978-0205017669 Chapter 6 Lecture Note

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CHAPTER SIX

The Ethics of Consumer Production and Marketing

Overview

Introduction

Annually, motor vehicles kill 34,000 Americans incapacitate 260,000, and injure 2.2 million

others. Americans are also exposed daily to astonishingly high levels of risk from the use of

consumer products. Each year on average 33.6 million people suffer injuries related to

consumer products (not counting motor vehicles) and about 28,200 of them are killed. The

Consumer Product Safety Commission estimates that the total cost of product related

injuries in a single year is about $800 billion. The number of product deaths and injuries

would be much greater if the U.S. government did not regularly require companies to recall

defective or harmful products. This chapter examines the ethical issues raised by product

quality and advertising.

However, product injuries make up only one category of costs imposed on consumers.

Other areas of costs for unwary consumers are deceptive selling practices, shoddy product

construction, products that immediately break down, and warranties that are not honored.

6.1 Markets and Consumer Protection

Consumers are at great risk every day. Many believe that consumers are automatically

protected from injury by the operation of the free market and neither governments nor

business people should intervene in markets to require product safety. In the market

approach to consumer protection, consumer safety is seen as a good that is most efficiently

provided through the mechanism of the free market whereby sellers must respond to

consumer demands. If consumers want products to be safer, they will indicate this

preference in markets by willingly paying more for safer products and showing a preference

for manufacturers of safe products while turning down the goods of manufacturers of unsafe

products. Manufacturers will have to respond to this demand by building more safety into

their products or they risk losing customers to competitors who cater to the preferences of

consumers. Moreover, if consumers do not place a high value on safety (or are unwilling to

pay for it), then it is wrong to force them to accept higher levels of safety through

regulation. Forcing the manufacturers to provide more safety than consumers want

increases manufacturing costs which leads to higher consumer prices so that ultimately

consumers are forced to pay for a product feature they did not want in the first place.

Critics to the market approach respond that the benefits of free markets are obtained only

when the markets have all of the seven defining characteristics: (a) There are numerous

buyers and sellers, (b) everyone can freely enter and exit the market, (c) everyone has full

and perfect information, (d) all goods in the market are exactly similar, (e) there are no

external costs, (f) all buyers and sellers are rational utility maximizers, and (g) the market

is unregulated. Critics of the market approach to consumer issues argue that these

characteristics are absent in consumer markets.

Most importantly, markets are efficient only if participants have full and perfect information

about the goods they are buying. This is obviously not always the case, however; some

products are simply too complex for anyone but an expert to understand them. Gathering

information is also time consuming and expensive, so many consumers may not have the

resources to acquire the necessary information on their own.

In theory, of course, if consumers really wanted this information, then a market would be

created for consumer information. It is difficult, however, for such organizations to cover

their costs. Once costly information is released, it is easily leaked to others who do not pay.

Because people know they can become free riders, the number of people who pay for the

information is too small to cover the costs of gathering it. Second, consumers are unwilling

to pay for information because they do not know what its value is until after they get it, and

then they already have it and don’t need to pay for it. When we buy information, we cannot

know in advance what we are purchasing until we have it. Markets alone, then, cannot

provide consumers with the information they need.

Another criticism of the free market approach to consumer issues refers to the sixth

characteristic of perfectly competitive free markets that “All buyers and sellers are utility

maximizers…” The consumers defined by the theory think ahead, consider, and watch

every penny they spend, knowing how their choices will affect their preferences. This does

not really characterize consumer choices, however. Most consumer choices are based on

probability estimates that we make concerning the chances that the products we buy will

carry no major risk of injury or the probability that it will serve our purposes. Research

shows, unfortunately, that we become inept and irrational when we make such choices.

