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BBB2154 | Business Ethics Prepared by Dr Khairul Anuar

L3 – Marketing and Advertising

Competition

• Competition tends to produce efficiency in the market and benefits the general consumer by resulting in a variety of goods at the best prices. But the competitive market works to the advantage of the buyer only when the competitive process is fair.

• One major way of undermining competition is through the creation of monopolies.

• A second way of controlling competition is for a small group of producers of a product to collude for their common good. For example, they may agree on the prices to charge—a practice known as price fixing. Such collusion is generally illegal because it undermines the competitive system to the detriment of the buyer.

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Pricing

• In general, the competitive system should preclude the possibility of overpricing where this means charging much more than the producer knows the product is worth, thus yielding an excessive profit. – There are some who might claim that overpricing is a misnomer

because there is no specific limit of justifiable profit. But this claim assumes that prices are competitive, and they are not always competitive.

• A second area in which excessive rates arise is in the lending of money. For those unable to borrow money in the conventional, competitive way, loan sharks can charge usurious rates

• A clearly immoral practice, because it is deceptive, is setting a price for a product higher than that at which it is ever sold, so that it can always be sold at a discount. This is deceptive, because to sell at a discount implies a discount from its real price, not a discount from an artificially inflated one.

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Price Gouging

• Price gouging refers to the practice of a seller putting a much higher price on the item for sale than is considered fair or reasonable.

• Price gouging usually refers to the pricing not of luxuries or optional items, but of practical necessities—fuel, food, water, and shelter—in times of emergency.

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Bidding

• Not all bidding is secret, but much of it is. • Secrecy tends to produce fairer bids and lower prices

for the purchaser. This happens in two ways. – If the process were open, a firm that could make a profit at

a price considerably less than the competition would make a bid only just enough less to win the contract.

– If the competition were open, a firm might start out at a bid low enough to scare off others from bidding, even though the bid is not the lowest he would offer if forced to make a secret bid.

• In addition to fraud, using materials inferior to those specified in the bid, and perpetrating other obvious violations of justice, honesty, and fairness, bidding has led to other questionable practices.

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Bidding

• One difficulty in some countries (even in the US) is that there are only a few construction companies capable of handling a given state’s large construction needs, whether for roads or large buildings.

• In the suppliers to the government, ethical issues include cost overruns and locking in the government to a single supplier.

• Several pitfalls are also common in the purchase of goods by a government or large firm. – There is always the possibility of leaking information to a

potential supplier—an unfair practice. – There is also the possibility of writing specifications in so

detailed and narrow a way that only one supplier can fill the order, thereby undermining the purpose of the bidding procedure.

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Consumer Marketing

• The opportunities for fraud, deception, and unethical practices are endless, but most such practices are clearly immoral and so raise no ethical problems.

• A few of the issues of current concern, however, include truth in lending, unit pricing, and labeling and dating. All of these have become items of consumer concern and the focus of attention by the consumers’ movement.

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Direct Marketing

• Direct marketing takes various forms. • Direct-to-individual marketing involves

contacting or targeting individuals rather than broadcast advertising to a large indiscriminate audience.

• Three principal ways of contact are through direct mail, direct phone solicitations, and email or other electronic means.

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Advertising

• There are five areas in which the moral dimension of advertising is of central importance: – the immorality of untruthful, misleading, or deceptive

advertising; – the immorality of manipulation and coercion through

advertising, including the question of audience; – the morality of paternalism with respect to

advertising; – the immorality of preventing some kinds of

advertising; and – the allocation and distribution of moral responsibility

with respect to advertising.

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Truth and Advertising

• A major function of advertising is to sell goods. Advertising may educate the public or mold public opinion.

• The terms “true” and “false” are properly predicates of sentences or propositions. Only a proposition can be true or false. A statement or proposition is true, roughly speaking, if the stated relation between subject and predicate corresponds to the actual relation in the world between what are designated or referred to by the subject and predicate.

• Lying consists, however, not simply in making a false statement. Lying consists in making a statement, which one believes is false, to another person, whom one has reason to think will believe the statement to be true.

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Truth and Advertising • Whether a statement or proposition is true or false

depends on the world; whether a statement is an instance of lying depends on the intent of the speaker.

• Some advertisements contain sentences—express propositions—that are appropriately evaluated in terms of truth and falsity.

• Without making any false statements, an ad might be misleading or deceptive. – A misleading ad is one in which the ad does not

misrepresent or make false claims but makes claims in such a way that the normal person, or at least many ordinary people, reading it quickly and without great attention and thought, will make a false inference or draw a false conclusion.

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Truth and Advertising

• A statement made about a product may be true, may not mislead, may not deceive, but may be morally objectionable nevertheless. Sometimes, what the ad does not say is as important as what the ad does say.

