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Consumers/Marketing Ethics Outline

I. Introduction A. Opening Case Comments

1. As an illustration of the complex moral relationship between businesses and their consumers, Shaw and Barry outline a brief history of the manufacture and marketing of cigarettes to the public, and then ask the following questions: a. What are the responsibilities to consumers of companies that sell

potentially or (in the case of cigarettes) inherently harmful products? b. To what extent do manufacturers abuse advertising? c. When is advertising deceptive? d. Can advertisers create or at least stimulate desires for products that

consumers would not otherwise want or would not otherwise want as much?

e. How, if at all, should advertising be restricted? 2. With the sale of goods to the public comes responsibility on the part of the

manufacturer and advertiser. a. Government has some responsibility to protect the public from hazardous

or mislabeled goods. b. However, what responsibilities do companies have toward their

consumers? How can goods be promoted while respecting the choices of individuals?

3. Chapter 6 examines the following topics: a. Marketing and a framework for marketing ethics. b. Product safety, legal liability, and regulation. c. Responsibilities of business to consumers concerning product quality,

prices, labeling, and packaging. d. Deceptive marketing promotion and the FTC. e. “Reasonable” vs. “ignorant” consumer standards. f. The social desirability of advertising, free speech, and consumer needs.

B. Chapter Learning Objectives – After completing this chapter students should be able

to: 1. Understand the basis for business’s responsibility to consumers and the

imbalance of power between sellers and buyers. 2. Trace the evolution of the relationship between business and consumer from a

philosophy of caveat emptor to the due care theory. 3. Identify and evaluate the systems that have been put in place to regulate

products and services, protect consumers, and ensure corporate compliance. 4. Delineate the responsibilities of business with regard to safety, product quality,

fair pricing, packaging and labeling, and marketing promotion. 5. Assess the merits of the arguments for and against advertising.

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II. Marketing A. Overview

1. A key to understanding the legal and moral obligations businesses owe to consumers is by first looking at marketing and the rights and obligations of both businesses and consumers.

2. Marketing is defined as “the performance of business activities that direct the flow of goods and services from producer to consumer or user.”

3. Because consumer choices are so important for business survival, ethical problems in trying to persuade consumers to purchase a business’s goods and/or services is inevitable.

B. Framework for Marketing Ethics 1. Most of the ethical problems in marketing involve three ethical concepts:

fairness (or justice), freedom, and well-being. a. Fairness is a central concern because it is a basic moral requirement of

any market transaction—and the result of successful marketing is always a market transaction.

b. Freedom is at issue in marketing with respect to having a range of consumer options.

c. Well-being is a consideration in evaluating the social impact of products and advertising, as well as product safety.

2. These three principles of fairness, freedom, and well-being can be expressed in the four-point Bill of Rights for Consumers that President John F. Kennedy proclaimed in 1962 (a.k.a. consumerism). These rights are: a. The right to be protected from harmful products (well-being). b. The right to be provided with adequate information about products

(fairness). c. The right to be offered a choice that includes the products that consumers

truly want (well-being and freedom). d. The right to have a voice in the making of major marketing decisions

(freedom). 3. This movement arose despite the fact that business had long operated on the

basis of the marketing concept, which stresses consumer satisfaction. 4. Traditionally, businesses are understood to have several rights, which are

limited only by the usual rules of fair market exchanges. These rights are: a. The right to make decisions regarding the products offered for sale, such

as their design and style. b. The right to set the price for products and all other terms of sale, including

warranties. c. The right to determine how products will be made available to consumers. d. The right to promote products in any way that producers choose.

5. Thus, the consumer movement sought to balance the rights of businesses with this new list of consumer rights.

III. Product Safety

A. Overview 1. Business’s responsibility for understanding and providing for consumer needs

derives from the fact that citizen-consumers are completely dependent on business to satisfy their needs.

2. The complexity of an advanced economy and the necessary dependence of consumers on business to satisfy their many wants increase business’s responsibilities to consumers—particularly in the area of product safety.

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3. Statistics suggest that faith in the conscientiousness of business is sometimes misplaced.

B. The Legal Liability of Manufacturers 1. The 1916 MacPherson v. Buick Motor Car case expanded the liability of

manufacturers for injuries caused by defective products. a. Prior to MacPherson, consumers could recover damages only from the

retailer of the defective product. 1) Rationale: A manufacturer’s liability for damage caused by a defective

product was based on a contractual relationship. 2) Under contract law, the “privity doctrine” only allows the contracting

parties to sue one another (e.g., the consumer-buyer and the retailer-seller).

