Consumers and business ethics

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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

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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

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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.

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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

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Trust in Business and Government

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Trust in China

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Trust Issues in China

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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.”

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China: Consumers & Food Safety

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Trust in Chinese Companies

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Discussion
Does the market provide sufficient protection for consumers? Or are additional

safeguards needed?
Why?
Who?

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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.

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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.

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Legal Issues
Health and safety
Credit and ownership
Marketing, advertising, and packaging
Product liability
Guarantees and

warranties

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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

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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

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Right to Safety
This means that businesses have an obligation not to

knowingly market a product that could harm consumers.

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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

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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.

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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.

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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

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Ethical Issues in Marketing

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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

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Sanlu Milk
Who is punished?

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Ford Pinto

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Ethics and Advertising (Marketing Communications)

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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)

Ethics & Marketing Communications

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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

Ethics & Marketing Communications

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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)

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Consumer Sovereignty Test

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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

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Advertising Practitioners and Ethics
How do advertising professionals perceive, process and think

about ethical issues?
Study by Drumwright and Murphy (2004) (51 in-depth 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

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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”)

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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

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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.

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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)

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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

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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?

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Ethical Consumption & Sustainable Consumption

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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.

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Typical Consumption
Typically consumer behavior is driven by judgments about how products

and services benefit the end-user (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

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Assumptions
Old patterns of production and consumption were based on two tacit

assumptions:
Unlimited resources (water, air, fish, oil, trees, etc.)
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)

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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.

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The Pacific Gyre

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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

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Consumer Behavior

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Willingness-to-pay (WTP)
Studies show that Western consumers who are sensitive to ethical

consumption issues (approx. 40-50% 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

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LOHAS

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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

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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

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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).

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

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Cradle-to-Cradle
Interface carpets: Lease carpets (rather than sell) to corporate customers and

up-cycle (rather than re-cycle) 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

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Boycotting
Consumers’ ethical values can also lead to negative purchasing behavior (avoidance

of certain brands or products)

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What about China?

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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

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Consumer Ethics
Consumers can also engage in unethical behavior that hurts business:
Fraudulent

consumer complaints or returns
Counterfeit products
Piracy

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Estimated Losses from Copyright Piracy (Millions US $) and Piracy Levels

(%) in Given Countries

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

SOURCE: International Intellectual Property Alliance (IIPA) www.iipa.com, Data Estimates for 2008 or 2009

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Why do we buy illegal products?
Original is too expensive (50.9%)
Good cost/performance

ratio (42.1%)
For ‘fun’ (22.8%)
They were a ‘spontaneous’ bargain (17.5%)
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

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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)

Consumers and business ethics

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