Part III: Business and Society Chapter 6: Consumers Chapter 7: The Environment

Part III: Business and Society

Chapter 6: Consumers

Chapter 7: The Environment

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Chapter Six: Consumers

Overview

Chapter Six examines the following topics:(1) Product safety, legal liability, and regulation.(2) Responsibilities of business to consumers

concerning product quality, prices, labeling, and packaging.

(3) Deceptive advertising and the FTC.(4) “Reasonable” vs. “ignorant” consumer

standards.(5) The social desirability of advertising, free speech,

and consumer needs.Moral Issues in Business

Chapter 1

Introduction

With the sale of goods to the public comes responsibility on the part of the manufacturer and advertiser.

Government has some responsibility to protect the public from hazardous or mislabeled goods.

What responsibilities do companies have toward their consumers?

How can goods be promoted while respecting the choices of individuals?

Moral Issues in Business Chapter 1

Product Safety

Business’s general responsibility for product safety: The complexity of an advanced economy and the necessary dependence of consumers on business to satisfy their many wants increase business’s responsibility for product safety.


Product Safety

The legal liability of manufacturers: The 1916 MacPherson vs. Buick Motor Car case expanded the liability of manufacturers for injuries caused by defective products.

Prior to that case, consumers could recover damages only from the retailer of the defective product.

The MacPherson case replaced the older caveat emptor (“let the buyer beware”) doctrine of consumer-seller relationship with a due care one.


Product Safety

Strict product liability: The MacPherson case still left the injured consumer with the burden of proving that the manufacturer had been negligent.

Negligence is difficult to prove. A product might be unsafe despite the

manufacturer’s having tried to exercise caution.


Product Safety

Strict product liability: In the 1960s, legal thinking became dominated by the doctrine of strict product liability, based on:Henningsen vs. Bloomfield Motors (1960).Greenman vs. Yuba Power Products (1963).

This holds the manufacturer responsible for injuries suffered as a result of defects in the product, regardless of whether the manufacturer was negligent.


Product Safety

Government safety regulation: In 1972, Congress passed the Consumer Product Safety Act.

It empowered the Consumer Product Safety Commission (CPSC) to protect the public against “unreasonable risks of injury associated with consumer products.”

The CPSC aids consumers in evaluating product safety, develops uniform standards, gathers data, conducts research, and coordinates product safety laws (local, state, federal) and enforcement.


Product Safety

Economic costs: Safety regulations benefit consumers but raise the price of products – critics worry that the expense is not always worth it.

Consumer choice: Consumers may dislike some mandated safety technology – but in other cases safety regulations may prevent individuals from choosing to purchase a riskier, though less expensive, product.


Product Safety

Legal paternalism: The idea that the law may justifiably be used to restrict the freedom of individuals for their own good.

(1)Some product safety affects not just consumers who purchase products but also third parties.

(2)In the increasingly complex consumer world, the assumption that consumers know their own interests better than anyone else is doubtful.

(3)Paternalistic regulation may infringe individual autonomy but bring more gain in social welfare.


Product Safety

How effective is regulation? Regulatory agencies (FDA, CPSC) often succeed in protecting interests of consumers and stressing business responsibility.

Regulation, however, is not always effective. Public opinion, media attention, pressure from

consumer advocacy groups, and the prospect of class-action lawsuits are also effective in forcing companies to take product safety seriously.


Product Safety

Self-regulation: Businesses generally prefer self-regulation, competition, and voluntary safety standards set by their own industry.

But self-regulation can easily subordinate consumer interests to profit making when the two goals clash.

Under the guise of self-regulation, businesses can end up ignoring or minimizing their responsibilities to consumers.


Product Safety

Automobile safety: The auto industry has a long and consistent history of fighting against safety regulations. Some examples:

(1) The industry successfully lobbied the federal government to delay the requirement that cars be equipped with air bags or automatic seat belts.

(2) In the late 1990s, the industry denied that car passengers are at a greater risk of serious injury or death caused by collisions with pickups or SUVS than with automobiles.


The Responsibilities of Business

Protecting the consumer requires more than just obeying the law. It also requires business to:

(1)Give safety the priority warranted by the product.

(2)Abandon the misconception that accidents result solely from consumer misuse.

(3)Monitor closely the manufacturing process itself.(4)Review the safety implications of their marketing

and advertising strategies.(5)Provide full details about product performance.(6)Promptly investigate consumer complaints.


