2. 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.
3. 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?
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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.
21. 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.
22. 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?
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
