Regulations on Promotional Gifts and Prizes Under the Fair Trade Law
Abstract:
1. Key areas of research
(1) The influence of promotional gifts and prizes on business operations
(2) How promotional gifts and prizes are distributed in Chinese Taipei
(3) An introduction to the regulations governing promotional gifts and prizes promulgated by the competition authorities in the United States, Japan, Germany, Korea and France
(4) A compilation of relevant regulatory provisions of the Fair Trade Law and other laws with regard to promotional gifts and prizes
(5) A discussion of previous cases, additional provisions needed in the Fair Trade Law, and the law’s effectiveness
2. Methodology
This study compiles academic studies of the objectives and motivations behind promotional activities involving gifts and prizes, and provides simple analytical models to structure discussion of their effects on the particular markets and the social contexts in which they occur. Surveys are then used to corroborate the proposed theoretical frameworks for analysis, and to introduce the attitudes of businesses toward the promotional use of gifts and prizes. Next, comparisons are made between different countries based on sample cases and the regulatory standards of the competition authorities. Relevant cases handled by the Fair Trade Commission are reviewed and examined with reference to current regulations governing promotional use of gifts and prizes. The current state of regulatory work by the competent authorities is assessed, and the necessity for additional considerations in other areas is examined.
3. Main findings and conclusions
(1) Market structure and promotional use of gifts and prizes:
a. There is a strong relationship between the structure of the market in which a business operates and whether or not it will use promotional gifts and prizes. If markets were either monopolistic or completely competitive, there would seem to be no need for promotions with gifts or prizes. However, markets dominated by monopolies or oligopolies are those in which businesses find the most obvious motivation for such activities.
b. Average cost structures and anticipated profits are closely tied to the frequency of promotional events and the monetary values of gifts and prizes. The frequency and monetary values of such promotions tend to be higher for long-term fixed-cost or decreasing-cost enterprises than for increasing-cost enterprises; there is also a positive correlation between the desire to hold such promotions and their creation of barriers to market entry or increased expectation of profits.
c. Opinion remains divided on the overall economic benefits of promotional events involving gifts and prizes. Most holding a positive view believe that such activities help provide more consumer information and increase competition, and that government should respect the outcome of market forces. Those with a negative view believe that such activities have neither positive nor negative effects on effective competition, and that the costs involved are for inducements and a waste of societal resources. They believe markets should be led back toward effective competition on the basis of price, quantity, service, and quality. Synthesizing the views of well-known economists, legal scholars, and management specialists, this study concludes “there is no need for government regulation of promotions involving gifts and prizes when they are small in value and take place in a competitive market, as they will help invigorate the economy. When no unfair competition occurs, the government’s administrative expenditures can also be kept low. However, when such activities result in anti-competitive activities, such as predatory pricing or the creation of barriers to market entry, then the government should use its regulatory powers to intervene.”
(2) The competition laws of countries relevant to this study all have detailed provisions with regard to promotional gifts and prizes and restraint of competition or unfair competition. In the United States, based largely on the accumulation of cases, deceptive or unfair competition practices are regulated through such principles as “full disclosure of information relating to promotional gift activities, with no alteration of conditions allowed after the fact.” However, the United States has strictly prohibited making purchase of products the qualifying standard for prizes. Most European countries adopt prohibition as a basic standard, with case-by-case approval for exceptions. Most usually allow only low-cost promotional items, but standards are undergoing continual readjustment, with a gradual loosening of restrictions. In neighboring countries Japan and Korea, laws governing “representations regarding gifts” are applied, along with provisions such as “categories and criteria for unfair competition,” and “categories and criteria for unfair competition in the provision of promotional gifts.”
(3) While Chinese Taipei has provisions specifically governing special industries, such as the “Tobacco Hazards Prevention Law” and the “Pharmaceutical Affairs Law,” for promotional events in most industries it applies the “Regulatory Principles for Cases Concerning Promotions by Means of Gifts and Prizes” of the Executive Yuan. In the more than four years since they took effect on 1 April 1995, the Commission has vigorously publicized those principles through all available channels, and businesses have been continuously adapting their promotional strategies in response. However, there is probably a need to continue to seek the true meaning behind the terse written framework of those principles. This research clearly delineates for the first time the valid scope and the limitations of those principles, and through analysis of the relevant cases handled by the Commission and their interpretations of the principles, obtains conclusions about determinations of product value, the value of gifts or prizes, the length of promotional activities, the total value of promotional gifts, and the largest permissible value of promotional gifts. This may serve as a reference for future Commission handling of cases and for the arrangement of promotional events by business enterprises.
