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Part III: Business and
Society
Chapter 6: Consumers
Chapter 7: The Environment
Chapter Six:
Consumers
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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
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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
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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Product Safety
 Self-regulation: Businesses generally prefer selfregulation, 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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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Other Areas of Business
Responsibility
 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.
Moral Issues in Business
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Other Areas of Business
Responsibility
 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.
Moral Issues in Business
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Other Areas of Business
Responsibility
 Price gouging: A seller’s exploitation of a shortterm 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.
Moral Issues in Business
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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.
Moral Issues in Business
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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.
Moral Issues in Business
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Deception and Unfairness in
Advertising
 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?
Moral Issues in Business
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Deception and Unfairness in
Advertising
 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
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Deception and Unfairness in
Advertising
 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.
Moral Issues in Business
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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.
Moral Issues in Business
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The Debate Over Advertising
 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.
Moral Issues in Business
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The Debate Over Advertising
 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 freemarket 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.
Moral Issues in Business
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