Is it illegal for a store to make up a fake original price?

It violates the FTC's price guides and most state unfair-competition statutes if the item was never actually sold at that price for a reasonably substantial period. The guides themselves are not a binding rule, so enforcement runs through Section 5 case-by-case actions, state attorneys general, and private class actions rather than automatic penalties.

Has the FTC ever punished a company for fake sale prices?

The FTC has brought scattered cases over the decades, but most of the recent, well-documented reference-pricing actions against major retailers, including Overstock.com and Kohl's, came from state attorneys general and private class actions rather than the FTC itself.

Does a bigger discount number mean a better deal?

Not reliably. Research on reference-price advertising has found that shoppers raise their estimate of an item's value in response to a listed 'was' price whether or not that price is realistic, which is exactly the effect a store gains from inflating it.

Do outlet stores use fake reference prices too?

Outlet pricing is a related but separate practice, where a garment is manufactured only for the outlet channel and priced against a number that was never a store price anywhere, a different mechanism from a department store marking down its own regular stock, though both lean on the same shopper instinct.

What a sale price actually means

Title 16, Part 233 of the Code of Federal Regulations is four short sections, and the Federal Trade Commission wrote the core of it in 1964. It is called the Guides Against Deceptive Pricing, and Section 233.1, “Former price comparisons,” says that a store may advertise a reduction from its own former price only if that former price is “the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time.” The guide does not require a sale to have happened at that price. It requires the price to have been genuinely, openly offered, in the ordinary course of business, long enough that a shopper walking in on any given week would plausibly have paid it.

The document is worth reading before the sale rack, because it draws the line most shoppers assume already exists somewhere. Section 233.1(c) gives the textbook violation: a retailer sells Brand X pens at $7.50 for months, then for a short period marks them up to $10 with no sales at that price, then advertises “was $10, now $7.50.” The consumer, the guide says, is still paying the same $7.50 he could have paid all along, but the ad has manufactured a bargain that never existed. Section 233.1(d) extends the same logic to prices lifted from months or years earlier without disclosure, and to comparison prices pulled from a narrow, unrepresentative slice of a store’s own inventory.

What the guide is, and what it is not

The word “guide” is doing real work here. Part 233 carries no statutory force and imposes no automatic penalty; it is the FTC’s published statement of what it will treat as an unfair or deceptive practice under Section 5 of the FTC Act, the same authority the agency uses case by case against everything from funeral homes to fuel-card issuers. A guide tells a company what the agency believes the law already requires; it does not create a private right of action, and the FTC itself brings a limited number of standalone reference-pricing cases in any given year, weighed against thousands of other consumer-protection priorities.

That gap between the rule as written and the rule as enforced is the correction most shoppers get wrong. The natural assumption is that a struck-through price is a regulated, checked number, the retail equivalent of a nutrition label. It is closer to a tax return: the standard exists, the company is expected to comply with it, and verification mostly happens after the fact, when someone with standing to sue decides to look.

Who has actually been caught

The people who look are usually state attorneys general and class-action plaintiffs, and the record they have built is specific enough to name.

In January 2014, an Alameda County Superior Court judge ruled that Overstock.com had spent years generating “list prices” and “compare at” prices with internal formulas rather than real market prices. The court found three distinct problems: list prices manufactured by formula rather than observed at any retailer, comparison prices drawn from a similar item rather than the exact product on offer, and comparison prices set to the highest figure a formula could produce across the market rather than a representative one, all without disclosing any of it to the shopper. The court found the practice ran from 2006 through 2013 and imposed $6.8 million in civil penalties under California’s false-advertising and unfair-competition statutes, calculated per day of the violation, plus the state’s litigation costs. Overstock appealed, and the California Court of Appeal affirmed the judgment in 2017 in People v. Overstock.com, Inc., 12 Cal.App.5th 426.

Kohl’s settled a private class action, Mulder v. Kohl’s Department Stores, in 2016, over allegations that the “original” and “compare at” prices printed on private-label merchandise had never been charged to any customer, at Kohl’s or anywhere else. The settlement made roughly $6.15 million available, most of it distributed to the class as store gift cards, with the rest covering administration, fees, and class representative payments. Kohl’s did not admit wrongdoing.

Michaels Stores reached an earlier and smaller settlement with the New York Attorney General’s office in 2011, paying $1.8 million (an $800,000 civil penalty plus a $1 million donation of arts and crafts supplies to New York schools) over discounts advertised against custom-framing prices the investigation found the company had rarely or never actually charged. More than a decade later, Michaels was back in federal court in California facing a new class action making a similar claim about its regular-price framing.

Three retailers, three different plaintiffs, three different decades of the same guide, and in every case the dollar figure landed in the low millions rather than anything that would function as a real deterrent against a national chain’s annual marketing budget. That is the enforcement record the correction beat rests on: the rule is not fake, but it is thin, and it is thin in a specific, documented way. It gets tested by whoever happens to sue, not by a regulator patrolling every markdown sign.

Why the number works on you anyway

None of this would matter if a fabricated “was” price failed to change what a shopper is willing to pay. It does not fail. Joel Urbany, William Bearden, and Dan Weilbaker ran a set of simulated-shopping experiments published in the Journal of Consumer Research in 1988, comparing how subjects responded to ads with no reference price, a plausible reference price, and a deliberately exaggerated one. An ad carrying a reference price, plausible or not, raised subjects’ estimate of the item’s real regular price and their sense of how much value the offer represented, compared to an ad with no reference price at all. The exaggerated reference price produced almost the same lift as the plausible one, even among subjects the researchers had identified as more skeptical of advertising going in.

That is the mechanism the CFR section exists to interrupt: the number itself does the persuading, largely independent of whether it is true. A shopper does not need to believe the store’s math to be moved by it. Seeing $120 crossed out next to $48 changes the felt value of the $48 whether or not $120 was ever a real transaction price, which is exactly why the guide asks for a real transaction price and exactly why real transaction prices are the harder, less profitable thing to supply.

Marketing researchers Gurumurthy Kalyanaram and Russell Winer, reviewing decades of this literature in 1995, split reference prices into two kinds: internal, the number a shopper already carries in memory from past shopping, and external, the number a store prints on the tag to supply that memory for her. A store cannot control the internal number. It can, and Overstock’s formulas show that some stores will, manufacture the external one from nothing.

What this has to do with the outlet rack

A related but separate version of the same instinct runs through outlet pricing, where a garment is cut for the outlet channel alone and priced against a number that was never a department-store price anywhere, on any rack, at any time, a mechanism worth its own accounting rather than a paragraph tacked onto this one. What both share is the reference number doing work the garment itself is not being asked to do.

What a real price looks like

DRESS prints garments to order rather than stocking ahead of demand, and every shirt, hoodie, and cap on the site carries one price, set once, with no struck-through number sitting next to it inviting a comparison to something that was never charged, less a virtue than an absence: nothing to check, because there is nothing offered as a discount from anything else. It is also the simplest way to satisfy Section 233.1 without thinking about it twice: a store with only one price for a garment cannot advertise a false former one.

The next time a tag says “compare at,” the useful response is not blanket suspicion but the question the CFR itself is built around: offered to the public, on a regular basis, for a reasonably substantial period of time, and did that actually happen here. Most tags leave the answer off entirely, the one part of the transaction nobody is required to show you, and almost nobody does.