Consumers and business ethics

1. Business Ethics P13601

DR. ‘ALIM J. BEVERIDGE
LECTURE 5

2.

Consumers and
Business Ethics

3. Today’s Lecture

Discuss the role of consumers as a key stakeholder
of firms
Are consumers treated ethically?
Ethical aspects of marketing
Advertising practitioners and ethics
Do the ethical concerns of consumers affect their
behavior?
Ethical and sustainable consumption

4. Introduction

The rights of consumers: ethical responsibilities
of governments and firms toward consumers
The ethical values of consumers: consumers’
goals and preferences as expressed through
consumer behavior

5. Consumers as Primary Stakeholders

Consumers are primary stakeholders because their
awareness, purchase, use and repurchase of products is
vital to a company’s existence.
Consumers and business are connected by an economic
relationship.
Consumers exchange money for goods or services.
Consumers expect the products they purchase to perform
as guaranteed by the sellers.
(C)Houghton Mifflin Company. All rights reserved

6. Do Consumers Need Protection?

Perfect market (perfect competition): Consumers
spend their money based on choice
Consumers buy good products and services, given
price, and stay away from bad products and services
Firms that serve consumers are rewarded
Firms that harm consumers are punished
Market self-regulates, self-corrects
Libertarian view
NO

7. Trust in Business and Government

8. Trust in China

9. Trust Issues in China

10. China: Consumers & Food Safety

China: Consumers & Food Safety
“More than 70 percent of Shanghai residents are concerned
about domestically produced food - a trend that shows no
signs of easing, according to a survey released yesterday. The
safety and quality of meat and dairy products worried local
people the most, the survey said.”
“The survey of 4,000 people in eight big cities like Shanghai
and Beijing found more than 73 percent felt unsafe or very
unsafe about food. Most said they think the illegal practices
occur in the production and processing of food, which they
consider the weakest link in the food supply chain in China.”
“The public also criticized poor access to food safety
information.”

11. China: Consumers & Food Safety

China: Consumers & Food Safety

12. Trust in Chinese Companies

13. Discussion

Does the market provide sufficient protection for
consumers? Or are additional safeguards needed?
Why?
Who?

14. Consumer Rights

At the most basic level, consumers have a right to products
and services which are safe, efficacious, and fit for the
purpose for which they are intended
Consumers expect the products they purchase to perform
as guaranteed by the sellers.
In the early 1900s “let the buyer beware” typified the power
that business- not consumers- wielded in
exchange relationships. This is still true
in less developed parts of the world.
(C)Houghton Mifflin Company. All rights reserved

15. Consumer Rights

At the most basic level, consumers have a right to
products and services which are safe, efficacious, and
fit for the purpose for which they are intended
Manufacturers should exercise due care to take all
reasonable steps to ensure that their products are
free from defects and safe to use (Boatright, 2009)
Contrast with caveat emptor (“let the buyer
beware”) view of consumer rights, common in the
early 1900s.
Still true in less developed parts of the world.

16. Legal Issues

Health and safety
Credit and ownership
Marketing, advertising, and
packaging
Product liability
Guarantees and warranties
(C)Houghton Mifflin Company. All rights reserved

17. Ethical Issues

Consumer Bill of Rights
Right to choose
Right to safety
Right to be informed
Right to be heard
Right to seek redress
Right to privacy
(C)Houghton Mifflin Company. All rights reserved

18. Right to Choose

To the extent possible,
consumers have the opportunity
to select from a variety of
products at competitive prices.
This right is based on the
philosophy of the competitive
nature of markets, which should
lead to high-quality products at
reasonable prices.
Right to fair prices
Right of access
(C)Houghton Mifflin Company. All rights reserved

19. Right to Safety

This means that businesses have an obligation not to
knowingly market a product that could harm
consumers.
(C)Houghton Mifflin Company. All rights reserved

20. Right to be Informed

Any information, whether communicated in written
or verbal format, should be accurate, adequate
(relevant and complete), understandable, and free of
deception so that consumers can make sound
decisions.
Transparency
(C)Houghton Mifflin Company. All rights reserved

