Section 3.6
Ethical and Legal Aspects
Business Studies
HSC Course
Topic 3:
Section 3.6:
Marketing
Ethical and Legal Aspects
Section Overview:
3.6.1
Environmentally responsible products
3.6.2
Other issues including creation of needs, impacts of retail developments, sugging
(selling under the guise of research)
3.6.3
Role of consumer laws in dealing with
– deceptive and misleading advertising
– price discrimination
– implied conditions
– warranties
– resale price maintenance.
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3.6.1 Environmentally Responsible Products
There are two key ways in which businesses have damaged the environment historically:

By depleting natural resources in production

By creating products or packaging that is not environmentally friendly
In recent years, both consumers and governments have become increasingly concerned
about this environmental impact. In response, some businesses have begun to modify how
they go about operating so as to minimise their impact on the environment. One of the
most famous examples of this is McDonald’s which switched the packaging for its
hamburgers from polystyrene boxes to waxed paper.
Environmentally Responsible Products are those products whose basic material can be
reused in its original form with the minimum loss of energy. When the product is finished, it
will decay to its component parts with little detrimental effect on the environment.
The move into environmentally responsible business operations has been driven by
businesses increasingly realising they have social and environmental responsibilities beyond
profit. Additionally, businesses have realised that consumers are increasingly demanding
environmentally responsible products.
3.6.2 Other Issues Including Creation of Needs, Impacts of Retail
Developments, Sugging (Selling Under the Guise of Research)
There are a range of other ethical issues that arise from marketing activities, some of which
attract a lot of criticism. These issues include the creation of needs, the impacts of retail
developments and ‘sugging’.
A)
Creation of Needs
Pervasive marketing can be used to create needs in the minds of consumers that did
not previously exist. For a business, this is an extremely attractive and effective way
of increasing revenues – the business has effectively created a market rather than
having to target an existing market.
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The use of advertising in particular to create false needs raises ethical questions about
the impact of marketing on consumers.
A related criticism is aimed at planned obsolescence, when producers cause their
products to become obsolete before they should actually need replacement. They
use materials that will break, wear out, or cannot be replaced at all in the search for
more sales.
Some producers constantly change the design of products, or introduce new
features, just to encourage more buying. All of the above are examples of how some
businesses create needs.
Question:
B)
Do you believe that the above business practices are ethical?
Impacts of Retail Developments
Another area of concern is the impact on consumers of the large growth of retail
developments in recent years. Large shopping centers are no longer simply a place
to go and shop, but have been extended to provide a place for customers to meet
their friends and be entertained. This growth in retail accessibility has increased the
pressures on consumers to make purchases. This disastrous trend has enormous
implications for consumers who spend more than they can afford and end up getting
caught in a debt cycle where they are forced to borrow even more.
C)
Sugging (Selling Under the Guise of Research)
SUGGING is the process of selling under the guise of research. This means that a
salesperson approaches the consumer to ‘ask a few questions’, pretending it is for
market research. However, as the interview progresses the consumer is given a sales
pitch and pressured to purchase a product. This form of selling, although not illegal,
is often considered unethical because of the misleading nature of the customer
interaction. Despite this unethical classification, the use of sugging is widespread
within Australia.
For Example: Questions like ‘Would you like to reduce your tax and pay off your
mortgage in 10 years?’ are not only designed to increase interest in
the product, but are questions that most people would answer ‘Yes’
to, thereby falling into the trap of the seller.
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3.6.3 Role of Consumer Laws in Dealing With
–
–
–
–
–
Deceptive and Misleading Advertising
Price Discrimination
Implied Conditions
Warranties
Resale Price Maintenance
CONSUMER LAWS protect consumers from a range of unethical business practices.
They are continually amended in Australia to reflect the changing nature of markets and the
ever-evolving tricks used by unethical businesses to cheat customers. In 1974, the Trade
Practices Act was introduced. The main types of consumer protection embodied in the Act
are focused on preventing deceptive and misleading advertising, implied conditions
and warranties, and resale price maintenance. The Trade Practices Act 1974 is
administered by the Australian Competition and Consumer Council (ACCC) which has
the power to prosecute and fine any business found in breach of the Act.
A)
Deceptive and Misleading Advertising
Under the Act, advertising must be truthful and avoid any false, misleading or
potentially misleading claims. Deceptive advertising includes practices such as
overstating the product’s features or performance, misleading labels, and running
rigged or unfair competitions.
Businesses must also avoid bait-and-switch advertising that attracts customers on
promises of low prices (the bait), when in fact there are very few products at those
low prices. Consumers, once in the store, are then drawn to other products which
are more expensive (the switch).
B)
Price Discrimination
PRICE DISCRIMINATION is the act of charging different prices for the same
product to different people. The Act specifically states that “businesses must not
charge different prices for goods, if those prices do not reflect the differences
in the costs of providing those goods to different businesses”. However, there
are circumstances where price discrimination is actually legislated for. For
Example:
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

