Business Ethics

The Ethics of Consumer

Production and Marketing
 Ethics of Consumers Production
• Sun Pharmaceutical Industries, Inc. (SPII), is voluntarily recalling two lots
of Riomet® (Metformin Hydrochloride Oral Solution), to the retail level
(Class II Recall). Riomet® is indicated to treat type 2 diabetes mellitus in
adult and children age 10 and above. This product is manufactured for SPII
by a contract manufacturer. The Riomet® has been found to be
contaminated (Scopulariopsis brevicaulis). The contamination was
discovered during sample preparation for the Antimicrobial Preservative
Effectiveness Testing (AMPET) being performed as part of the 12 month
stability study interval.

• Use of Riomet® (Metformin Hydrochloride Oral Solution) potentially could

result in a risk of infection, especially in the immunocompromised patient.
The most plausible portal of entry of Scopulariopsis brevicaulis is the
respiratory tract, where it may cause pneumonia, sinusitis and
disseminated infections. To date, SPII has not received any reports of
adverse events related to this recall.
 Ethics of Consumers Production
• Rajesh Maru, 32, died recently at Yamunabai Laxman Nair Charitable Hospital,
Mumbai after his hand was trapped in a MRI machine, an accident that has
sparked concerns about the chaotic and sometimes dangerous conditions in
India’s government-run hospitals. He had entered an MRI testing room at the
hospital holding a cylinder of oxygen, after a hospital staff member gave him
the okay to proceed, according to local news reports. Maru died within
minutes, his hand that was holding the oxygen tank trapped by the machine.
He was freed and taken to the emergency room in 10 minutes but pronounced
dead on arrival. A postmortem report said he died of a collapsed lung.
Authorities are investigating the incident. Three people — a doctor, and two
hospital assistants — have been arrested on suspicion of negligence.
• Apple confirmed that iPhones with older batteries were being intentionally
slowed down as the devices' batteries aged in order to prevent further
performance issues. Since then, the company has received considerable
backlash over the lack of transparency in how this information was revealed to
customers. This led to Apple issuing an apology and offering $29 battery
replacements for device owners during 2018 as a way to make amends.
 Ethics of Consumers Production
• Companies have been caught
out for peddling mediocre
products, using wild claims like
"scientifically proven" with
"guaranteed results."
– VW falsely advertised
environmentally friendly diesel cars.
– Red Bull said it could "give you
wings."
– Kellogg said Rice Krispies could
boost your immune system.
– Wal-Mart falsely advertised the
price of Coke in New York.
– Hyundai and KIA over-advertised its
cars' horsepower.
 Risks to Consumers
• Costs imposed on customers because of:
– Injuries because of dangerous and risky products
– Deceptive selling practices
– Poorly constructed products
– Failure to honor warranties
– Deceptive and unpleasant advertising
 Market Approach to Consumer
Protection
• Consumers automatically will be protected from injury by
the operation of free and competitive markets and that
neither governments nor business people have to take
special steps to deal with these issues.
• The consumer is said to be “sovereign” (King)
• When consumers want and will willingly pay for something,
sellers have an incentive to cater to their wishes.
• In a market, the price of safety and the amount sellers
provide will be determined by the costs of providing it and
the value consumers place on it.
• Government intervention in consumer markets makes them
unfair, inefficient, and coercive.
 Problems with the Market Approach
• The critics of 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
• But, these characteristics are absent in consumer markets,
focusing especially on characteristics (c) and (f).
 Problems with the Market Approach
– Buyers do not have adequate information when products
are complex and information is costly and hard to find.
• Market for information: Free riders and difficult to see value
• Markets are not able to support organizations that can provide
consumers with the information they need.
– Buyers are often not good at estimating probabilities and
are often irrational (maximize utility) about product risk
and are inconsistent when weighing choices based on
probability estimates of future costs or payoffs.
– Many consumer markets are monopolies or oligopolies.
 Market Approach
• It does not appear that market forces by themselves can deal with
all consumer concerns for safety, freedom from risk, and value.---
Market failures
• So, consumers must be protected through the legal structures of
government and through voluntary initiatives of responsible
business people.
• But, part of the responsibility for consumer injuries must rest on
consumers. Often carelessness, lack of skill, knowledge or
experience to handle
• Flaws in product design, in the materials out of which products are
made, or in the processes used to manufacture the products.

