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Part III: Business and Society

Chapter 6: Consumers
Chapter 7: The Environment

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Chapter Six:
Consumers

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Overview
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
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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?
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“Wigand revealed in a 60 Minutes interview that his employer knew nicotine was addictive and intentionally manipulated the tobacco content of its cigarettes to increase the amount of nicotine they delivered.”

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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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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.
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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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Product Safety
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.
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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.
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Product Safety
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.
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The Responsibilities of Business
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
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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:
Express: The claim that a seller explicitly states
Implied: 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:
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.
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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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“In May 2008, American Airlines, one of the industry’s major carriers, started imposing a checked-bag fee. Other airlines promptly followed suit. What are consumers to think when a policy instituted by one company is promptly adopted by others?”

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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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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.
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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?
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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.
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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 spanning 30 years, showed that exposure to TV ads is “associated” with obesity in children under twelve.
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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.
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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.
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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 free-market 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.
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Discussion on issues in Chapter 6

Make sure you have viewed the video on “Consumers” in this Module.

Do consumers have the right to buy, purchase, consume any product or service?  Employees are consumers.

How do you argue Case 5.4?

Do employee rights outweigh the religious rights of store owners?

Use the Argument Formula