the FTC— they have little incentive, since the FTC cannot give them
reparations— and the Commission has never developed effective machinery
for independently uncovering frauds. And by hypothesis, in an area
where the private market is failing to supply correction information,
consumers frequently will not realize that they have been defrauded.

If this is a correct description of the FTC's emphasis in the fraud
area, and some corroborative evidence will be provided in a moment, the
FTC is doing little or nothing that is not within the competence of
courts. But the FTC's fraud activities are not merely redundant. Ordi-
narily, a firm cannot conduct a lawsuit against a competitor or potential
competitor without incurring costs comparable to those of its opponent.
This rough equality of burdens is a deterrent to the use of the litigation
process to harass. Proceeding against a competitor by way of a complaint
to the Trade Commission, in contrast, is a method of imposing the cost
of litigation on the competitor at no cost to the complainant. All of the



30See FTC 1960 Ann. Rep., p. 82.



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costs of prosecution are borne by the FTC; all of the costs of defense
by the respondent. The complainant pays nothing. This arrangement
creates an incentive to engage in litigation designed purely to suppress
competition, for its enables the complaining party to create a barrier to
entry in its exact technical sense: a condition that imposes upon a new
entrant a cost not borne by firms already in the market.*^

1 emphasize the effects of the unequal burdens of FTC litigation on
entry because it is the new firm or, what is analytically quite similar,
the new product sold by an existing firm that is most vulnerable to a
charge of deceptive marketing. A new product is generally a substitute
for an old one, and to market the new product successfully the seller
must convince consumers that it has all or many of the best features of
the old, besides being cheaper or otherwise preferable. This gives an
opening to the seller of the old product to argue that its attributes are
being falsely ascribed to the new. Such arguments are likely to fare
better before an administrative agency that conceives its mission as one
of protecting fools from being misled than before a court that views its
mission as the impartial resolution of disputes between an old and a
new seller.

A perusal of FTC rules and decisions reveals hundreds of cases in
which prohibitory orders have been entered against practices, not in-
volving serious deception, by which sellers have attempted to market a
new, often cheaper, substitute for an existing product. Forced disclosure
of the country of origin of watchbands, Christmas tree bulbs, radio
components, and scores of other products; prohibition of literally true
designations on the ground that they might cause confusion with the
same product made by a different process (e.g., charcoal made out of
corn cobs); broad prohibitions against comparisons with more expensive
substitutes; forced disclosure of facts that are irrelevant to product per-
formance but might alarm consumers (for example, that motor oil has
been "reprocessed"): these and other unworthy categories of proceeding
constitute a significant part of the FTC's total output over the years.^^
And, in contrast to the antitrust area, reviewing courts have deferred
broadly to the judgment of the Commission in fashioning standards of
deception (e.g., the fool test), doubtless because the unfair-or-deceptive
standard of section 5 of the Federal Trade Commission Act, unlike
antitrust provisions, is a purely administrative standard.



siStigler, The Organization of Industry 67 (1968) .

32Many of these cases are discussed in Alexander, honesty and competition (1967)



452
110

Partial confirmation of the judgment that the FTC's efforts in the
consumer-fraud field are systematically misdirected is furnished by a sur-
vey of the more than 200 decisions and orders in this field issued by the
Commission during the 12-month period, July 1, 1962, to June 30, 1963,
scanned earlier in connection with the agency's antitrust work. In more
than one-third of the cases, there was, so far as one can determine from
the allegations of the complaint or, in the few litigated cases, the Com-
mission's opinion, no fraud or unfairness worthy of the name in-
volved. Some of these cases turn on technical issues— the efficacy of
vitamin or iron supplements, the salubriousness of yogurt, the efficacy
of a "six month" floor wax— on which experts differ. Others involve
payola, which is a form of commercial bribery and has nothing to do
with fraud; still others, the use of games of chance to sell merchandise.
A few involve the practice of collection agencies in smoking out elusive
debtors by announcing that a reward or bequest awaits the individual
whom they are trying to run to ground. A number of cases involve
nondisclosure of the foreign origin of badminton-set components, watch-
bands, ball bearings, and other products. In one case manufacturers
of domestic substitutes were called to testify that consumers prefer
American-made products! In no case was there a suggestion that foreign
materials or workmanship were inferior in quality to domestic, or other-
wise distinguishable save in being cheaper.