Most of us are not good at estimating probabilities. We typically underestimate risks and

overestimate the probabilities of unlikely but memorable things. We typically underestimate

the risks of common life-threatening activities such as driving, smoking, eating fried foods,

or being injured by the products we use, and we underestimate the probabilities of unlikely

but memorable events such as tornadoes or attacks by grizzly bears in national parks. Our

probability judgments go astray for a number of reasons:

1. We ignore or discount important information about a product,

2. We make broad generalizations on the basis of small samples.

3. We believe in a self-correcting but nonexistent “law of averages.”

4. We believe that we control purely chance events.

Secondly, people are irrational and inconsistent when weighing choices based on probability

estimates of future costs and payoffs. Research shows that people inconsistently rank one

payoff as being both better and worse than another. Finally, markets often fail to have

numerous buyers and sellers. Since most consumer markets are monopolies or oligopolies,

the sellers are able to extract abnormally high profits by ensuring that demand always

exceeds supply.

Finally, many, perhaps most consumer markets are not competitive, but are, monopolies or

oligopolies in which suppliers can manipulate price and supply. So, as a whole then, market

forces by themselves are not able to deal with consumer concerns for safety, freedom from

risk, and value. Instead, consumers must be protected by governmental action and the

voluntary initiatives of responsible business people. Of course, part of the responsibility for

consumer injuries does rest on consumers. People often use items that they have neither

the skill nor experience to handle.

Injuries also occur because of flaws in design, materials, or manufacturing, however. In

these cases, it is the manufacturer’s duty to minimize injuries. Their expertise makes them

most knowledgeable about the safest materials and methods of making their products.

Where does the consumers’ duty end and the manufacturer’s duty to protect the consumers

begin? Three different theories address this question: the contract, “due care,” and the

social costs views.

6.2 The Contract View of Business Firm’s Duties to Consumers

In the contract view of business’ duties to consumers, the relationship between a firm and

its customers is essentially contractual. When we purchase an item, we enter voluntarily

into a “sales contract” with the firm, who then has a duty to provide a product with the

characteristics they have agreed to supply. Consumers therefore have a correlative right to

receive the product they have been promised, and pay a certain sum of money to the firm

for the product.

This theory’s primary responsibility rests on the view that such contracts are free

agreements that impose on each side the duty of complying with the terms of the

agreement. Both Kant’s and Rawls’ theories offer justification for this view. From Kant’s

point of view, if a person fails to adhere to the terms of the contract, the practice cannot be

universalized and it treats the other person as a means and not an end. Rawls holds that

freedom becomes expanded by the assurance that the keeping of contracts is based on the

assurance that people need to trust each other’s word. This secures the benefits of the

institution of contracts.

Traditional moralists also remind us that contracts are subject to several moral constraints

(mentioned in Chapter Two): both parties must have full knowledge of the agreement,

neither party must misrepresent the facts, and neither party must be forced to enter the

contract under duress or undue influence.

Therefore, the contractual theory of business firms’ duties to consumers claims that a

business has four main moral duties:

1. Complying with the terms of the sales contract and the secondary duties of

2. Disclosing the nature of the product,

3. Avoiding misrepresentation,

4. Avoiding the use of duress and undue influences.

By acting in accordance with these duties, a business respects the right of consumers to be

treated as free and equal persons—that is, in accordance with their right to be treated only

as they have freely consented to be treated.

The Duty to Comply

First, businesses must provide a product that actually lives up to the express claims that

they make about it. In addition, they must also carry through on any implied claims they

knowingly make about it. Generally, such claims refer to one of four areas: reliability,

service life, maintainability, and product safety. Businesses therefore, must provide

products that are as reliable, long-lasting, easily maintained, and as safe as consumers are

led to believe them to be. In fact, our legal system (as cited in the Uniform Commercial

Code) has incorporated the moral view that firms have a duty to live up to the express

claims they make about their products.

Since a contract cannot bind where both parties do not have full knowledge, the seller also

has a duty to disclose to the buyer any facts about the product that would affect the

consumer’s decision to purchase it. Sellers also must not misrepresent their products. Even

more than not disclosing information, misrepresentation makes freedom of choice

impossible; it is, in reality, coercive. Coercion itself also renders a contract void, because

people act irrationally when under the influence of fear. Sellers must not take advantage of

gullibility, immaturity, or ignorance, which reduce the buyer’s ability to make a free rational

choice.

