Business Ethics and Social Responsibility

The Role of Business in Social and Economic Development

Some Ethical Issues in Consumer Relations

Learning Objectives:
▪ Discuss some of the ethical issues in relation to consumer relations
▪ Describe the different approaches to consumer protection
▪ Explain the significant points om the issue of advertising of ethics
▪ Analyze the ethical arguments for and against marketing to children
▪ Trace the arguments on the ethics of pricing

Among the most common ethical issues regarding the relationship between the seller and
the buyer:
1. Consumer Protection
2. Advertising Ethics
3. Marketing to Children
4. Fair and Just Price

- These issues fall under marketing ethics, a subdiscipline within the field of business
ethics.
 Ethics of Consumer Protection
The four (4) approaches to consumer protection:
1. Market Approach
2. Contract Approach
3. Due Care Approach
4. Social Costs Approach

The Market Approach

In a free market economic system, buyers and sellers are free to interact. Sellers are free to
produce the goods and services that buyers need and want. Buyers are free to choose from
the products offered by various sellers. Buyers are assured of product safety, quality and
reasonable price because of this complete freedom to choose their seller.

The Market Approach to consumer protection is assumed that the free market will ensure
the protection of the buyers from unreasonably high prices and low-quality and hazardous
products.

Businesspersons ensure ethical relations with consumers by heeding the dictates of the
market (buyers); otherwise they could endanger their reputation and eventually leads to the
downfall of the business.

This approach also assumes that there is less need for government intervention to assure
product safety and quality. The natural laws of the market would be enough, and the
demands of the consumers would become the guiding principle for the sellers.

Weakness of Market Approach: it assumes that there is perfect competition in the market
economy. But this is a wrong assumption. Reasons that prove that there is no perfect
competition:
 a. Many times, the buyers lack information regarding the details of the products due to
their complexity, the inaccessibility of information regarding the product and the high
cost of accessing the relevant information regarding the product
b. Many consumer markets are usually monopolies and oligopolies. Monopoly happens
when a single firm produces the entire market supply of a good or service. Oligopoly
happens when a few sellers control most or all the market and sell similar or identical
products.

Therefore, the market approach to the protection of consumer will not be beneficial to the
consumers because there is a need to clearly define the duties of both the seller and the buyer
when it comes to protection from the potential harms that products can cause.

To further prevent further injustice, business ethicists had developed three approaches: The
Contract Approach, The Ethics of Due Care and The Social Costs Approach.

The Contract Approach

The approach claims that sellers and buyers always enter into a contractual agreement. Even
if there is no written contract, the agreement is implied. The seller is duty-bound to deliver
safe and value-for-money products and services by virtue of this contractual agreement. The
buyer is protected because the seller makes a promise.

Four important conditions to be considered as a contractual agreement:

▪ First, the buyer and the seller have full knowledge of the nature of the contract
▪ Second, the buyer and the seller do not misrepresent relevant facts
▪ Third, the buyer and the seller are not forced to enter the contract
▪ Fourth, the buyer and the seller have adequate information regarding the product

Owing to the contractual nature of a buying-and-selling relationship, these are the four
important duties of business:
▪ Duty to comply with express and implied claims of reliability, service life, maintainability
and safety
o The “duty to comply” pertains to the seller’s moral obligation to deliver what it
claims to be the products’ features.
o For reliability, it means that it will function in a particular manner that the buyer
is led to believe.
o For service life, it will be used effectively for a period.
o For maintainability, pertains to the comfort of repairing the product and
maintaining it in proper condition.
o For safety, refers to the duty of the seller to make the product as safe as possible.
▪ Duty of disclosure
o This pertains to the seller’s moral obligation to reveal the relevant facts about the
products and the terms and conditions of the sale.
▪ Duty not to misrepresent
o This pertains to the seller’s deliberate attempt to deceive and mislead the buyer
just to sell the product.
o One of the most common forms of misrepresentation is called the “bait-and-
switch” tactic. It typically involves an advertiser luring customer into the store by
offering a product at an unrealistically low price (the bait). The customer is then
told that the advertised goods are (1) not available or (2) of inferior quality
and/or not suitable for the consumer’s needs then (3) the goal is to switch the
customer to another, more expensive product. This is unethical because it
involves deception or fraudulence and insincerity on the part of the seller.
▪ Duty not to coerce
o This pertains to the moral obligation of the seller not to take advantage of a
buyer’s fear, emotional stress, immaturity and ignorance that may hinder the
buyer’s ability to choose freely whether to buy or not to buy.