A number of the cases in this group involve allegations of fictitious
pricing. A sale price is represented to be lower than the seller's regular
price or the manufacturer's preticketed or list price. Judging from the
cases in which the Commission wrote an opinion, the seller's representa-
tion is usually accurate— the sale price is lower than the former price; the
compared price is the bona fide manufacturer's list price— and the Com-
mission's complaint is that the seller did not have many sales at the
former price, or that, due to widespread discount selling in the local area,
the manufacturer's list price is not a common selling price there. How-
ever, such representations are not only literally truthful, but unlikely to
be understood by consumers in the strained sense insisted upon by the
Commission. Consumers realize that price reductions are commonly mo-
tivated by the seller's inability to move the item at the former price and
that many products are never sold at the manufacturer's list price. These
cases serve no purpose other than harrassment of discount sellers.

Among the many other cases in which it is hard to believe that a sub-
stantial number of consumers would be fooled are cases in which the
Commission orders a seller of dime-store jewelry to disclose that its



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"turquoise" rings do not contain real turquoises, orders a toy manufacturer
to disclose that its toy tank does not fire projectiles that actually explode,
orders the maker of "First Prize" bobby pins to change the name because
a consumer might think his purchase would make him eligible to enter
a contest, and orders a manufacturer of shaving cream to cease represent-
ing that his product can shave sandpaper without first soaking the sand-
paper for several hours. The representation that a product is "guaran-
teed" is interpreted by the Commission, though I doubt by any con-
sumer, to mean fully guaranteed; furthermore, the term is deemed mis-
leading per se unless all of the conditions of the guarantee are printed in
the ad. "Free," as in "buy one and get one free," means, to the Commis-
sion, and only to the Commission, a true gratuity. The practice of offer-
ing a cheap product in order to get a hearing from the consumer and
then trying to switch her to a more expensive one is condemned even
where the seller appears perfectly willing to sell the cheaper product if
the consumer is unconvinced by his spiel.

In another one-third or so of the year's consumer-protection cases, if
there is any fraud, and my guess is that typically there is none, the private
legal remedies for the wrong seem plainly adquate and there is no excuse
for expending public funds. This group includes cases of passing off one
product as something else and of disparagement of competitors. Typical
are false claims that a product is "stone china" or "whole cowhide" or
meets the standards of the Aluminum Window Manufacturers Associa-
tion. The trade association composed of sellers of the genuine article
article should have no difficulty obtaining an injunction in a private suit.
Other cases involve sales not to consumers but to business firms, or to
businessmen qua businessmen, who should be held responsible for pro-
tecting themselves against deception, either by the exercise of normal
caution or by invoking the tort and contract remedies on which business
enterprises usually rely in purchasing. The remaining cases in the group,
and the vast majority, are those under the Fur Products Labeling Act, the
Wool Products Labeling Act of 1939, and the Textile Fiber Products
Identification Act.^^ Sellers of fur, wool, or textile products who resorted
to fraud could be dealt with under section 5 of the Federal Trade Com-
mission Act. The purpose of the specialized statutes, as disclosed by their
terms and the legislative history,^^ is less to combat fraud than to protect
the trademarks and goodwill of high-grade furs, wools, and textile fibers
against infringement or dilution by sellers of cheap substitutes. Judging



3315 U. S. C. 69 (1964) ; 15 U. S. C. 68 et seq. (1964) ; 15 U. S. C. 70 (1964)
34Cited in the discussion of the Bureau of Textiles and Furs in Part Vj\. of the
majority report.



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from the cases in my sample, much of the Commission's enforcement
activity under these statutes consists of springing traps on the unwary:
sellers are enjoined for failing to label natural mink "natural"; for using
abbreviations instead of the full name; and for other misdeeds of compar-
able gravity. My point, however, is not that the Commission's enforce-
ment of these curious laws (which it helped get enacted)-^^ is frequently
aberrational but that the policing of trademarks and quality standards is
a job for sellers and their trade associations rather than for the govern-
ment.