• Where then does the consumers’ duty to protect their own interest
end, and where does the manufacturers duty to protect consumers’
interest begins?
 Theories on Ethical Duties of
Manufacturers
• Contract view of Business
• Due care theory
• Social Cost view of firm
 Contract View of Business Firm’s
Duties to Customer
• The view that the relationship between a business firm
and its customers is essentially a contractual
relationship, and the firm’s moral duties to the
customer are those created by this contractual
relationship.
• A contract is a free agreement that imposes on the
parties the basic duty of complying with its terms.
(Duty to comply)- Kant, Rawls
• Secondary moral considerations (Duties)
– Both the parties must have full knowledge
– Neither party should intentionally misrepresent
– Neither party must be forced to enter
 Moral Duty to Consumers under Contractual Theory

• Duty to comply with express and implied terms: duty to provide

consumers with a product that lives up to those claims that the firm
expressly or impliedly made about the product, which led the
consumers to enter the contract freely and which formed the
customers’ understanding concerning what they are agreeing to
buy. Accordingly product quality is the degree to which product
performance meets predetermined expectations with respect to:
– Functionality/ reliability: will function as the consumer is led to
expect that it will function
– Durability/ Service life: period of time during which the product will
function as effectively as the consumer is led to expect to function
(obsolescence)
– Maintainability: ease with which can be repaired and kept in working
condition
– Safety: the degree of risk associated with using a product (known-
existence, frequency , severity, ways to cope; acceptable or reasonable
to buyer- reduced or eliminated)
 Moral Duty to Consumers under Contractual Theory
• Duty of disclosure: An agreement can not bind unless
both parties know what they are doing and freely
choose to do it.
– nature of the product and terms of the contract
– Freedom depends on knowledge and alternatives
• Duty not to misrepresent- Misrepresentation (Subject
matter of contract) renders freedom of choice
impossible.
– Deception may be created by a verbal lie or by a gesture
• Duty not to coerce: People often act irrationally when
under the influence of fear or emotional stress
– Buyer will not consent if acting rationally
 Variety of Misrepresentation
• Computer software or hardware manufacturer selling the
products it knows contains bugs
• Using a name that manufacturers know consumers will
confuse with the brand name of a higher quality competing
product
• Marking a fictitious “regular price” on an article that is
always sold at a much lower “sale” price
• Advertising a unusually low price that is intended to be sold
at a higher price once customer is lured into the store
• Advertising a unusually low price that is intended to “bait
and switch” buyer over to a more expensive product , once
customer is lured into the store
• Soliciting paid testimonials from professionals who have
never really used the product
 Problems with Contractual Theory
• Assumes manufacturers deal directly with consumers but
they do not.
– Manufacturer’s advertisements do form a kind of direct promise
to consumers.
• Contract is a two-edged sword
– Sellers can get rid of all their duties to buyers by getting them to
agree to disclaimers (“as is”, “with all its faults”) of responsibility
and providing opportunity to examine the product.
• Assumes consumer and seller meet as equals (skill at
evaluating the quality and are able to protect their
interest), (gave birth to doctrine of caveat emptor).
– but seller has more knowledge, expertise and time then buyer;
so consumer must rely on the seller
 Due Care Theory of
Firm’s Duties to Customer
• The view that because manufacturers are in a more
advantaged position and consumers must rely on them,
they have a duty to take special care to ensure that
consumers’ interests are not harmed by the products that
they offer them.
• Weak version of doctrine of caveat vendor- let the seller
take care.
• Since consumer depend on the expertise of the seller, they
have a duty to exercise due care to prevent others from
injury by the product even when manufacturer explicitly
disclaims such responsibility and buyer agrees to the
disclaimer.
• Ethics of care, Rule Utilitarian, Kant, Rawls
 Manufacturer’s Duties
in Due Care Theory
• Manufacturers exercise due care only when they take adequate
steps to prevent whatever injurious effects they can foresee.
• In designing product:
– research its risks in conditions of use
– design it so risks are minimized
– take capacities of users into account
• In production:
– use strict quality control to eliminate defects
– ensure materials and manufacturing do not add defects or risk
• In marketing (information):
– provide users with information about using product safely
– warn of all dangers (labels, notices, or instructions)
– do not market to those unable to avoid risk (Capacity of the persons)
 Manufacturer’s Duties in Due Care
Theory
– 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.
– A firm should not oppose regulation of the sale of
a product when regulation is the only effective
means of ensuring that the users of the product
are fully aware of the risks its use involves.
 Problems with Due Care Theory
• There is no clear method for determining when
one has exercised enough “due care”. How far the
firm must go to ensure safety of the product.
• Assumption that manufacturer can discover the
risks that attend the use of a product before the
consumer buys and uses it. Also, does not
indicate who should pay for product injuries that