The main objections to the contractual theory maintain that the assumptions on which the

theory is based are unrealistic. Manufacturers do not deal directly with consumers. They do

deal indirectly with them through advertisements, however, and promoters of the theory

argue that advertisements forge the indirect contractual relationship between seller and the

buyer.

Another objection to the theory points out that consumers can freely agree to purchase a

product without certain qualities. Manufacturers can be released from normal contractual

obligations simply by disclaiming that the product is safe and reliable. Disclaimers can, in

effect, nullify all of the seller’s contractual duties.

Finally, critics of this theory point out that the assumption that buyer and seller meet on

equal ground is false. Buyers and sellers are not equally skilled; the seller is in a much

stronger position than the buyer. Sellers only have to know their own products, while

buyers need to know about every sellers’ products for every commodity they purchase.

Consequently, consumers must usually rely on the word and the judgment of the seller in

making their purchase decisions.

6.3 The Due Care Theory

The due care theory of the manufacturer’s duties to consumers is based on the idea

that consumers and sellers do not meet as equals and the consumer’s interests are

particularly vulnerable to being harmed by the manufacturer, who has a knowledge and an

expertise that the consumer lacks. Because manufacturers are in a more advantaged

position, they have a duty to take special care to ensure that the products they offer do not

harm the consumers’ interests. The doctrine of caveat emptor is here replaced with a

weak version of the doctrine of caveat vendor. Let the seller take care. Because

consumers must rely on the expertise of the manufacturer, they have a duty not only to

deliver a product that lives up to the express and implied claims they make about it. They

have a duty to exercise due care to prevent others from being injured by the product, even

if they explicitly disclaim such responsibility.

Due care must enter into the product’s design, choice of materials and construction

methods, quality control, and warnings attached to it. Failure to exercise due care in these

areas is a breach of the manufacturer’s moral duties. This theory rests on the principle that

agents have a moral duty not to harm or injure others. The principle can be defended by the

ethics of care, of course, but rule utilitarianism, Kant, and Rawls can all also be used as a

solid basis for the theory.

Manufacturers’ responsibilities to exercise due care extends to the following three areas:

1. Design – a product’s design should not conceal any dangers, should conduct

research and tests to uncover any risks, incorporate all feasible safety devices, and

use adequate materials. The capacities of the persons who will use the product

should be considered. The design should additionally be well tested to ensure that

consumers will use the product properly.

2. Production – the manufacturing process must be controlled to eliminate any

defective items, identify weaknesses, and ensure that unsafe economizing measures

are not taken. Adequate quality controls are to be used during manufacturing.

3. Marketing – the firm should attach labels, notices, and instructions on the product

warning of all potential dangers involved in using or misusing the item.

Manufacturers must also take into consideration the capacities of the persons who

they expect will use the product. If the possible harmful effects of using a product

are serious or if they cannot be adequately understood without expert opinion, then

sale of the product should be carefully controlled.

There are three difficulties with the due care theory. The basic problem with it is that there

is no way to determine when one has exercised enough due care. Every product involves

some small risk; if all risks were eliminated; few if any products would be affordable.

Secondly, the theory assumes that the manufacturer can indeed discover all the risks

attendant upon using a product before it is actually used and this may not be possible.

Finally, the theory is to some, paternalistic, assuming that the manufacturer alone should

make the important decisions about the level of risk the consumer should bear. Perhaps

such decisions should be left up to consumers, who can decide for themselves whether or

not they want to pay for additional safety measures.

6.4 The Social Costs View of the Manufacturer’s Duties

The third theory of the duties of the manufacturer extends beyond what the other two

theories impose. It maintains that a manufacturer must pay the costs of any injuries

sustained through any defects in the product, even when the manufacturer exercised due

care in the designing, making, and marketing it, and took all reasonable precautions to

warn users of every foreseen danger.

