debt and inflate profits.
Financial Illusion: Misled investors and employees about the company’s actual profitability.
Regulatory Aftermath: Led to new regulations, like the Sarbanes-Oxley Act, designed to improve corporate governance and financial transparency.

5. Pyramid Schemes

Pyramid schemes are fraudulent investment scams promising high returns that rely on recruiting new investors to pay returns to earlier investors. Such schemes tend to collapse, causing significant financial losses to most participants:

Recruitment Focus: Emphasis on recruiting new members to sustain payouts.
Unsustainable Model: Eventually collapse as recruitment fails to keep up.
Legal Prohibition: Banned in many countries with heavy penalties for organizers.

Regulatory Frameworks

Regulations against unfair trade practices are enforced by governmental bodies and international organizations:

1. Federal Trade Commission (FTC)

The FTC is a U.S. federal agency whose goal is to protect consumers and ensure a strong competitive market by regulating anti-competitive behavior and unfair business practices.

Consumer Protection Laws: Enforces laws that promote consumer rights and prevent fraud.
Business Education: Provides guidance to businesses on how to remain compliant with regulations.

2. International Trade Administration (ITA)

The ITA is part of the U.S. Department of Commerce and works to reduce barriers to foreign markets and enforce legal provisions that ensure fair trade policies.

Anti-dumping Actions: Implements measures against illegal dumping and subsidies.
Trade Agreements: Works on trade agreements to protect market fairness.

3. Competition and Markets Authority (CMA)

The CMA is a British government body responsible for strengthening business competition and curbing unethical business practices in the market.

Market Investigations: Conducts in-depth market investigations and imposes penalties if needed.
Public Education: Raises awareness about consumer rights and anti-competitiveness.

4. European Competition Network (ECN)

The ECN is a cooperative network of competition authorities within the EU, ensuring that competition laws are consistently applied across the Union creating a fair market environment.

Collaboration: Promotes cooperation among member regulatory bodies.
Harmonized Enforcement: Ensures laws are uniformly enforced.

Conclusion

Unfair trade practices disrupt market dynamics, harm consumers, and create an unlevel playing field for businesses. Regulatory bodies worldwide actively work to detect, prevent, and penalize such malicious activities through stringent laws and constant vigilance. Businesses must adhere to ethical practices to maintain consumer trust and foster a competitive, fair marketplace.