Although the Contract View of protecting the consumers is better that the market approach,
the problem is the assumption that buyer and seller meet each other as equals in the sales
agreement. The problem of information asymmetry persists, and consumers do not have the
luxury of time, energy and resources to be always on guard regarding product safety.

Due Care Approach

The main assumption of the ethics of due care is that in a business transaction, the buyer and
the seller are not on equal footing. The seller is always more knowledgeable about the details
of the product. The buyer relies on the expertise of the manufacturer and to a certain extent
of the retailer.

There will always be information asymmetry or the situation when “two parties do not
possess the same information or do not have the same access to information.”

The ethics of due care states that the seller has the duty to take all the necessary precautions
so that the buyer will not be harmed by the product.
▪ Caveat emptor (let the buyer beware) is the duty of the buyer to check the product if it is
of good quality
▪ Caveat vendor (let the seller beware) is the duty of the seller to assure that the product is
safe and not defective.

The duty of due care happens when the manufacturer specifies the hazards of the product
through warning labels and clear instructions. Failure to take “due care” is a breach of moral
duty and violates the rights of the consumer who may be injured.

Social Costs Approach

The manufacturer has full responsibility for all the harms that the product may cause the
buyer and calls this the strict products liability. It is also a doctrine that the seller of a product
has legal responsibilities to compensate the user of that product for injuries suffered because
of a defective aspect of the product, even when the seller has not been negligent in permitting
that defect to occur.
The social cost is part of the cost to be shouldered by the manufacturer. Safe products are
expected, consumers are totally protected from harm, and manufacturers gain the full trust
of the consumers.

Some limitations of social costs approach (1) it is a form of injustice to the manufacturer
since one has a moral responsibility only if the harmful effect is foreseeable and he or she
did nothing to prevent it; (2) it will not assure that accidents will not happen. This could
make consumers more complacent and irresponsible since they always think that they can
get back to the manufacturer thus, it is prone to the abuse of the consumers; (3) it means big
expenses for insurance companies, which will lead to high premium on instances. Small
businesses would not be able to afford high insurance expenses.

The Consumer Act of the Philippines

In the Philippines, the fundamental law that protects the rights of the consumers is Republic
Act 7394 (The Consumer Act of the Philippines). Its main objectives include the following:
1. Protection against hazards to health and safety.
2. Protection against deceptive, unfair, and unconscionable sales acts and practices.
3. Provision of information and education to facilitate sound choice and the proper
exercise of rights by the consumer.
4. Provision of adequate rights and means of redress.
5. Involvement of consumer representatives in the formulation of social and economic
policies.
 Ethics of Advertising
Advertising is commonly defined as “techniques and practices used to bring products,
services, opinions, or causes to public notice for the purpose of persuading the public to
respond in a certain way.

Political advertising is when politicians and government officials inform and persuade the
public to respond in specific ways (solicitation of votes, support for advocacies, and others).

Commercial advertising is an organized method of communicating information about a

product or service which a company or individual wants to sell to the people.

The main purpose of advertising is to inform the public on at least three things: new products
being introduced, alternative products that the public can choose from, and the features,
uses, and benefits of the products.

Advertising has become a strategy of persuading the public to patronize a product. The twin
purposes of advertising: (1) to inform – informational advertising and (2) to persuade –
persuasive advertising.

Advertising is both legal and ethical. First, it is a violation of fundamental human rights if we
will ban advertisements. Advertising is an exercise of one’s freedom of expression. Second,
there are benefits that the society can get from advertising such as source of income for many
people and source of revenue for the government, lifeblood of media institution and public
is presented with vital information.