3) Since manufacturers were not part of the contractual exchange, they were not in privity of the contract and therefore could not be sued.

b. Although never a legal doctrine, one can categorize the pre-MacPherson era as adopting the caveat emptor (“let the buyer beware”) doctrine. 1) According to the doctrine of caveat emptor, consumers were held to

the ideal of being knowledgeable, shrewd, and skeptical in their purchases.

2) This meant that the consumer was entirely responsible if harmed by a purchased product unless he/she could show some breach of contract and was in privity to the contract.

2. The MacPherson decision recognized the 20th century economic reality of large manufacturing concerns and national systems of product distribution. a. Among other things, local retailers are not as likely as large

manufacturers to be able to bear financial responsibility for defective products that injure others. 1) Thus, MacPherson changed the “public policy” between consumers

and manufacturers. 2) It looked at the old privity system and determined that the privity

system did not represent what was in the best interest of the public—this is what we mean by public policy.

3) Since local retailers are not as likely as large manufacturers to be able to bear responsibility for defective products that injure others, MacPherson determined that what was in the best interest of the public would be to shift this burden to those who were in a better position (i.e., manufacturers).

4) How were they in a better position? a) Manufacturers can control the quality of the goods they

manufacture. b) They can better absorb these costs increase through reduced

profits or increasing prices. 5) Relate this back to our discussion of the changing “social contract”

between corporations/businesses and their stakeholders that we discussed in Chapter 5.

6) You should also note that this is a utilitarian approach. b. MacPherson adopted a “due-care” theory of the manufacturer’s duty to

consumers. 1) Due care is the idea that consumers and sellers do not meet as

equals and that the consumer’s interests are particularly vulnerable to being harmed by the manufacturer, who has knowledge and expertise

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the consumer does not have. 2) According to the due-care theory, manufacturers have an obligation,

above and beyond any contract, to exercise due care to prevent the consumer from being injured by defective products.

3) In law, the concept of due care manifests itself in the tort of negligence. a) A tort can be simply defined as a noncontractual, civil wrong.

Explain. b) Negligence can be simply defined as failure to exercise a duty of

due care. c) A simple legal definition of due care is carelessness or failure to

act as a reasonable person would act given the same or similar circumstances.

d) Under the tort theory of negligence, the injured party can sue the party that was negligent (i.e., failed to act with due care); the injured party does not have to be in privity to the negligent party because negligence is based on tort law, not contract law.

c. As the concept of due care spread, it superseded the old doctrine of caveat emptor.

3. Strict Product Liability – Despite its support for the due-care theory and for a broader view of manufacturer’s liability, the MacPherson case still left the injured consumer with the burden of proving that the manufacturer had been negligent (i.e., acted carelessly). a. Problems:

1) Negligence is often difficult to prove. 2) A product might be unsafe despite the manufacturer’s having

exercising due care. b. These problems led to a further policy shift adopted in the 1960 New

Jersey case of Hennington v. Bloomfield Motors and the 1963 California case of Greenman v. Yuba Power Products.

c. This new approach to product safety adopted a strict liability approach. 1) According to the strict liability approach, the manufacturer of a

product has legal responsibilities to compensate the user of that product for injuries suffered due to a defective aspect of the product, even though the manufacturer has not been negligent in permitting the defect to occur.

2) Because liability is not dependent on fault (i.e., carelessness or unreasonableness) in this approach, sometimes the term “no-fault liability” will also be used to describe this approach.

3) Like negligence, strict liability is a tort. It is not based on contract therefore no privity requirement need be shown.

d. Negligence versus Strict Liability – Two important differences: 1) Proof: In negligence, the plaintiff must show that the defendant

breached its duty of care (i.e., acted carelessly or unreasonably); in strict liability, the plaintiff must simply show that the product was defective.

2) Parties Subject to Suit: In negligence, the plaintiff can sue only those parties who were alleged to be careless in the manufacture or selling of the product; in strict liability, the plaintiff can sue any party who sold the good in its defective state. Explain.

e. Critics of strict product liability contend that the doctrine is unfair because

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even if the manufacturer acts reasonably it can be held liable. f. The argument for strict product liability is basically utilitarian.

1) First, its advocates contend that only such a policy will induce firms to bend over backward to guarantee product safety.

2) Second, proponents of strict liability contend that the manufacturer is best able to bear the cost of injuries due to defects.

3) Note: These were the same arguments used in MacPherson to adopt the due care standard.