The Responsibilities of Business

Some businesses respond quickly to suspected hazards. Examples of two successful companies:

JCPenney and Burning Radios: It withdrew an entire line of defective radios, ran national ads to inform the public, and offered immediate refunds.

Johnson Wax and Fluorocarbons: It withdrew all its aerosol fluorocarbon products worldwide after studies showed the released chemicals were depleting the earth’s fragile ozone layer.


Other Areas of Business Responsibility

Product quality: Warranties are obligations for product quality and reliability that sellers assume.

There are two kinds of warranty:(1) Express: The claim that a seller explicitly states.(2) Implicit: The claim, implicit in any sale, that a

product is fit for its ordinary, intended use, called the implied warranty of merchantability – it’s not a promise that the product will be perfect but a guarantee that it will be of passable quality.



Pricing: For many consumers, higher prices mean better products, so sellers raise prices to give the impression of superior quality or exclusivity – but higher prices do not always mean better quality.

Manipulative pricing: Consumers are misled by prices that conceal a product’s true cost – this trickery or manipulation raises moral questions about business’s view of itself and its role in the community.



Price fixing: The effort to control a given market and conspire to force consumers to pay artificially high prices. There are two kinds of price fixing:

(1) Horizontal: Occurs when competitors agree to adhere to a set price schedule (not to cut prices below a certain minimum, or to restrict price advertising or the terms of sales or discounts).

(2) Vertical: Takes place when manufactures and retailers, as opposed to direct competitors, agree to set prices.



Price gouging: A seller’s exploitation of a short-term situation by raising prices when buyers have few purchase options for a much-needed product.

Thought generally viewed as unethical, there is disagreement about what it is and whether all instances of it are wrong.

The question “What is a fair price?” is not an easy one to answer – one must consider the costs of material and production, operating and marketing expenses, profit margin, etc.



Labeling and packaging: Business is responsible to provide accurate, clear, and understandable product information that meets consumer needs.Product labels often fail to do this. Package shape, terms, and quantity surcharges

may also mislead shoppers. Moral conduct begins by providing consumers

with what they need to know to make informed product choices.


Deception and Unfairness in Advertising

The goal of advertising: Advertising provides little useful information about goods and services, but has as its goal to persuade us to buy certain ones.

Deceptive techniques: Providing frank product information is not always the most effective way to sell something – advertisers are tempted to misrepresent and deceive by exploiting ambiguity, concealing facts, exaggerating, and using psychological appeals.



The Federal Trade Commission’s (FTC) role: Created in 1914 as an antitrust weapon, it was expanded to include protecting consumers against deceptive advertising and fraudulent practices.

Is the FTC (or other regulatory bodies) obligated to protect only reasonable, intelligent consumers who act sensibly in the marketplace?

Or should it also protect ignorant consumers who are careless or gullible in their purchases?



The Federal Trade Commission’s (FTC) role: Should the FTC use the reasonable-consumer standard or the ignorant-consumer standard?

Adopting the former would entail protecting only reasonable people from deceptive advertising – if so, gullible consumers would be unprotected.

Adopting the latter would mean prohibiting advertisements that can deceive anyone – if so, the FTC’s restrictions and caseload would expand.

It now follows a modified ignorant-consumer rule. Moral Issues in Business

Chapter 1


Advertising to children: Children are particularly susceptible to the exaggerations of advertising.Advertisers say that parents still control what

gets purchased and what doesn’t. Critics doubt the fairness of selling to parents

by appealing to children. Childhood obesity: The Institute of Medicine’s

2005 report, reviewing 123 research studies over 30 years, showed that exposure to TV ads is “associated” with obesity in children under twelve.


The Debate Over Advertising

Consumer needs: Defenders of advertising (such as Harvard business professor Theodore Levitt) view its imaginative, symbolic, and artistic content as answering real human needs.



Manipulation: Critics (such as John Kenneth Galbraith) say that advertising manipulates those needs or even creates artificial ones. He also suggests that: The same process that produces products also

produces the demand for those products (the dependence effect).

Advertising encourages a preoccupation with material goods and leads us to favor private consumption at the expense of important public goods and services.



Market economics, free speech, and the media: Defenders of advertising say that it has three advantages: It is a necessary and desirable aspect of a free-

market system.It is a protected form of free speech.It is a useful sponsor of the media, especially

television. However, critics challenge all three claims.


Documents

Part III: Business and Society Chapter 6: Consumers Chapter 7: The Environment