cannot be foreseen.
• Puts manufacturer in paternalistic position of
deciding how much risk is best for consumers.
 Social Costs View of the
Manufacturer’s Duties to Consumers
• The view that a manufacturer should pay the costs of any
injuries caused by defects in the product, even if the
manufacturer exercised all due care in designing, making,
and marketing it, and the injury could not have been
foreseen.
• A manufacturer has a duty to assume the risks of even
those injuries that arise out of the defects in the product
that no one could reasonably have foreseen or
eliminated.
• The theory is a strong version of the doctrine of caveat
vendor: Let the seller take care.
• Has formed the basis of the legal doctrine of “strict
liability” founded on utilitarian arguments.
 Justification of the Social Costs View
• Utilitarian Argument (values of efficiency): Product
injuries are external costs that should be internalized
as a cost of bringing the product to market, this
maximizes utility (More efficient use of resources)
because:
– Price reflects all the costs in producing and using, market
forces will ensure that the product is not overproduced
and resources are not wasted
– manufacturers will be motivated to exercise greater care
and thereby reduce the number of accidents and
– distributes costs more fairly among all the users instead
allowing losses to fall on users who may not be able to
sustain the loss by themselves.
 Criticisms of the Social Cost View
• Unjust to manufacturers since compensatory justice
principles (violates) says one should compensate injured
parties only if the injury was foreseeable and preventable.
• Falsely assumes that the social cost view prevents
accidents.
– Instead, it encourages consumer carelessness by relieving them
of responsibility for their injuries.
• Increased financial burden of manufacturers and insurers:
Has increased the number of successful consumer lawsuits,
which imposes heavy losses on insurance companies and
makes insurance too expensive for small firms.
– Response: studies show only small increase in lawsuits and
insurance firms remain profitable.
 Advertising
– Advertising is a massive business.
– Who pays for advertising expenditure?
– What do consumers get for their advertising
money?
– Information about the product? Reduced Price?
Make people buy things they should not buy?
Insult intelligence? Represent the truth?
– Is advertising, then, a waste or a benefit?
– Does it harm consumers or help them?
 Advertising Ethics
– Advertising is defined as a form of “information” and an
advertiser as “one who gives this information”.
– Consumer information?
– Sell the product?
– A public communication aimed at a large social group intended
to induce members of this audience to buy the seller’s products.
– As it is publicly addressed it has widespread social effects
– As it is intended to induce members of its audience to by sellers
product; it can succeeds by (1) creating a desire for the seller’s
product and a (2) belief that a product will satisfy a preexisting
desire.
– Advertising Ethics: its social effects, its creation of consumer
desire and its effect on consumer beliefs.
Criticisms: Social Effects of Advertising
• Degrades people’s tastes, it wastes valuable resources,
and it creates monopoly power.
• Psychological affects of advertising
• It debases the tastes of the public by presenting irritating
and aesthetically unpleasant displays. Often intrusive,
strident (Conspicuously and offensively loud), and
repetitive.
– Response: this criticism is not a moral criticism.
• It debases the taste of consumers by gradually and subtly
inculcating materialistic values and ideas about how
happiness/ success is achieved. (self fulfilment)
– Response: this criticism ignores the lack of evidence that
advertisements can change people’s values and has large
psychological effects.
Criticisms: Social Effects of Advertising
• Advertising as waste
• Its costs are selling costs that, unlike production costs,
do not add to the utility of products and so waste
resources.
– Response:
– It produces and transmits information on the availability and
nature of the products.
– Advertising serve to a beneficial rise in demand (reduce
cost). Indirectly motivates a greater productivity, efficiency
and a lower price structure.
– Shift demand from one firm to another; most pressing social need
at present is finding ways to decreasing consumption
Criticisms: Social Effects of Advertising
• Advertising as Market Power
• It is used by big firms to create brand loyalties which
let them become monopolies or oligopolies. Reduce
competition and raise barriers.
– Response: this criticism ignores studies aimed at uncovering
a connection between advertising intensity and market
concentration have been inconclusive.
– Soaps, cigarettes, breakfast cereals|| drugs, cosmetics.
– In some oligopolistic industries smaller firms spend more.
– Whether advertising harms consumers by diminishing
competition??
 Advertising and the Creation of
Consumer Desires
• Advertising is manipulative: It creates desire for the sole purpose of
absorbing industrial output.
• Psychic desires which, unlike physical desires, are capable of being shaped
(pliable) and unlimited.
– They give him a sense of personal achievement, accord him a feeling of
equality with his neighbors, divert his mind from thought, serve sexual
aspiration, promise social acceptability, enhance his subjective feeling of
health, well-being or orderly peristalsis, contribute by conventional canons
to personal beauty, or are otherwise psychologically rewarding.
– Subliminal suggestions (attempt to make consumer associate unreal sexual or
social fulfillment with a product), Targeted to children (fantasy and reality)