Another group of cases does not involve fraud or information at all.
They are cases under the Flammable Fabrics Act,^^ a safety statute,
curiously lodged with the FTC, which forbids the sale in interstate
commerce of dangerously flammable fabrics. A number of other cases
involve hard-core fraud where, if the allegations of the complaint be
believed, the number and blatancy of the misrepresentations, combined
with the evasive character of the respondent's operations, indicate the
kind of malice or wilfulness (in the legal sense of those terms) that
would justify criminal proceedings under the federal mail-fraud statute^''
or state criminal fraud laws.^s These are the freezer-plan, correspond-
ence-school, and other mail-order or door-to-door frauds that have long
been the staple of the Commission's fraud docket. The respondents in
these cases seem thorough rogues, and I would be atonished if the
feeble weapons at the Commission's disposal had much effect on them
beyond mild harassment and perhaps inducing some to abandon inter-
state commerce and prey on intrastate commerce instead.

That leaves a bare handful of cases in which Commission action may
have served a useful purpose, although knowledge of the true facts might
lead one to revise this estimate, and in only one case is it probable that
private legal remedies would be inadequate. Thus we find cases (not
marked by evidence of wilfulness) where a seller falsely claimed that a
fabric had been imported from Italy; where the length of a tape was
misrepresented; and where one brand of bread was falsely advertised as
lower in calories than other breads. And these are instances where cor-
rective action against the deception could probably be left to competitors.
There is, however, an interesting case in which cheap jewelry was repre-



35See e.g., Hearings on H. R. 2321 before a Subcomm. of the H. Comm. on Inter-
state and Foreign Ckjmmerce, 82d Cong., 1st Sess. 8 (1951) .

3615 U. S. C. 1191 et seq. (1964) .

3718 U. S. C. 1341 (1964).

38Collected in Note, the Regulation of Advertising, 56 Colum. L. Rev. 1018, 1098-
1111 (1956).



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sented as goldplated, when in fact a minute layer of gold had been
applied by electrolysis. At first blush, one might think that this, too,
is a case where competing sellers, sellers of real goldplate, can be relied
upon to correct the deception— until one remembers that the people who
buy the cheap jewelry in question may not be potential customers of
real goldsmiths.

In fiscal year 1963, one is forced to conclude, the FTC bought
precious little consumer protection for the more than $5 million that it
expended in the area of fraudulent and unfair marketing practices,^"
and the many millions more that it forced the private sector to expend
in litigation and compliance. Besides wasting a good deal of money in
tilting at windmills, the Commission inflicted additional social costs of
unknown magnitude by impeding the free marketing of cheap substitute
products, including foreign products of all kinds, fiber substitutes for
animal furs, costume jewelry, and inexpensive scents; by proscribing
truthful designations; by harassing discount sellers; and by obstructing
a fair market test for products of debatable efficacy.

Before leaving the subject of fraud and the FTC, I should like to
say a word about the extent of deception in sales to poor people. The
majority report of this committee recommends that the FTC give more
emphasis to the protection of poor people from fraud. I am far from
satisfied with the evidence that has thus far been adduced to support
the proposition that fraud is rampant in the urban slums. It consists,
for the most part, of unverified and often incredible assertions by dis-
satisfied consumers in testimony before legislative committees or in
interviews.'**^ Nor is it immediately clear why fraud should be prevalent



39FTC 1963 Ann. Rep.