If the seller can prove that its costs are different when selling to different retailers
If the seller makes different qualities of the same product for different retailers

If the retailer is trying to temporarily meet local competitors’ prices
Other examples include the discounts which are available to students, pensioners and
war veterans, and the cost of airfares for business and holiday travelers.
C)
Implied Conditions
An IMPLIED CONDITION of sale is a condition that is not explicitly stated, but
rather conveyed and understood at the point of sale. The Act states that a product
“must be of merchantable quality and be fit for its purpose”, identifying two key
implied conditions at the point of sale that businesses must adhere to.
To be of merchantable quality the product must be in a condition reasonable for its
advertised condition and price. It is illegal for businesses to sell a product that does
not work or will break soon after.
A product must also be ‘fit for its purpose’. Essentially, this means the product must
exhibit all the characteristics it is advertised with, and be able to reasonably perform
its intended duty. For Example: Consider a bookshelf that is sturdy enough to
hold a photo-frame, but collapses under the weight of books.
D)
Warranties
Similarly, if a product is purchased and is found to be faulty by no fault of the
customer, the seller has an obligation to replace it free of charge to the customer.
This is known as an implied warranty even though the good may have been sold
without one.
E)
Resale Price Maintenance
RESALE PRICE MAINTENANCE occurs when the supplier of a product, tells
the retailer that the business must sell their product for a particular price. This is
usually accompanied by a threat to stop supply if the retailer breaks the agreement.
Although the law states that a business cannot fix its sale price to the consumer,
many manufacturers will flaunt this rule or seek to manoeuvre around this rule by
creating ‘Recommended Retail Price’ levels. However, retailers can still sell the
product at a discount if they wish. A manufacturer cannot refuse supply.
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DEFINITIONS:
Consumer Laws
Laws which protect the consumer from unsafe products and
ensure their rights with the seller.
Implied Conditions
Unwritten guarantees that the product or service will do the
job it is intended to do.
Price Discrimination
The act of charging different prices for the same product to
different people.
Resale Price Maintenance
A pricing policy where the supplier of a product, tells the
retailer that the business must sell their product for a
particular price.
Sugging
The process of selling under the guise of research.
HOMEWORK ACTIVITIES:
Activity 1:
Read the Case Study “How Shell learnt to put things right” on P.273 and
the Case Study “Green Bucks” on P.275/276 of the Text.
Activity 2:
Briefly explain how a business you know has taken a more environmentally
responsible stance in recent years.
Activity 3:
Explain the difference between ethical and legal responsibility.
Activity 4:
A car salesman advertises a used car as practically new and tells potential
buyers it has ‘never had a scratch on it’. However, the salesman knows that
the car has, in fact, been in an accident and required significant body work.
Explain how this salesman is acting unethically or unlawfully.
Activity 5:
Later that same day, having sold a new Toyota Camry to a teenager for
$20,000, the salesman sees a well-dressed gentleman looking at the same car.
The salesman informs the gentleman that the price of the car is $22,000, not
negotiable. Justify whether the salesman has acted ethically or unlawfully.
Activity 6:
Imagine that the used car in Activity 4 is bought by a young couple that day.
On the way home the car breaks down suffering from severe engine trouble.
Examine how the car is in breach of any implied conditions and what action
the car salesman must take.
Activity 7:
Complete the Activities (Questions 1 – 5) on P.280 of the Text.
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