12.

Business Ethics & Consumers

 Introduction
 Consumers make purchases of goods and services
with high expectation.
 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?
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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.

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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.

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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.

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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.

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 Cases:
• Grass cutter was
cutting the small
branches at Mr ZZ
lawn using grass
cutting machine.
While doing so, the
severed branch flies
and hurt Mr ZZ who
was reading his news
paper. Discuss.
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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.” hence the policing function.
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.
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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.

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Case:
• Toyota recalled Camery
produced with serial
number XXXXX for
inspection and if
necessary rectify the
car’s brake system f.o.c.
Disuss.

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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.

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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.

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 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.
Business Ethics
Chapter 6
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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.

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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.

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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.

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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.

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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.

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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.
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 Other Areas of Business Responsibility

 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.

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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.

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 Class Discussion

• Discuss the ethical responsibilities of

businesses towards consumers. (Hint: 6
points)

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