40See items cited in section V.A. of the majority report. The lawyer's penchant for
substituting anecdotal for scientific evidence has been a frequent source of blunders.
A relevant case is that of predatory pricing. For many years it was believed that large
sellers would frequently sell below their cost in order to destroy their competitors.
This belief, sustained by victims' anecdotes much like those we now read about in the
fraud area, spurred enactment of section 2 of the original Clayton Act and other
statutes. In 1958, a scholarly study of the Standard Oil Trust showed that, even before
section 2 was enacted, the most notorious predator of them all had not, in fact,
employed predatory pricing; the study also supplied reasons why, as a matter of
economic theory, such pricing is rarely a rational strategy for monopolizing. McGee,
Predatory Price Cutting: The Standard Oil (N. J.) Case, 1 J. Law & Econ. 137 (1958) .
This study has never been refuted, and is widely accepted. See Turner, Conglomerate
Mergers and Section 7 of the Clayton Act, 78 Harv. L. Rev. 1313, 1339-52 (1965) . And
they are corroborated by the extraordinary paucity of cases over the years in which
predatory pricing could plausibly be inferred. Predatory pricing is now regarded by
most students of antitrust as very largely a mythical beast. The belief in its reality
was based on the same kind of casual, anecdotal evidence now adduced, again without
good basis in theory, to create belief in the existence of a serious problem of consumer
fraud.



456
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in sales to the poor. Since the poor of any major city represent in the
aggregate a substantial market, one would expect sellers to compete in
supplying true information about products to poor as to rich consumers.
And neither the reported profit rates of slum merchants nor the structure
of retail distribution and finance markets support a hypothesis of exploi-
tation. Still, I do not deny the possibility that there m.ay be a serious
problem here. Perhaps, as Anthony Downs has argued in another con-
text, the poor "are people who 'fall into the cracks' between the neat
logical categories" of economic analysis.^^ Maybe the educational de-
ficiencies of poor people are such that honest sellers find it too costly to
educate them to the product misrepresentations of dishonest rivals. At
all events, given the state of our knowledge, it is premature to unleash
the FTC on the problems of poor consumers. Study should precede
action. Having failed in so much else, the FTC is not likely to succeed
in making a dent in our most intractable domestic problem, that of
poverty, until it is better understood.

I am also concerned lest a campaign of compelling greater disclosure
of product claims by slum merchants have results quite different from
those intended. To repeat an earlier point, information is not costless. If
slum merchants are forced to supply additional information, they will
raise their prices; in effect, the careful poor consumer will be insuring
his careless neighbor against the consequences of imprudence. This
seems a curious way to fight proverty.*^

IV.

My colleagues of the majority, while fully conscious of the Commis-
sion's deficient performance of more than 50 years, maintain a resolute
air of optimism. With better leadership and better staff, with greater
appropriations, with a renewed sense of dedication, and with wise direc-
tion from committees such as these, the Commission, in their view, can
still be redeemed for socially productive activities. I am not so sanguine.
The Commission has done so badly continuously over so long a period
of time that it is difficult any longer to regard its failings as accidental



4iComments, in Issues in Urban Economics 419, 426 (Perloff & Wingo eds. 1968) .

42Equally questionable are proposals to abrogate, as unfair, certain devices used in
the financing of consumer purchases, such as the defense of holder in due course. See,
e.g., Comment, Consumer Legislation and the Poor, 76 Yale L. J. 745 (1967) . Any
rule that makes it more costly for merchants or finance companies to do business with
poor people is likely to raise the price of products and credit to them, and thereby
make it even more difficult for them to obtain the goods they want.



457
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and remediable. It is not as if the deficiencies in its performance had
gone unobserved until the present committee began its study. The
criticisms and recommendations of this committee were anticipated by
the Hoover Commission in its 1949 report on the FTC^^ {^ such detail
as to make the present study little more than an updating of that report.
And 25 years earlier a perceptive study of the FTC by Gerard Henderson
had reached similar conclusions.^*

