Bait & Switch – Definition

Cite this article as:"Bait & Switch – Definition," in The Business Professor, updated September 9, 2019, last accessed October 27, 2020,


Bait and Switch Definition

The bait and switch system, which in some constitutions is considered a form of retail fraud, is a situation where a firm sells a product or item on juicy low prices only to up-sell the consumer on a pricier item which is similar to the former. Some legislations have rules against the bait and switch system, but due to its different uses, it is hard to know what and what constitutes fraud.

A Little More on What is Bait and Switch

“Bait” in bait and switch refers to a product which is engaging and has an appealingly low price or term. Baits can come in the form of juicy interest rates for loans and mortgages or other investment products or can come in the form of products which should normally command a high price. The switch, in this case, happens mostly when the customer has put both feet past the door. This way, the advertiser is in total control and would want to sell the customer a more expensive similar product.

Also termed as false advertising, countries such as the United States, Canada, and England allows individuals to file a lawsuit against agencies using these tactics. However, it should be noted that once the advertiser is able to sell the teaser product, then the consumer would lose his or her rights to a lawsuit as it can be termed an upgrade as stated in marketing laws. This would still hold even if the salesperson uses aggressive tactics and convincing measures to make sure that the teaser product is sold.

The United States jurisdiction permits businesses to offer teaser products in a limited quantity, as long as they also inform prospects that the products are in limited amounts. They are also required to make refunds if these items sell out, or make a reduction in prices for similarly costlier products.

Illustrations of Bait and Switch

In the mortgage industry, the bait and switch tactic has gained fame as a marketing tactic that propels businesses forward. Agents or firms in this industry would post low mortgage rates, with the knowledge that a large number of applicants would be unable to qualify for the teaser rates due to its limited amount. As applicants continue to step their feet past the door, they’ll offer a higher rate which these applicants can qualify for, thus giving the agents and firms a higher profit on loans. Automobile financing firms also use the bait and switch tactics to get customers by offering ridiculously low-interest rates on vehicles knowing fully well that only a minuscule amount of a large number of applicants would qualify.

This tactic is also used in other sectors, and they include:

  • In the real estate sector, a broker may release a building with a ridiculously low price just to get applicants. When applicants troop in, this building would no longer exist, and they’ll be forced to receive offers of other similar buildings at a higher price.
  • Hotels can offer low rates for rooms, only to add other fees after the customer has already paid for his room
  • Fake recruiters can post attractive jobs just to collect resumes from applicants
  • Most training programs will lead you in on a cost of $10 per month, and when you’re past the door, they’ll bring up an even better offer with higher rates telling you that the initial program has been filled up.

Reference for “Bait and Switch” › Resources › Knowledge › Strategy…/bait-and-switch-5452

Academic research on “Bait and Switch”

The Fed’s Backroom Bailout Policy: Reportedly More than 2 Trillion in Loans and Guarantees without a Timely Public Record, Expanding its Regulatory Powers …, Auerbach, R. D. (2008). The Fed’s Backroom Bailout Policy: Reportedly More than 2 Trillion in Loans and Guarantees without a Timely Public Record, Expanding its Regulatory Powers Despite a History of Malfeasance and, Since October 2008, Rewarding Banks for Holding Their Surging Reserves Rather than Lending. Chap. L. Rev., 12, 535.

Mergers and acquisitions analysis With the case study method, Agarwal, P., & Mittal, R. (2014). Mergers and acquisitions analysis With the case study method. International Journal of Management and Commerce Innovations, 2(1), 236-244.