This theory, which forms the basis of the legal doctrine of strict liability, is utilitarian. It

says that the external costs of injuries resulting even from unavoidable defects constitute

part of the cost society must pay for producing and using a product. Having the

manufacturer bear these costs is the most efficient use of society’s resources: that way, the

price of the good will reflect its real cost and it will not be overproduced. Secondly,

manufacturers will take even greater care since they will be responsible for paying for all of

the costs of injuries. Third, when they include the cost of injuries in the price of the product,

they also will be distributing the real cost of the item among all users, which would seem

more fair than making just the unlucky injured parties bear the entire cost of the injury

themselves.

Underlying this third theory on the duties of the manufacturer are the standard utilitarian

assumptions about the values of efficiency which holds that the efficient use of resources is

so important for society that social costs should be allocated in whatever way will lead to a

more efficient use and care of our resources.

The major criticism of this theory is that it is unfair because it violates the basic canons of

compensatory justice: a person should not be forced to compensate an injured party if he or

she could not have foreseen and prevented the injury. Critics also contend that the theory

will not actually reduce the number of accidents. Instead, it may have the unintended effect

of encouraging carelessness in consumers, which would cause even more accidents. Finally,

such critics argue that liability suits will increase and impose heavy losses on insurance

companies, forcing insurance rates to rise precipitously. A growing number of consumers

successfully sue manufacturers for compensation for any injuries sustained while using the

product, even when the manufacturers took all due care to ensure that the product was

safe.

Social cost theorists counter by pointing out that, in reality, the costs of consumer liability

suits are not large. Less than 1% of product-related injuries result in suits, and successful

suits average only a few thousand dollars in any case. Moreover, the insurance industry has

remained quite profitable, despite the warnings of the critics.

6.5 Advertising Ethics

Advertising is a huge industry, which imposes great expense on manufacturers and service

providers. Commercial advertising is sometimes defined as a form of “information” and

an advertiser as “one who gives information.” The implication is that the defining function of

advertising is to provide information to consumers. In the end, consumers must cover the

costs of advertising, but what do they get for this extra expenditure? Most consumers say

that they get very little. So is advertising a waste, or a benefit? Does it help or harm

consumers?

Though advertising is sometimes defined as “information,” this fails to distinguish it from

the type of information found in Consumer Reports. Most advertisements contain precious

little information in any case, for example: “Got Milk?” (America’s Dairy Farmers and milk

Processors) and “Have it your way” (Burger King) are nearly empty statements. The

primary function of advertisements is to sell products to prospective buyers. It is publicly

addressed to a mass audience, so it has a necessarily widespread social effect. It is also

intended to create desire and a belief in consumers that the product will satisfy the desire.

Advertising’s critics point out that it has several harmful effects on society. First, its

psychological effects are damaging in that it debases the tastes of consumers by inculcating

materialistic values about how to achieve happiness. Whether or not advertising has such

effects is still uncertain. Indeed, the success of advertising may depend on consumers

already having the values that the advertisements focus upon.

Another major criticism of advertising is that it is wasteful. Those who make this type of

objection point to the distinction between production costs and selling costs. Production

costs are the costs of the resources consumed in producing a product. Selling costs are

the additional costs of resources that do not go into the product itself, but rather are

incurred as a result of persuading consumers to purchase it. The resources consumed by

advertising, according to this theory, add nothing to the utility of the product.

Advertisers counter that advertisements are a kind of communication between a seller and

potential buyers and do add information to the product. They also say, however, that

advertising creates desire for the seller’s product in consumers and is a means of satisfying

some desire the buyer already has.

Discussion of the ethical aspects of advertising is focused around its stated social effects, its

creation of consumer desires, and its effects on consumer beliefs.