(4) The design and application of surveys in this study are used to corroborate the proposed theoretical frameworks for analysis, and to introduce the outlook of businesses with respect to the regulations governing promotional use of gifts and prizes. The following conclusions have been obtained:
a. Ninety-four percent of businesses have used promotional gift activities, compared with a lower rate of 86 percent for promotional prizes.
b. The incentives for holding promotional gift activities, listed in order of importance, are: introducing new products; responding to competitors’ strategies; enhancing brand recognition; creating a company image; and promotional activities as part of cooperative strategies between businesses. Also in order of importance, the methods for disseminating information on promotional gifts are: newspaper and magazine ads; posters and handouts; product packaging; direct mail ads; television ads and signboard displays.
c. The incentives for holding promotional prize activities, listed in order of importance, are: responding to competitor’s strategies; introducing new products; enhancing brand recognition; creating a company image; and promotional activities as part of cooperative strategies between businesses. Also, in order of importance, the methods for disseminating information on promotional prizes are: posters and handouts; newspaper and magazine ads; direct mail ads; product packaging; signboard displays and television ads.
d. Businesses all give consideration to the FTC regulations when holding promotional events involving gifts or prizes. Eighty-four percent of respondents indicated that they did not find the regulations restrictive, as their previous promotional activities already conformed to the regulations. Another 14 percent reported less extravagant promotional activities after becoming aware of the regulations. Only 2 percent of respondents felt that the regulations limited their creativity or placed restrictions on their promotional activities.
e. With regard to items stipulated under the “Principles for Handling Cases Concerning the Value of Promotional Gifts and Prizes,” such as “limits on the value of promotional gifts,” “the total annual value of prizes,” and “largest value of promotional prizes,” about 98 percent of businesses responded that such regulations were “very” or “mostly” reasonable, while only about 2 percent expressed that they were “very unreasonable.”
f. With regard to whether clauses along the lines of “there shall be full disclosure of important information regarding promotional activities” and “conditions may not be changed after the fact” should be included in the regulations governing promotional activities, businesses responded with respective approval rates of 84 percent and 69 percent.
4. Criticism and suggestions:
(1) A consultative committee composed of Commission specialists drew up the “Principles for Handling Cases Concerning the Value of Promotional Gifts and Prizes” to regulate Chinese Taipei’s domestic practices in this regard. The principles took effect on 1 April 1995, and have received a positive response from various industries. Instances of promotional gift or prize activities in deliberate violation of the Commission’s regulations regarding the value of gifts and the individual and aggregate value of prizes are rarely seen. The efficacy of the regulations, due to their clear and explicit standards and feasibility of implementation, is such that the Commission’s costs have been reduced and a deterrent effect established sufficient to nip the problem in the bud. This method of drawing up provisions may serve as a reference for the competent authorities in drafting other related regulations.
(2) Because the decisions of businesses about whether to use promotional activities in a competitive way are closely linked to the structure of their markets, the competent authorities should continue to gather data on the market dynamics of the few long-term decreasing-cost enterprises which dominate their markets, such as the print media, telecommunications and airlines, as well as the competitive circumstances in industries which will be shifting away from monopolistic structures, such as petroleum, electrical power, and tobacco and spirits.
(3) Advanced western countries may have from a decade or two up to a hundred years of experience in enforcing competition laws. The special laws of countries such as Germany, Japan and Korea, such as the “promotional gifts law,” “promotional gift designation law,” and the “gifts law,” provide detailed standards regarding promotional giveaways through the placement of these statutes within the hierarchy of laws, and are a valuable model for Chinese Taipei.
(4) Enterprises may engage in competitive activity by taking advantage of matters not regulated under the “Principles for Handling Cases Concerning the Value of Promotional Gifts and Prizes,” such as free taste-testing, free try-outs or other advertising promotional activities not conditional on sales, “discounts” on like merchandise, “volume discounts” for like merchandise, or “package discounts” on combinations of merchandise. The competent authorities should perhaps consider the need to compile relevant research for timely regulation of this issue.
(5) With regard to the cases and interpretations related to the “Principles for Handling Cases Concerning the Value of Promotional Gifts and Prizes,” and research compiled in this study on criteria such as product value, gift or prize value, duration of promotional activities, limits on the value of promotional gifts and the largest permissible value of promotional prizes, in addition to serving as a reference for the Commission in its handling of future cases and for enterprises in holding promotional activities, the competent authorities also need to continue publicizing the relevant issues in order to establish a fair and reasonable competitive environment.
(6) The competent authorities also need to give appropriate and careful consideration to whether clauses such as “there shall be full disclosure of important information regarding promotional activities” and “conditions may not be changed after the fact” should be included in the regulations governing promotional activities, in accordance with the approval expressed by most enterprises.
Written by
Wu Ch’eng-wu
Chang En-sheng
Lin Yu-ch’ing
Cheng Chia-lin
Lai Mei-hua
Chan Li-ling (First Department)