Market Reactions to Accounting Policy Choices for Mergers and Acquisitions: Evidence for the Japanese Adoption of International Accounting Standards, Yosano, T., & Shimada, Y. (2010). Market Reactions to Accounting Policy Choices for Mergers and Acquisitions: Evidence for the Japanese Adoption of International Accounting Standards. Available at SSRN 1689448. The purpose of this paper is to explore, through M&As accounting policies, whether the Japanese adoption of IFRS is favorable for market participants. M&As are excellent prototypes for this study, because they have a substantial impact upon firms’ financial statements. Additionally, Japanese M&A accounting standards still maintain the amortization period within twenty years, which is practical in creating a sharp contrast comparison with the impairment approach outlined by the IFRS 3 and SFAS141/142. We focus on how the recognition and implementation of three different measurement rules, such as the pooling-of-interests, purchase with the amortization of goodwill, and purchase with the immediate expensing of goodwill, influence investors’ interpretations of earning numbers. First, we found that investors interpreted earning figures congruently despite the different accounting policies used. This phenomenon is consistent with the functional fixation hypothesis, which suggests that investors are bottom-line oriented. Second, we found that acquiring firms’ who choose to expense entire goodwill values within the current fiscal year in order to alleviate investors’ concerns that the M&A would negatively impact bottom-line earnings, and we have found that this is done successfully, convincing investors to regard the immediate write-off as an irrelevant item to the firm’s future earnings. The immediate write-off deserves our attention, because it yields the same future bottom-line earnings as firms who use the purchase with impairment method prescribed in IFRS 3 and SFAS 141/142.

Cross-sectional Stock Returns on Fundamental Value vs. Market Value in Mergers and Acquisitions: Evidence from Japan, Yosano, T., & Shimada, Y. (2008). Cross-sectional Stock Returns on Fundamental Value vs. Market Value in Mergers and Acquisitions: Evidence from Japan (No. 2008-59). This study looks at the difference between the fundamental value and the market value of firms during the merger and acquisition process, and investigates the role of that difference on the method of payments (cash vs. stock) and on the subsequent stock performance around the merger and acquisition (M&A) announcement date. The number of M&A transactions has dramatically increased since the stock swap and stock transfer schemes were introduced in 1999. We investigate the scenario that managers who specialize in analyzing the corporate value of the firms possibly shorten the value correction time and partially reduce misvaluation in the capital market. The Means of Payment hypothesis suggests that the managers should choose stock payment over cash payment when the acquiror is over-valued in the market. However, we found that Japanese managers more positively use cash payment when the firm has sufficient financial slack (is cash rich). The Misvaluation hypothesis suggests that positive excess returns of the acquiror could be detected around the announcement day of M&A transactions, when the acquiror and/or the target is/are under-valued in the market. We found strong evidence which supports the Misvaluation hypothesis. In calculating the fundamental value of the firms, we employed the Residual Income Model, using financial analysts forecast value of future profits, after controlling the book-to-market ratio. We found strong evidence which supports the Misvaluation hypothesis. In particular, the hedging portfolio strategy supports the long position of the acquiring firms (M&A transactions are categorized as high acquiror’s valuation–high target’s valuation group) and simultaneously holds the short position of the acquiring firms (M&A transactions are conversely categorized as low acquiror’s valuation–low target’s valuation group). This combination shows more persistent and more positive abnormal returns than the long position strategy of simply holding acquired stock after all M&A transactions. However, the simple long position strategy in Japan is still positive, when compared to the US.

Who should learn what from the failure and delayed bailout of the ODGF?, Kane, E. J. (1987). Who should learn what from the failure and delayed bailout of the ODGF?. In March 1985, the failure of the Ohio Deposit Guarantee Fund (the ODGF) sent shock waves reverberating through the financial world. This episode is popularly interpreted as evidence of the dangers of both private deposit insurance and continuing financial deregulation. This paper argues that policies of financial deregulation played little role in the ODGF insolvency. The failure of the ODGF was instead a failure of government regulation, rooted in inadequacies in the OGDF information and enforcement systems. The ODGF may be conceived as the Federal Savings and Loan Insurance Corporation writ small. Both agencies share many of the same structural imbalances: large unresolved losses, explicitly mispriced and underreserved services, inadequate information and monitoring systems, insufficient disciplinary powers, and a susceptibility to political pressures to forbear. Doctors perform autopsies on dead patients to improve their ability to protect living ones. This paper’s autopsy of the institutional corpse of the ODGF focuses on identifying the kinds of disturbances that transform structural imbalances into a full-fledged crisis. Our research underscores the way that deceptive accounting and underfinanced insurance funds contain crisis pressures in the short run by setting the stage for more severe problems down the line. As financial markets approach more and more closely the perfect and complete markets beloved by finance theorists, the amount of time that can be bought by policies that merely defer crisis pressures is shrinking and becoming hard to use productively.

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