Critics of advertising claim it has several adverse effects on society:

1. It degrades people’s tastes. To be effective it must present irritating and

aesthetically unpleasant displays, inculcating materialistic values and ideas about

how happiness is achieved.

2. It wastes valuable resources. Selling costs are those that do not add to the

product but are used to getting people to buy the product.

3. It creates monopoly power. Monopolies lead to higher consumer prices.

John Kenneth Galbraith and other critics have long argued that advertising merely

manipulates consumers, creating desires solely to absorb industrial output. Physical desires,

such as the desire for food and shelter, are perfectly normal. But the psychological desires

that are inspired by advertising are not under the consumer’s control in the same way that

physical desires are, which puts the firm (instead of the individual) in control. If Galbraith’s

view is correct, then advertising violates the individual’s right to choose freely for himself or

herself. It is not clear, however, that this view is correct, and theorists such as F. A. von

Hayek have pointed out that psychic wants have been around longer than advertising in any

case.

The most common criticism of advertising concerns is its effect on the consumer’s beliefs.

Because advertising is a form of communication, it can be as truthful or deceptive as any

other form of communication. Most criticisms of advertising focus on the deceptive aspects

of modern advertising. Nevertheless, even if advertising as a whole is not manipulative,

there are clearly some advertisements that are intended to manipulate. Such

advertisements do clearly violate the consumer‘s right to be treated as a free and equal

rational being.

Deceptive advertising takes many forms: using deceptive mock-ups, untrue paid

testimonials, inserting the word guarantee where nothing is guaranteed, quoting misleading

prices, failing to disclose defects in a product, misleadingly disparaging a competitor’s

goods, simulating well-known brands or use of “bait and switch” tactics are all forms of

deception. There is no controversy over whether or not deceptive advertising is immoral: it

clearly is. The problem is to understand how advertising becomes deceptive.

All communication involves three things: the author or originator of the message, the

medium that carries the message, and the audience who receives it. Deception involves

three necessary conditions in the author:

1. The author must intend to have the audience believe something false.

2. The author must know it to be false.

3. The author must knowingly do something that leads the audience to believe the

falsehood.

Thus, an advertiser cannot be held morally responsible for an audience having

misinterpreted a message when the misinterpretation is unintended, unforeseen, or the

result of carelessness on the part of the audience.

The media carrying the message also has a responsibility to ensure the truth of what it

carries to the audience. Both the author and the media must take into account the

interpretive skills of the audience as well. To determine the ethical nature of an

advertisement, the following points are relevant: The capacities of the person or persons

who receive the message, the capacity that the consumers possess to filter out the puffery

and bias most advertising messages carry.

Whether an advertisement is deceptive depends on the capacity of the audience for which

it is intended. A clever and knowledgeable audience may be capable of interpreting and

advertising that may be misleading. A less educated audience might not. Advertisements

that will reach the less sophisticated audience must be designed to avoid misleading those

potential buyers whose judgment is limited, particularly when matters of health or safety

are involved. In those cases, special care should be exercised not to mislead users into

ignoring possible dangers.

The moral issues raised by advertising are complex and involve still unresolved problems.

However the main factors that should be taken into consideration when determining the

ethical nature of a given advertisement are the: social effects, effects on desire and effects

on beliefs.

6.6 Consumer Privacy

Advances in technology have created the potential for serious harm to consumers’ privacy.

Financial institutions, credit bureaus, etc., maintain detailed files on consumers, including

information about their economic activity and personal information (such as marriage,

employment, addresses, and other information). The three main credit unions maintain files

on 150 million consumers, with millions of file updates each day. Though these files are

used as an important deciding factor in granting loans, credit cards, and jobs, a recent

study found errors in 43% of credit reports.

The individual’s obvious right to privacy, both physical and psychological, is important.

Psychological privacy is privacy with respect to a person‘s inner life. This includes the

person’s thoughts and plans, personal beliefs and values, feelings, and wants. These inner

aspects of a person are so intimately connected with the person that to invade them is

almost an invasion of the very person. Physical privacy is privacy with respect to a

person’s physical activities.

