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CHAPTER 4

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Chapter Four:
Consumers
BUSINESS ETHICS
1
Overview
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(1)
(2)
(3)
(4)
(5)
Chapter Six examines the following topics:
Product safety, legal liability, and regulation.
Responsibilities of business to consumers
concerning product quality, prices, labeling, and
packaging.
Deceptive advertising and the FTC.
“Reasonable” vs. “ignorant” consumer standards.
The social desirability of advertising, free speech,
and consumer needs.
2
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?
3
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.
4
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
5
Product Safety
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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
6
Product Safety
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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.
7
Product Safety
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
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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.
8
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.
9
Product Safety
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(1)
(2)
(3)
Legal paternalism: The idea that the law may justifiably be used to
restrict the freedom of individuals for their own good.
Some product safety affects not just consumers who purchase
products but also third parties.
In the increasingly complex consumer world, the assumption that
consumers know their own interests better than anyone else is
doubtful.
Paternalistic regulation may infringe individual autonomy but
bring more gain in social welfare
10
Product Safety
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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 classaction lawsuits are also effective in forcing companies
to take product safety seriously.
11
Product Safety
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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..
12
Product Safety

(1)
(2)
Automobile safety: The auto industry has a long and
consistent history of fighting against safety regulations.
Some examples:
The industry successfully lobbied the federal government
to delay the requirement that cars be equipped with air
bags or automatic seat belts.
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.
13
The Responsibilities of Business
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(5)
(6)
Protecting the consumer requires more than just
obeying the law. It also requires business to:
Give safety the priority warranted by the product.
Abandon the misconception that accidents result
solely from consumer misuse.
Monitor closely the manufacturing process itself.
Review the safety implications of their marketing and
advertising strategies.
Provide full details about product performance.
Promptly investigate consumer complaints.
14
The Responsibilities of Business

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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.
15
Other Areas of Business Responsibility
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(1)
(2)
Product quality: Warranties are obligations for
product quality and reliability that sellers assume.
There are two kinds of warranty:
Express: The claim that a seller explicitly states.
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
16
Other Areas of Business Responsibility
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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
17
Other Areas of Business Responsibility
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(1)
(2)
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:
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).
Vertical: Takes place when manufactures and
retailers, as opposed to direct competitors, agree to
set prices.
18
Other Areas of Business Responsibility
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(1)
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.
.
19
Other Areas of Business Responsibility

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.
.
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(1)
20
Deception and Unfairness in Advertising

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.
.


(1)
21
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