Product Safety, Consumer Protection, & Deceptive Marketing Chapter 4 © 2003 by Paul L. Schumann. All rights reserved.

Introduction Examples of Bridgestone/Firestone and Metabolife International clearly demonstrate, consumers are exposed daily to high levels of risk simply by using consumer products The risk translates into injury, death and high costs. Consumers must also bear the costs of deceptive sales practices, shoddy mechandise, and un-honored warranties. This chapter examines ethical issues raised by product quality and advertising

Issues Consumer ProtectionConsumer Protection Deceptive MarketingDeceptive Marketing Consumer’s Right to PrivacyConsumer’s Right to Privacy

Markets and Consumer Protection (1) Consumer safety is seen as a good that is most efficiently provided through the mechanism of free market whereby sellers must respond to consumer demands. If consumers want products to be safer - must be willing to pay more for safer products and shows preference for manufacturers of safe products. Producers must build more safety into their products or they risk losing customers to competitors. –Market ensures that producers respond adequately to consumer’s desires for safety

Markets and Consumer Protection (2) If consumers: –do not place a high value on safety –unwilling to pay for safety or –has no preference for safer products then it is wrong to push increased levels of safety down their throat through government regulations. Such government interference distorts markets, making them unjust, disrespectful of rights and inefficient. Only consumers can say what value they place on safety and they should be allowed to register their preferences through free choices in markets and not to be coerced by businesses or governments into paying for safety levels they may not want.

Markets and Consumer Protection (3) eliminated The critics of this market approach respond that the benefits of free markets are obtained with certainty only when markets have the seven characteristics that define them:- a) there are numerous sellers and buyers 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 is no external costs f) all buyers and sellers are rational utility maximizers g) the market is unregulated

Markets and Consumer Protection (4) eliminated These characteristics are absent in consumer markets, focusing especially on characteristics (c) and (f). Markets are efficient only if participants have full and perfect information about the goods they are buying.

Ethical Duties of Manufacturers Contract Theory Due Care Theory Social Costs Theory

Contract View of Business Firm’s Duties to Consumers The view that the relationship between a business firm and its consumers is essentially a contractual relationship and the firm’s moral duties to the customer are those created by this contractual relationship.

Contract Theory Firm’s duties to customer created by contract with customer –Explicit contracts –Implicit contracts Contract creates duties

Contract Theory Duties 1.Duty to comply: product must be reasonably safe for its intended use –Consumer can bear risk if all 4 conditions met: A.They know the risk exists B.They can appraise the risk’s probability & severity C.They can cope with the risk D.They refuse to pay more to reduce the risk

Contract Theory Duties 2.Duty of disclosure: disclose relevant facts 3.Duty not to misrepresent: don’t mislead 4.Duty not to coerce: don’t exploit fear, stress, gullibility, immaturity, or ignorance

Due Care Theory Buyers & sellers don’t meet as equals –Sellers have better knowledge & expertise –Buyers in vulnerable situation Seller has a duty to exercise due care to protect consumers from harm that the seller can reasonably foresee

Due Care Theory Seller should protect consumers by: –Design –Choice of materials –Manufacturing process –Quality control –Warnings, labels, & instructions Failure by a seller to exercise due care is considered to be negligence

The Social Cost View (1) Manufacturer should pay the costs of all injuries caused by the defect in a product even if exercised due care (Eg. Proton : defects in the steering wheel) Argues that injuries are external costs that should be internalized. –Manufacturer bear the external costs that results from these injuries as well as the internal costs of design and manufacture and all costs are internalized and added on as part of the price of the product.

The Social Costs View of Manufacturer’s Duties (1) The view that a manufacturer should pay the costs of any injuries sustained through any defects in the product even when the manufacturer exercised all due care in the design and manufacture of the product and has taken all reasonable precautions to warn users of every foreseen danger.

The Social Costs View of Manufacturer’s Duties (2) Manufacturer has a duty to assume the risks of even those injuries that arise out of defects in the product that no one could reasonably have foreseen or eliminated. This theory is a strong version of the doctrine caveat vendor. Let the seller take care.

Social Costs Theory Strict liability –Seller should bear all the costs when a consumer is injured by a product Product price now reflects all costs, including costs associated with consumer injuries Seller has incentive to protect consumers Costs spread across all users of the product

Social Costs Theory Critics: –Not practical: insurance will become too expensive –Reduces incentives for consumers to be careful

Product Liability Legal Issues Grounds for recovery: –Warranty: product must be fit for its intended use –Intentional misconduct: seller knew (or was reckless) that the product was defective and would cause injury in normal use –Negligence: due care –Strict liability: wild animals, known dangerous domestic animal, abnormally dangerous stuff

Deceptive Marketing “Hype” or “puffery” is expected But deception is unethical We need guidelines to decide where to draw the line between hype and deception

Deceptive Marketing Guidelines Intent: Does the seller intend to get the audience to believe a falsehood? Knowledge: Does the seller know the claims are false? Actions: Does the seller take actions to get the audience to believe the falsehood? Audience Sophistication: Does the audience understand the claims made are not real?

Consumer Privacy Companies may have access to lots of information about their customers –Concern: that information might be misused Right to Privacy: right of a person to decide what information is collected about the person, who has access to the information, and how the information is used But a company has a need for some information about its customers

Consumer Privacy Guidelines to balance business needs against consumer’s right to privacy: –Relevance: relevant business purpose –Informing: consumers know –Consent: consumers consent –Accuracy: accurate information & correct errors –Purpose: benefits consumer –Recipients & security: ensure security