21. Right to be Heard

Relates to opportunities for consumers to
communicate or voice their concerns in the public
policy process.
This implies that governments have the responsibility
to listen and take consumer issues into account.
(C)Houghton Mifflin Company. All rights reserved

22. Right to Seek Redress

Consumers have the right to express dissatisfaction
and seek restitution from a business when a good or
service does not meet their expectations.
(C)Houghton Mifflin Company. All rights reserved

23. Right to Privacy

Relates to consumers’ awareness of how personal
data are collected and used, and it places a burden
on firms to protect this information.
Think about apps on your phone:
Alipay, WeChat, Didi or Uber
Banks and credit card companies
Free email providers like Gmail,
qq.com, 123.com
(C)Houghton Mifflin Company. All rights reserved

24. Ethical Issues in Marketing

Area of marketing
Product policy
Marketing
management
Some common ethical
problems
Main rights involved
Product safety
Fitness for purpose
Right to safety
Marketing
Deception
communications Misleading claims
Intrusiveness
Promotion of materialism
Creation of artificial wants
Perpetuating dissatisfaction
Reinforcing stereotypes
Right to information
Right to privacy
Pricing
Excessive pricing
Price fixing
Predatory pricing
Deceptive pricing
Right to fair prices
Distribution
Buyer-seller relationships
Gifts and bribes
Slotting fees
Right of access
Right to choose

25. Common Problems

Information asymmetry
-> Incomplete information, e.g. unknown risk,
unknown ingredients, unclear causal link
Cigarettes, tainted milk, Ford Pinto, “gutter oil”
Monopoly, oligarchy or collusion
(price setting)
->
No choice, high prices
HIV drugs
Extreme consequences
-> No redress

26. Sanlu Milk

Who is punished?

27. Ford Pinto

28. Ethics and Advertising (Marketing Communications)

29. Ethics & Marketing Communications

Ethics & Marketing Communications
Marketing communications aim to (two-fold
function):
Inform consumers about goods and services
Persuade consumers to purchase
Some exaggeration etc. is allowable (and indeed
sometimes enjoyable)
“Deception occurs when a marketing
communication either creates, or takes advantage
of, a false belief that substantially interferes with
the ability of people to make rational consumer
choices” (Boatright, 2009)

30. Ethics & Marketing Communications

Ethics & Marketing Communications
Criticisms of advertising broken down into two
levels
Individual
Concerned with misleading or deceptive
practices that seek to create false beliefs about
specific products or companies in the individual’s
consumers’ mind
Social
Concerned with the aggregate social and
cultural impacts, such as promoting materialism
or unhealthy lifestyles

31. Consumer Vulnerability

Some populations of consumers are vulnerable
Limitation on informed decision making due to
inability to properly discern
Children
Lack of sufficient education
Elderly: Easily confused or manipulated
Exceptional physical or emotional need (e.g.,
recently bereaved)
Exceptional physical need (e.g., seriously ill,
addicted)

32. Consumer Sovereignty Test

Dimension
Definition & Key Questions
Sample criteria for
establishing adequacy
Consumer
capability
Freedom from limitations
in rational decision making
Is the target market vulnerable in
ways that limit consumer decision
making?
Vulnerability factors, e.g.
age,
education, health
Information
Availability and quality of
Quantity, comparability and
relevant data
complexity of information;
Are consumer expectations at
degree of bias or deception
purchase likely to be realized? Do
consumers have sufficient information
to judge?
Choice
Opportunity to switch
Number of competitors and
Can consumers go elsewhere? Would level of competition;
they incur substantial costs or
switching costs
inconveniences in transferring their
loyalty?