C. Government Safety Regulation 1. The Consumer Product Safety Commission (CPSC) was created in 1972 by

the Consumer Product Safety Act (CPSA). a. Its job is to “protect the public against unreasonable risks associated with

consumer products.” b. Because the CPSC regulates potentially dangerous consumer products, it

issues product safety standards for consumer products that pose an unreasonable risk of injury.

c. If a consumer product is found to be imminently hazardous—that is, its use can cause an unreasonable risk of death or serious injury or illness—the manufacturer can be required to recall, repair, or replace the product or take other corrective action.

d. Alternatively, the CPSC can seek injunctions, bring actions to seize hazardous consumer products, seeks civil penalties for knowing violations of the Act or its rules, and seek criminal penalties for knowing and willful violations of the Act or its rules.

e. A private party can sue for an injunction to prevent violations of the Act or its rules and regulations.

2. In undertaking its policing function, the CPSC aids consumers in evaluating product safety, develops uniform standards, gathers data, conducts research, and coordinates product safety laws (local, state, federal) and enforcement.

3. Compared with many other developed European countries, the U.S. regulates fewer products (relying more on media attention, pressure from consumer advocacy groups and the threat of lawsuits to protect consumers), and many products escape effective regulation.

4. Economic Costs – Safety regulations do protect consumers, but they add to the cost of products. a. Question: Is the expense worth it?

5. Consumer Choice – Consumers may dislike some mandated safety technology, but in other cases safety regulations may prevent individuals from choosing to purchase a riskier, though less expensive, product. a. Preventing consumers from being able to choose a cheaper but riskier

product can have both economic and ethical drawbacks. 6. Legal Paternalism – Regulating consumer choice also raises the issue of legal

paternalism. a. Legal paternalism is the idea that the law may justifiably be used to

restrict the freedom of individuals for their own good. b. Shaw and Barry state that paternalism is a large issue that cannot be

done justice here, but regard to safety regulations, three comments are in order. 1) First, some product safety affects not just consumers who purchase

products but also third parties. a) However, regulating these products on or product features can be

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defended on nonpaternalistic grounds. 2) Second, anti-paternalism gains plausibility from the view that

individuals know their own interests better than anyone else does and that they are fully informed and able to advance those interests. a) However, paternalists state that in the increasingly complex

consumer world, the assumption that consumers know their own interests better than anyone else is doubtful.

3) Third, the controversy over legal paternalism pits the values of individual freedom and autonomy against social welfare. a) Shaw and Barry say that in the end, one may have to examine

paternalistic product safety legislation case by case and try to weigh the conflicting values and likely results.

D. Problems with Regulation 1. Regulatory agencies often succeed in protecting interests of consumers and

stressing business responsibility. However, regulation is not always effective. a. Shaw and Barry give numerous examples on pages 299 – 300. b. They also discussed two areas: self-regulation and automobile safety.

2. Self-Regulation – Businesses generally prefer self-regulation, competition, and voluntary safety standards set by their own industry. a. But self-regulation can easily subordinate consumer interests to profit

making when the two goals clash. b. Under the guise of self-regulation, businesses can end up ignoring or

minimizing their responsibilities to consumers. 3. Automobile Safety – The auto industry has a long and consistent history of

fighting against safety regulations. Some examples: a. The industry successfully lobbied the federal government to delay the

requirement that cars be equipped with air bags or automatic seat belts. b. In the late 1990s, the industry denied that car passengers are at a greater

risk of serious injury or death caused by collisions with pickups or SUVS than with automobiles.

c. However, as car buyers become better informed, automobile manufacturers are rethinking Lee Iacocca’s old bromide “Safety doesn’t sell.”

E. The Ethical Responsibilities of Business Regarding Product Safety – Note I added the word “Ethical” here to emphasize that we are not just concerned with laws; otherwise, this would be a business law course. I also added the words “Regarding Product Safety” because we will be covering other areas of ethical responsibilities regarding consumers in this chapter. 1. Simply obeying regulations and laws does not exhaust the moral

responsibilities of business in the area of consumer safety. 2. However, when it comes to product safety, the exact nature of business’s moral

responsibilities is difficult to specify, because much depends on the particular product or service being provided. a. Often times business ethicists cite a business’s moral obligation of “do no

harm.” b. However, numerous products produced may cause harm or may have

side effects. 1) My Example: Automobile manufacturers know that a number of the

vehicles they produce will be involved in accidents. Can they make an automobile perfectly safe? Yes, is called a tank. The problem is how many of us could afford such a vehicle. So the general moral

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obligation of “do no harm” does not help us much. 3. Nevertheless, attending to the following points would go a long way in helping

business behave morally with respect to consumer safety: (Make sure you understand these and know the examples that illustrate each.) a. Businesses should give safety the priority warranted by the product.