It must be balanced, however, with the rights and needs of others. Banks must know

something about the credit history of those to whom they are lending money, for example.

Since consumers benefit from the banking system, they also benefit from their right to

privacy being balanced against the banks’ right to know their personal information.

To balance these two factors, the following factors are crucial:

1. Purpose – The purpose for which the information is collected must be legitimate,

resulting in benefits generally enjoyed by those who are having the information

gathered from them.

2. Relevance – Databases should contain only information directly relevant to the

purpose for which it is collected.

3. Informing – Consumers should be informed that information is being collected and

told what the purpose of its collection is.

4. Consent – Businesses should collect information only if consumers consent to

provide it.

5. Accuracy – Agencies must ensure that the information is up to date and otherwise

accurate, quickly correcting any errors.

6. Security Recipients and Uses – Agencies must ensure that the information is

secure and not revealed to parties that the individual has not explicitly or implicitly

consented to be a recipient of that information or used in ways to which the

consumer did not consent.

Extra Resources

1. “Supersize Me” (2005) is a 96 minute documentary on the nutritional value of fast

foods; “Food, Inc” (2009) is a 91 minute documentary on how large corporations

produce our food.

2. “The Corporation” (2004) is a 145 minute documentary on the corporation with

interviews. The following are suggested interviews for this chapter:

Lucy Hughes, Vice President of Initiative Media, advertising executive, and Dr. Susan

Linn, professor of Psychiatry, Baker’s Children Center, Harvard on advertising for

children.

Professor Joe Badaracco – Marketing to Kids “It’s OK If It Doesn’t Work”

Milton Friedman – Democracy “I Don’t Believe in Democracy”

Ira Jackson – History “Adam Smith: Poster Boy for Greed”

Ira Jackson – Capitalism “Capitalism Needs a Moral Manifesto”

Mary Zepernick – Democracy “Property Over People” .

Questions for Class Discussion

1. What is the market approach to consumer protection? In what ways does it fall short

of completely protecting consumers?

2. Why are people not good at making probability estimates? How is this relevant to

consumer protection issues?

3. According to the contract view of business’ duties to customers, what are the four

basic duties a firm has to its customers? Why are they necessary? What objections

do critics raise about this theory?

4. What characterizes the due care theory? To what aspects of business does a

producer’s duty to exercise due care extend?

5. How does the social costs view extend the due care theory and the contract view?

Why do its critics say that the social costs view is unfair? Are their arguments

persuasive?

6. What are the social effects of advertising? Does it really create consumer desire in

the way that Galbraith maintained?

7. How does advertising become unethical? What steps must each part of the

advertising “communication” process take to ensure that it remains ethical?

8. What factors must be taken into consideration when determining the ethical status of

a particular advertisement?

9. Why do consumers have a right to privacy? Why does industry have a right to know

consumers’ personal information? How do we strike the balance between them?

What considerations are relevant when striking this balance?

Activities and Assignments

1. Have students bring in print or video advertisements that are 1. informative and

helpful and 2. misleading and/or unethical. Discuss what makes each example either

ethical or unethical.

2. Using some of the advertisements the students have collected, discuss the audience

that each advertisement seems to be aimed at.

3. Ask students to describe something that they purchased which either immediately

broke, was unsafe, or was not what they thought it would be based on the

advertisement that induced them to purchase it. What losses did they incur? Were

they treated fairly by the producer?

4. Have students get a copy of their own (or a parent’s or close relative’s) credit report.

Without revealing their personal information to the class, ask each student to rate

the relevance and accuracy of what they find, and tabulate the results for the entire

class. (There are numerous online sources of such reports, either free or moderately

priced.)

5. Have students check one of the consumer protection websites listed on the

companion web site (www.prenhall.com/velasquez) to look for a product that they

have been thinking of buying. Have them compare the information they find there

with the information they receive from the media about the product.