33. Social Issues in Marketing

Concerns that marketing communications:
Are intrusive and unavoidable
Create artificial wants
Reinforce consumerism and materialism
Create insecurity and perpetual dissatisfaction
Perpetuate social stereotypes
Such criticisms have been common for at least the
last 30 years

34. Advertising Practitioners and Ethics

How do advertising professionals perceive, process
and think about ethical issues?
Study by Drumwright and Murphy (2004) (51 indepth interviews in 29 advertising agencies in the
US) shows that advertising/marketing professionals
often exhibit moral myopia and moral muteness
However, there are also important cases of moral
imagination
These apply more broadly to consumer issues and
firm behavior

35. Moral Myopia

Distortion of moral vision, leading to difficulty of
recognizing ethical issues or seeing them clearly
Moral myopia may occur due to rationalization
and dismissing potential ethical concerns or
responsibility, e.g.:
Consumers are smart: they will not be fooled by a
possibly deceptive / unethical advertising message;
Place responsibility on others (society, families, the
law, etc.)
What is legal is moral (“We don’t do anything illegal”)

36. Moral Muteness

Individuals who recognize ethical issues but remain
silent and avoid confronting with them either
personally or organizationally (e.g., not speaking up
when observing unethical behavior, not questioning
aspects of decisions that can be morally debatable
Why:
Compartmentalization
The client is always right
Ethics is bad for business
Pandora’s box syndrome

37. Business Integrity

In 1982 a flight attendant died after
taking a dose of Extra Strength Tylenol
Managers at Johnson & Johnson first
thought about trying to deny that the
company did anything wrong, but the
CEO said otherwise.
Even though there was no evidence of wrongdoing by
J&J, within a week the company had recalled every
bottle of Extra Strength Tylenol off store shelves
around the US.

38. Doing Good (Instrumental)

See social needs or issues as business opportunities
Base of the pyramid: serve consumers who live on
$1 a day or less
Eg: Hindustan Unilever’s Surf Excel
Quick Wash, developed for the Indian
market
Do laundry with less water
(saves 2 gallons)

39. Doing Good (Normative)

Poor people can’t get loans from banks
(no access)
No collateral
Amounts too small
Are forced to get loans from loan sharks
(predatory lending)
Microfinance: Grameen Bank, a bank for the poor,
founded by Muhammad Yunus
Now available everywhere around the world
Focus on women

40. Merck & River Blindness

Merck & River Blindness
1978: 300,000 blind due to river blindness, 18
million infected (WHO). Most very poor.
No effective cure.
Merck discovers that a veterinary drug kills the
worm that causes the disease in humans.
On the average, it took 12 years and $200 million to
bring a new drug to market
What should Merck do?

41.

Ethical Consumption &
Sustainable Consumption

42. Ethical Consumption

“Ethical consumption is the conscious and deliberate
decision to make certain consumption choices due to
personal moral beliefs and values.”
Sustainable consumption is: ‘the use of goods and
services that respond to basic needs and bring a
better quality of life, while minimising the use of
natural resources, toxic materials and emissions of
waste and pollutants over the life-cycle, so as not to
jeopardise the needs of future generations’
(European Environment Agency definition)
Related terms: organic, socially responsible,
environmentally friendly, responsibly sourced, ethically
sourced, sustainable, green, eco-, etc.

43. Typical Consumption

Typically consumer behavior is driven by judgments
about how products and services benefit the enduser (self, members of family or household, friends,
colleagues, etc.)
Ethical consumption also takes into account impact
on other stakeholders, especially the environment,
but also society or specific social groups
Similar to SRI

44. Assumptions

Old patterns of production and consumption were
based on two tacit assumptions:
1. Unlimited resources (water, air, fish, oil, trees, etc.)
2. Unlimited capacity to absorb waste and by-products
Both these assumption are now known to be false
Many consumers in the industrialized world are
becoming aware (even though they are the least
affected)

45. Public Concerns

Global warming
Water shortage
Health & food safety
Labor exploitation (child labor, slave labor)
Deforestation
Species extinction
Conflict resources (conflict minerals)
Hazardous waste
Etc.

46. The Pacific Gyre

47. Consumer Behavior

Europe-wide survey on consumer attitudes:
70% of consumers said company’s commitment to
social responsibility was important when buying a
product or service
Easily said: What about actual purchasing behavior?
Some argue that consumers are not willing to pay
more, despite what they say

48. Consumer Behavior

49. Willingness-to-pay (WTP)

Studies show that Western consumers who are
sensitive to ethical consumption issues (approx. 4050% of consumers) are willing to pay a 20-30%
premium for products that are labeled “organic” or
“fair trade”
Not all consumers are alike
Some more sensitive, willing to pay more

50. LOHAS

51. Traditional Companies

Many traditional companies getting on board
Walmart’s Plus One: convert to organic cotton
without charging the customer more (no premium)
Nike: Trash Talk shoe made out of recycled materials
Toyota: Prius Hybrid

52. New Companies

TerraCycle: Make better
products for home and
garden, using only garbage,
and sell for less
Tom’s Shoes: One pair
donated to a poor
person for each pair
bought

53. Cause-Related Marketing

Companies are increasingly linking philanthropic
efforts with consumer interests to strengthen ties to
consumers.
Partnerships between companies
and NGOs (e.g. IKEA and UNICEF).