Factors in safety control that ought to be considered include: 1) Cost; 2) What is specified by law; 3) The seriousness of the injury that the product can cause; and 4) The frequency of injuries.

b. Business should abandon the misconception that accidents occur exclusively as a result of product misuse and abuse, and that they are thereby absolved of all responsibility.

c. Business must monitor the manufacturing process itself. 1) For example, businesses should periodically review working

conditions and the competence of key personnel. d. When a product is ready to be marketed, businesses should have their

product safety staff review their market strategy and advertising for potential safety problems.

e. When a product reaches the marketplace, businesses should make available to consumers written information about the product’s performance.

f. Businesses should investigate consumer complaints in a timely manner. 4. Morally speaking, no one is asking for an accident- and injury-proof product,

only that a manufacturer do everything reasonable to approach that ideal. a. Shaw and Barry go on to give examples of companies and industries that

do not act morally and two companies, JCPenney and Johnson Wax, that have acted morally.

IV. Product Quality – I am going to make each of these subareas a major heading because it

is easier to outline the material and it also shows that they are just as important to consumers as product safety. A. Overview

1. The demand for high-quality products is closely related to a number of themes mentioned in the discussion of product safety. a. Most people would agree that business bears a general responsibility to

ensure that the quality of a product measures up to the claims made about it and to reasonable consumer expectations.

b. They would undoubtedly see this responsibility as deriving primarily from the consumer’s basic right to get what he or she pays for.

2. There are numerous ways in which business assumes responsibilities to consumers for product quality and reliability, a few of which will be discussed here.

B. Express Warranties – Goods only, not services. 1. Express warranties are the claims that sellers explicitly state.

a. Assuming that the buyer relies on this explicit statement when purchasing the goods, the express warranty becomes part of the contractual transaction between the buyer and the seller.

2. Express warranties can be created in one of three ways: a. By an affirmation of fact or promise about the goods.

1) Statements of opinion (puffing) or value do not create an express

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warranty. Explain and give examples (e.g., “this car will go 250 mph” versus “this car is fast”)

2) Note: The goods do not have to be of poor quality here, only that they do not meet the seller’s promise.

b. By a description of the goods. 1) Explain and give examples (on the outside of a 5 pound package of

potatoes it says, “Idaho Potatoes”). 2) Note: The goods do not have to be of poor quality here, only that they

do not meet the seller’s description. c. By a model or sample of the goods.

1) Model – one of a kind or a prototype. 2) Sample – one of many. 3) The express warranty is created here by the quality or performance of

the model or sample. 4) Give Las Vegas hotel carpeting example.

3. Problems: a. Since express warranties are contractual in nature, the law allows the

seller to disclaim or limit the warranty in most circumstances. 1) Disclaiming a warranty means to cancel it. Example: “Seller makes

no express warranties on its products.” These goods sold “as is.” 2) Limiting a warranty means limiting the remedy available to the buyer.

Example: “If buyer is not 100% satisfied with the product, buyer can exchange it for one of equal or lesser value.” Note, I cannot get my money back.

b. Since express warranties are contractual in nature, the privity doctrine applies in most circumstances. However, the law has expanded the privity doctrine here to include manufacturers, not just retailers, if the manufacturer is the one making the express warranty. Explain.

C. Implied Warranties 1. An implied warranty is one that the law derives by inference from the nature

of the transaction or the relative situations or circumstances of the parties. a. Unlike express warranties, implied warranties automatically arise from

the transaction; the seller does not have to make an explicit statement. b. However, like express warranties, implied warranties are contractual in

nature. c. There are two major types of implied warranties: the implied warranty of

merchantability and the implied warranty of fitness for a particular purpose.

2. The implied warranty of merchantability is created when goods are sold by a merchant seller. Note: All that is required is a sale; no statement need be made. a. A merchant seller is a person who normally sells goods of this kind.