However, advertising also raises serious ethical issues. These issues arise from the
businessperson’s primary purpose to persuade the public to buy the product to gain more
profit for the business. Also, if the advertisements become manipulative, deceptive and
misleading.
Three important factors to consider in determining the ethical implications of an
advertisement:
▪ Social effects
o One of the most serious effects of advertising is the creation of a highly
consumerist and materialistic culture and society. As a result, many equate
happiness with material possession.
▪ Effects on desire
o Manipulating the minds of the viewers to desire, buy, and consume the products
being advertised. Advertisers create needs or turn mere wants into needs. It also
violates a fundamental right: “the consumer’s right to be treated as a free and
equal rational being.”
o The issue of manipulation links the advertising process with classical
conditioning of Ivan Pavlov. Human beings can also be conditioned and
manipulated.
o Subliminal advertising is another issue in the discussion of the manipulative
aspect of persuasive advertising. This is an advertising that operates below the
limits of the consciousness of its audience. Subliminal advertising operates by
including text or images into the overt, perceived advertising product that will not
themselves be consciously perceived but will appeal to basic and universal needs.
Such advertising messages are sometimes referred to as “hidden” or “embedded”
messages.
▪ Effects in beliefs
o Deceptive advertising is considered as the main issue regarding advertising’s
effects on belief. These are the two questions to ask in relation to deceptive
advertising:
1. Is the content of the advertisement truthful?
2. Does the advertisement tend to mislead those to whom it is directed?

Consumer’s Bill of Rights

It is created because of the rise in issues regarding unfair treatment coming from the
business sector, consumer movements and consumer protest actions. The following are the
eight fundamental rights of consumers:
▪ The right to safety
▪ The right to a choice
▪ The right to know
▪ The right to be heard
▪ The right to recourse and redress
▪ The right to full value
▪ The right to education
▪ The right to representation and participation

Code of Ethics for Advertising

This was first published in 1975 and last revised in March 2000 by the Advertising Board of
the Philippines (AdBoard). This regulates the advertising industry in the Philippines and to
avoid ethically questionable practice such as false and deceptive advertising.
 Marketing to Children
Children do not have money to buy the products they want but what they possess can be
more powerful than money – their ability to persuade their parents to buy and spend on toys,
food, etc.

Children are more vulnerable to persuasive techniques. Furthermore, children are not yet
capable of judging whether the products that they want are impractical, hazardous, or have
no long-term benefit. Children are not yet autonomous and rational thus, they can easily be
persuaded, exploited, and manipulated by the advertisers.

In the Code of Ethics promulgated by the Advertising Board of the Philippines (AdBoard),
the following provisions are included:
1. Advertisements for cigarettes and tobacco products will not be aimed at or directed to
minors as the target audience.
2. Advertisements shall not exploit the youth younger than 18 years of age who are
especially vulnerable, whether on account of their youth or immaturity, or as a result of
any physical, mental or social handicap in any form of cigarette advertising.
3. Models and talents who are minors or appear to be minors and those who portray
authority figures or roles meant to appeal especially to minors (e.g., folk or comic book
heroes, war or national heroes, law enforcers) will not appear in such advertisements.
4. No advertisements on cigarettes shall appear in any children’s programs, or in children’s
magazines, or publications directed specifically to children and minors.
5. Cigarette advertising in television should not ne aired om programs whose audiences are
predominantly below eighteen (18) years of age.

The issue of advertising and marketing to children is not that difficult to discern and resolve
if the products involved are obviously hazardous and unsuitable for children. The ethical
dilemmas come into the picture when products involved are those with less nutritional value
(fast-food products and junk foods), suggest unrealistic features (toys, such as dolls with
unrealistic or exaggerated body proportions or extremely muscular characters or action
figures), toys that encourage violence (toy guns, robots, and some action figures), and other
products that offer no worthwhile values.

Advertisers have also occupied schools and every possible public space. Where the children
are, there are sure to be advertisers as well.

Parents and adults have the duty to guard, guide and filter what the children watch and see.
Children will not be easily persuaded if they are properly guided by the family.
 Ethical Issues on Pricing
A just price must essentially “correspond to the value of the good sold.” The three conditions
to determine whether a product’s price is fair and just:
1. There must be enough information about the product both on the side of the seller and
the buyer. The relevant information causes the buyer to act freely whether to buy or not
to buy for a price.
2. The price is just if both the buyer and seller are free to negotiate about the price. And if
one is not satisfied with what is proposed by the other, then either of them is free not to
close the buying deal.
3. The price is just if there are no extraordinary circumstances that put pressure on the
buyer or the seller.

There is no exact mathematical computation to determine a just price.