54. Product Stewardship

(a) Linear flow of resources
Extraction
Manufacture
(b) Circular flow of
resources
Distribution
Extraction
Consumption
Manufacture
Product
recapture
Distribution
Consumption
Disposal
Disposal

55. Cradle-to-Cradle

Interface carpets: Lease carpets (rather than sell) to
corporate customers and up-cycle (rather than recycle) old carpets into new ones (requires carpets
made from special materials)
OAT shoes: made of biodegradable materials. Plant
them when you are done with them and they will
sprout flowers within days

56. Boycotting

Consumers’ ethical values can also lead to
negative purchasing behavior (avoidance
of certain brands or products)

57. What about China?

58. Critiques

Not deep lifestyle changes in most cases - still same
patterns of consumption
Guilt-free consumption
Narcissistic: A way to express values, identity
A fad
Too little: Insignificant compared harm and waste
caused by industry and other
Distracts from real problems
Mostly a “first-world” phenomenon

59. Consumer Ethics

Consumers can also engage in unethical behavior
that hurts business:
Fraudulent consumer complaints or returns
Counterfeit products
Piracy

60. Top Counterfeit Commodities Seized at US Borders

Copyright © 2014 Pearson Education

61. Estimated Losses from Copyright Piracy (Millions US $) and Piracy Levels (%) in Given Countries

Country
Books
Losses
Brazil
China
India
Italy
Malaysia
Mexico
Poland
Russia
Spain
Thailand
$38
52
38
20
9
41
NA
42
NA
37
Records
& Music
Entertainment
Software
Business
Software
Losses Levels Losses Levels Losses Levels
$147
466
18
350
24
436
118
313
13
15
48%
90%
60%
25%
60%
82%
27%
58%
20%
50%
NA
NA
130
817
NA
273
76
NA
510
91
Losses: Illegal copying or pirating of movies, music, software, and books
Level: the proportion of pirated items sold as a percentage of total items sold
91%
95%
89%
64%
83%
88%
60%
79%
35%
77%
$831
3,078
1,505
1,138
192
497
362
1,869
617
368
56%
80%
66%
49%
59%
59%
54%
68%
43%
77%
Totals
Loss
$1,016
3,596
1,691
2,325
225
1,247
556
2,224
1,140
511
SOURCE: International Intellectual Property Alliance
(IIPA) www.iipa.com, Data Estimates for 2008 or 2009

62. Why do we buy illegal products?

Original is too expensive (50.9%)
2. Good cost/performance ratio (42.1%)
3. For ‘fun’ (22.8%)
4. They were a ‘spontaneous’ bargain (17.5%)
1.
Although high-income consumers in well-developed
countries can afford the genuine brands, they also buy
counterfeits (Gentry, Putrevu, and Shultz 2006; Prendergast, Chuen, and Phau 2002).
Source: Fleisch, E. (2006) Presentation at the MIT Convocation, January 23-24, 2006

63. Conclusion

Consumers are a critical stakeholder group for
business
Multiple ethical issues arise related to product safety
and advertising
Behavioral ethics (e.g., moral myopia and moral
imagination) affects both individual (advertising
professionals) and firm behavior
Sustainability is a rising concern for consumers,
Producers are increasingly responding to the demand
Some consumers make choices based on their ethical
concerns, both positively (markets for green products,
fair trade, etc.) and negatively (boycotting specific
products)

64. Next Lecture

Dr. Oliver Laasch
Stakeholder analysis and engagement
CSR & sustainability standards, tools and reporting
Read textbook chapter 5, pp. 177-195
Other readings will be posted on Moodle
THANK YOU