Explain. b. Goods are tangible, movable personal property and are divided into two

categories for purposes of the implied warranty of merchantability: food goods and non-food goods. 1) Food goods are defined as any good consumable on or off the

premises of the seller. Give examples. 2) Non-food goods are any good that is not a food good. Give

examples. c. Food Good Standard: To be considered merchantable, food goods must

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be fit to eat on the basis of consumer expectations—that is, would a reasonable consumer consuming such goods find them fit to eat. 1) My Example: Blue Ship Tea Room case specializing in homemade

fish chowder and bone being stuck in woman’s throat versus male in grandma’s cherry pie.

d. Non-Food Good Standard: To be considered merchantable, non-food goods must be fit for the ordinary purposes for which such goods are sold. 1) My Example: Using a dining room chair to stand on versus sit on and

it breaks. 3. The implied warranty of fitness for a particular purpose is created when the

following conditions are met: a. The seller or lessor has reason to know the particular purpose for which a

buyer or lessee will use the goods; b. The buyer or lessee is relying on the skill and judgment of the seller or

lessor to select suitable goods; and c. The goods do not meet the buyer’s or lessee’s expressed needs. d. Example: Buying a pipe for a leaky sink at hardware store. e. Thus, the goods must be fit for a particular purpose as opposed to a

ordinary purpose. 4. Problems:

a. Since implied warranties are contractual in nature, the law allows the seller to disclaim or limit the warranty in most circumstances. 1) Disclaiming Example: “Seller makes no implied warranty of

merchantability on its products.” These goods sold “as is.” 2) Limiting Example: “If buyer is not 100% satisfied with the product,

buyer can exchange it for one of equal or lesser value.” Note, I cannot get my money back.

b. Since the implied warranties are contractual in nature, the privity doctrine applies in most circumstances. However, the law has expanded the privity doctrine here to protect non-buyers in the buyer’s family, household, or guests of the buyer. Explain using propane grill example.

5. The Magnuson-Moss Warranty Act was enacted as an attempt to improve the quality of warranties given by manufacturers to consumers. As such, it only applies to consumer goods—goods sold primarily for personal, family, or household use. Explain. a. The Act does not regulate the safety or quality of consumer goods but

does seek to make consumer warranties easier to understand, to prevent deceptive warranty practices, and to provide a relatively effective method of enforcing warranty obligations.

b. The Act prohibits a disclaimer of implied warranties whenever one of the following occurs: 1) An express written warranty is given; or 2) A service contract is made with the consumer within ninety days after

the sale (a service contract is where the warrantor promises to service and repair a product for a set period of time in exchange for a fixed fee).

D. The Federal Food, Drug, and Cosmetic Act (FDCA) of 1938 – This and related laws govern a number of areas dealing with product quality that you need to be exposed to. 1. The FDCA is administered by the Food and Drug Administration (FDA).

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a. The FDA is empowered to regulate food, food additives, drugs, cosmetics, and medicinal devices.

2. Regulation of Food – The FDCA prohibits the shipment, distribution, or sale of adulterated food. a. Food is deemed adulterated if it consists in whole or in part of any “filthy,

putrid, or decomposed substance” or that is otherwise “unfit for food.” 1) Note that food does not have to be entirely pure to be distributed or

sold—it only has to be unadulterated. 2) For example, the FDA has set ceilings/”action levels” for certain

contaminants, or “defects,” as the FDA likes to call them from various foods. Some of these action levels are: a) Golden Raisins – 35 fly eggs per eight ounces. b) Popcorn – 2 rodent hairs per pound. c) Shelled Peanuts – 20 insects per 100 pounds. d) Canned Mushrooms – 20 maggots per 3 1/2 ounces. e) Tomato Juice – 10 fly eggs per 3 1/2 ounces.

b. The FDCA also prohibits false and misleading labeling of food products. In addition, it mandates affirmative disclosure of information on food labels, including the name of the food, the name and place of the manufacturer, and a statement of ingredients.

3. Regulation of Drugs – The FDCA gives the FDA the authority to regulate the testing, manufacture, distribution, and sale of drugs. a. The Drug Amendment to the FDCA, enacted in 1962, gives the FDA

broad powers to license new drugs in the United States through a formal application process.

b. It allows the FDA to withdraw approval of any previously licensed drug. c. It requires all users of prescription and nonprescription drugs to receive

proper directions for use and adequate warnings about any related side effects.

d. It prohibits the manufacture, distribution, or sale of adulterated or misbranded drugs.

4. Regulation of Cosmetics – Under the FDCA, the FDA has issued regulations that require cosmetics to be labeled, to disclose ingredients, and to contain warnings if they are carcinogenic (cancer-causing) or otherwise dangerous to a person’s health. a. The FDA’s definition of cosmetics include substances and preparations

for cleansing, altering the appearance of, and promoting the attractiveness of a person. Ordinary household soap is expressly exempted from this definition.

b. The manufacture, distribution, or sale of adulterated or misbranded cosmetics is prohibited.

c. The FDA may remove from commerce cosmetics that contain unsubstantiated claims of preserving youth, increasing virility, growing hair, etc.