• It is immoral to advertise and sell a dangerous product without indicating its dangers.

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Manipulation and Coercion

• Persuasion in itself is not immoral. • In Kantian terms, both coercion and manipulation

treat another person only as a means to one’s own end and deny respect for his or her freedom.

• Coercion involves force or the threat of force, either physical or psychological.

• Manipulation does not use force; it involves playing upon a person’s will by trickery or by devious, unfair, or insidious means.

• Coercion and manipulation in advertising are therefore immoral.

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Allocation of Moral Responsibility in Advertising

• Prime responsibility for advertising rests on the one who initiates and directs the advertising.

• Advertising agencies handle the promotion of a great many goods. Advertising agencies have the moral responsibility not to lie, mislead, or misrepresent products. They also have an obligation to investigate when they suspect that they are being asked to lie, mislead, or misrepresent a product.

• Once an advertisement or an advertising program has been produced, it can be presented to the public in a variety of forms. All TV stations, magazines, and newspapers have the moral responsibility for what appears in their shows or in the pages of their publications.

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Allocation of Moral Responsibility in Advertising

• If members of the general public are concerned about the truthfulness or accuracy of an ad, if they feel an ad is misleading or deceptive, they can perform a public service by making their feelings and perceptions known.

• Government has taken an active role in regulating and monitoring advertising. The role of government in the area of advertising is to protect the public interest.

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A Framework for Marketing Ethics

• Most of the ethical problems in marketing involve three ethical concepts: – Fairness

• Or justice

– Freedom – Well-being

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A Framework for Marketing Ethics

• Two traditional doctrines in marketing are: – Caveat Emptor- buyer beware

• Buyer has full responsibility to judge the quality of the goods

– Caveat Venditor - seller beware • Places a responsibility on the seller to fully reveal the

quality of the goods sold

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A Framework for Marketing Ethics

• The Consumer Product Safety Commission has the power to – Issue standards – Require warnings – Ban dangerous products entirely

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Labeling

• The Fair Packaging and Labeling Act (1966) Requires that containers disclose

• The Ingredients of the product • The amount • Other pertinent information

– Including nutritional content in the case of food

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Distribution

• Distribution – The means by which products are delivered from

the manufacturer to the consumer

• Illegal abuses of power in distribution are: – Reciprocal dealing, exclusive dealing, and tying

arrangements

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Distribution

• Ethical issues in distribution – Abuse of power in channeling relations – Slotting allowances to gain access to shelf space in

stores – Gray markets that arise from diverting and parallel

importing

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Advertising

• Advertising is communication about an organization and its products – It is transmitted to a target audience through a

mass medium

• Ethical concerns about advertising, include – Deceptive advertising, irrational persuasion, and

the impact of advertising

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The Due Care Theory

• Manufacturers have an obligation to exercise due care. – Taking all reasonable precautions to

• Ensure that products they put on the market are free of defects

• Manufacturers are liable when they fail to carry out this obligation.

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The Concept of Negligence

• Negligence involves the interplay of three factors: 1. The probability of harm 2. The severity of the harm 3. The burden of protecting against the harm

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Risks to Consumers

• Dangerous and risky products • Deceptive selling practices • Poorly constructed products

• Failure to honor warranties

• Deceptive and unpleasant advertising

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Market Approach to Consumer Protection

• Safety is a commodity that should not be mandated by government.

• Safety should instead be provided through the market.

• In a market, sellers will provide safety if consumers demand it.

• 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.

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Problems with the Market Approach

• Assumes markets are perfectly competitive, but they are not because: – Buyers do not have adequate information when

products are complex and information is costly and hard to find.

– Buyers are often not rational about product risk or probabilities and are often inconsistent.

– Many consumer markets are monopolies or oligopolies.

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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.

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Moral Duty to Consumers under Contractual Theory

• Duty to comply with express and implied claims of: – reliability – service life – maintainability – safety

• Duty of disclosure • Duty not to misrepresent • Duty not to coerce

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Problems with Contractual Theory

• Assumes makers of products deal directly with consumers but they do not. – Manufacturer’s advertisements do form a kind of

direct promise to consumers. • Sellers can remove all their duties to buyers by

getting them to agree to disclaimers of responsibility.

• Assumes consumer and seller meet as equals, but seller has more knowledge so consumer must rely on the seller.

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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.

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Manufacturer’s Duties in Due Care Theory

• 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:

– provide users with information about using product safely – warn of all dangers – do not market to those unable to avoid risk

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Problems with Due Care Theory

• Does not limit what producer must spend to eliminate risk.

• 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.

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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.

• Product injuries are external costs that should be internalized as a cost of bringing the product to market, this maximizes utility and distributes costs more fairly.

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Criticisms of the Social Costs View

• Unjust to manufacturers since compensatory justice 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.

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