The failure of these studies to have a significant impact on the
Commission's behavior is rooted in the fact that they were preoccupied,
as is the present majority report, with management efficiency. It is
tempting to ascribe the deficiencies in the Commission's performance
to mismanagement, and hence to focus on leadership, personnel, organ-
ization, planning, and other managerial concerns. But it is doubtful
that mismanagement is more than a symptom of the agency's underlying
problems. Two of these problems that have already been touched on
in these pages are the unsoundness of the assumptions that underlie most
of the Commission's activities and the remoteness of the Commission
from Presidential interest and support. The proposition that supplies
the Commission with its raison d'etre— that the administrative process
has a constructive role to play in supplementing judicial and market
remedies against restraints of trade and deceptive practices— is highly
questionable. Even if the conceptual foundations of the Federal Trade
Commission were stronger than they are, the Commission would still
suffer greatly from its isolation from the President. The consumer
interest has always been poorly represented in Congress in comparison
with organized interest groups. Dependent on Congress to a degree that
no Attorney General is, the Commission is naturally influenced by the
parochial interests of powerful Congressmen. And Presidents have
deemed it statesmanlike to conciliate these Congressmen on appointment,
staffing, and other matters relating to the Commission as a means of
enlisting their support for legislation more central to the Administra-
tion's program. Exhortations by this committee are unlikely to change
these stubborn facts of political life.

Another inherent limitation of the FTC arises from the structure
of incentives operating on the members and staff of the Commission.
Fundamentally, the problem is that the output of a regulatory agency,
unlike the output of a private firm, is not sold in any market, and, not

43Commission on Organization of the Executive Branch of the Government. Task
Force on Regulatory Commissions, Appendix N, p. 1^.4 (lyw) .
44Henderson, supra note 4, ch. VI.



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being sold, cannot be priced. As a result, regulators lack objective cri-
teria against which to measure the effectiveness with which they pursue
the goals of regulation. The absence of such criteria makes it difficult
to design a system of rewards for success and punishments for failure
that would align the regulators' personal interests with the social in-
terest in effective regulation. Unlike businessmen, whose social product
is measured with reasonable precision by profit-and-loss statements, or
professionals, whose performance can usually be measured with tolerable
accuracy by reference to widely accepted professional standards, regu-
lators' performance cannot be well evaluated, any they are in conse-
quence left with considerable latitude to substitute their personal goals
for the social goals of regulation.*^

This analysis has implications that go far beyond the problems of the
FTC. Its relevance here is in reminding that the personal goals of
FTC members and staff (power is shared between these groups, not
concentrated wholly in the hands of the commissioners) influence the
character and direction of the Commission's activity. It has been
proposed as a reasonable hypothesis that regulators motivated by
self-interest act so as (a) to retain their jobs and (b) to obtain greater
appropriations for their agency as a way of augmenting personal power
(and frequently remuneration as well).*^ This assumption seems reason-
able as to those commissioners who seek reappointment and those mem-
bers of the staff who make a career of government service. The path
of self-interest for such individuals would appear to lie through con-
ciliation of well organized economic interests and influential Congress-
men—foci of political power. Zealous pursuit of the consumer interest
offers few dividends besides unquiet.

Not every commissioner or staff member makes a career of govern-
ment service, however. Among the 14 FTC commissioners appointed
since 1949 who are not present incumbents, the average tenure was only
4 years, less than a full term (7 years). The majority of these commis-
sioners left the agency to join private law firms. The turnover among
staff is also high, and most of those who leave enter the private practice
of law too. A commissioner concerned with his future success at the
bar will have no greater incentive to promote the consumer interest
fearlessly and impartially than one whose guiding principles are job
retention and agency aggrandizement. He will receive no bonus upon

45Cf. Downs. Inside Bureaucracy (1966) ; Stigler. The Regulation of Industry
(April 10, 1969, unpublished) .



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entry (or reentry) into private practice for the vigorous championing
of the consumer interest. The gratitude of consumers-indulging the
improbable assumption that such a thing exists-cannot be translated
into a larger practice. On the other hand, the enmity of the organized
economic interests, the trade associations and trade unions, that a
zealous pursuit of consumer interests would engender may do him some
later harm, while making his tenure with the Commission more tense
and demanding than would otherwise be the case. Exceptional people
may rise to the challenge but they are unlikely ever to constitute a sizeable
fraction of commissioners.

The picture is much the same with regard to those members of the
staff who do not intend to make the Commission a career. The principal
attraction of government service to lawyers who wish to use it as a
steppingstone to private practice lies in the opportunities it affords to