– Using us this way treats us as means and not as ends and so is unethical.
– Violates consumer’s right to be treated as a free and equal rational being.
• Response: this criticism ignores studies which suggest non-subliminal
advertising cannot create and manipulate desires in adults.
 Advertising and Its Effects on
Consumer Beliefs
• Deceptive advertising
– Can misrepresent the nature of the product by using
deceptive mock-ups, using untrue paid testimonials,
false guarantees, quoting misleading prices, failing to
disclose defects in a products, misleading disparaging
a competitors goods, or simulating well-known brand
name.
– Condemned on the ground that it violates consumers’
right to choose and on the grounds that it generates a
public distrust of advertising that diminishes the
utility of this form and even of other forms of
communication.
 Advertising and Its Effects on
Consumer Beliefs
• Deceptive advertising
– Various ethical problems can be organized around:
– An author who (unethically) intends to make the
audience believe what he or she knows is false by
means of an intentional act or utterance.
– Media or intermediaries who communicate the false
message of the advertisement (positive cooperation).
– An audience who is vulnerable to the deception and
who lacks the capacity to recognize the deceptive
nature of the advertisement.
 Consumer Privacy
• Consumer privacy involves the handling and protection
of sensitive personal information that individuals
provide in the course of everyday transactions.
• Protects individuals from disclosures that can shame,
interfere in one’s private life, hurt loved ones, and lead
to self-incrimination.
• Enables the intimacy that develops personal
relationships, the trust and confidentiality that
underlies client-professional relationships, the ability
to maintain distinct social roles, and the ability to
determine how others will see us.
 Balancing Right to Privacy and
Business Needs
• Is the purpose of collecting information a legitimate
business need that benefits the consumer?
• Is the information that is collected relevant to the
business need?
• Is the consumer informed the information is being
collected and the purpose?
• Did the consumer consent to the information
disclosure?
• Is the information accurate?
• Is the information secure and not disclosed to
recipients or used in ways to which the consumer did
not consent?
ON THE EDGE: The Tobacco Companies and Product Safety

On May 24, 2004, U.S. District Judge Gladys Kessler ruled the big tobacco companies—Philip
Morris, Reynolds, and Liggett—would be liable for $280 billion—almost all their profits during the
past 50 years—if the U.S. Department of Justice (DOJ) proved that since 1953 they knowingly
conspired to deceive the public about the risks of smoking and its addictive nature, and so
operated as outlaw companies in violation of the Racketeer-Influenced and Corrupt
Organizations Act. The DOJ claimed that in 1953 the companies met in New York and formed a
group called the Tobacco Industry Research Committee (TIRC) that began a “conspiracy to deny
that smoking caused disease and to maintain that whether smoking caused disease was an
‘open question’ despite having actual knowledge that smoking did cause disease.” In the 1950s,
despite published research showing that smoking causes cancer, the group advertised “there is
no proof that cigarette smoking is one of the causes” of lung cancer, and from the 1960s to the
1990s advertised that “a cause and effect relationship between smoking and disease has not
been established.” The DOJ alleged the tobacco companies advertised that nicotine is not
addictive even as they “controlled the nicotine delivery of cigarettes so that they could addict
new users.” The DOJ also claimed the companies “researched how to target their marketing at
children and actively marketed cigarettes to children.” Finally, the DOJ stated that while the
companies had a duty to test their product, to design a safe product, and to warn users of all
dangers, the companies instead did no research and tried to suppress research on smoking
risks, marketed a product that kills 400,000 Americans a year, designed “low tar/low nicotine”
cigarettes whose risks were the same as regular cigarettes, failed before 1969 to warn of the
risks and addictive nature of smoking, and targeted children who could not know the true risks of
smoking.
If the DOJ claims are true, what do the three theories of manufacturers’ duties imply?