5. Regulation of Medicinal Devices – The Medicinal Device Amendment to the FDCA in 1976 gave the FDA authority to regulate medicinal devices, such as heart pacemakers, kidney dialysis machines, defibrillators, surgical equipment, and other diagnostic, therapeutic, and health devices. a. The mislabeling of such devices is prohibited, b. The FDA is empowered to remove “quack” devices from the market.

6. Other Acts Administered by the FDA – In addition to the FDCA, the FDA

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administers the following statutes and amendments to the FDCA: a. Pesticide Amendment of 1954 – Authorizes the FDA to establish

tolerances for pesticides used on agricultural products. b. Food Additives Amendment of 1958 – Requires FDA approval of new

food ingredients or articles that come in contact with food, such as wrapping and packaging materials.

c. Color Additives Amendment of 1960 – Requires FDA approval of color additives used in foods, drugs, and cosmetics.

d. Animal Drug Amendment of 1968 – Requires FDA approval of any new animal drug or additive to animal food.

e. And the list goes on E. The Ethical Responsibilities of Business Regarding Product Quality

1. Again, simply obeying regulations and laws does not exhaust the moral responsibilities of business in the area of product quality.

2. In addition, consumers today are more militant than ever in their insistence on product quality and on getting exactly what they paid for. Therefore, attending to the following points would go a long way in helping business behave morally with respect to product quality: a. Have we lived up to any promises explicitly made to the consumer? b. Have we lived up to any promises implicitly made to the consumer? c. Have we provided the consumer with adequate information about the

product? d. Is this information written in a clear and concise manner? e. Are any warnings related to product quality conspicuous?

V. Labeling and Packaging – Your authors discuss this after “Pricing”; I like to discuss it after product quality because they are so closely related. A. Overview

1. Business has a responsibility to provide accurate, clear, and understandable product information that meets consumer needs.

2. Labeling and Packaging Laws – A number of federal and state laws deal specifically with the information given on labels and packages. a. In general, labels must be accurate, and they must use words that are

easily understood by the ordinary consumer. 1) In some instances, labels must specify the raw materials used in the

product. 2) In other instances, the product must carry a warning.

3. Federal Statutes – There are numerous federal laws regulating the labeling and packaging of products. These include the following: (These are just to give you some examples; you do not need to know these are just the ones discussed below in bold) a. The Wool Products Labeling Act of 1939. b. The Fur Products Labeling Act of 1951. c. The Flammable Fabrics Act of 1953. d. The Fair Packaging and Labeling Act of 1966. e. The Comprehensive Smokeless Tobacco Health Education Act of 1986.

B. Food Labeling – Because of the quality and safety of food are so important to consumers, several statutes deal specifically with food labeling. 1. The Food, Drug, and Cosmetic Act (FDCA) discussed earlier prohibits false

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and misleading labeling of food products. a. In addition, it mandates affirmative disclosure of information on food

labels, including the name of the food, the name and place of the manufacturer, and a statement of ingredients.

2. The Fair Packaging and Labeling Act (FPLA) of 1966: a. The purpose of the Act is to enable consumers to obtain accurate

information with respect to the quantity (of the contents) of products and to make meaningful comparisons of similar products.

b. The FPLA requires the labels on consumer goods to identify: 1) The product; 2) The manufacturer, processor, or packager of the product and its

address; 3) The net quantity of the contents of the package; and 4) The quantity of each serving if the number of servings is stated.

c. Label must use simple and clear language that a consumer can understand.

d. This Act is administered by the Federal Trade Commission (FTC) and the Department of Health and Human Services.

3. The FPLA was amended by the Poison Prevention Packaging Act (PPPA) of 1970: a. Many children suffer serious injury or death when they open household

products and inhale, ingest, or otherwise mishandle dangerous products. b. The PPPA is intended to avoid this problem by requiring manufacturers to

provide “childproof” containers and packages for all household products. 4. The Nutrition Labeling and Education Act (NLEA) of 1990:

a. The NLEA requires food manufacturers and processors to provide more nutritional information on virtually all foods and bars them from making scientifically unsubstantiated health claims.

b. It requires the more than 20,000 food labels found on grocery store shelves to disclose the number of calories derived from fat and the amount of dietary fiber, saturated fat, cholesterol, and a variety of other substances.

c. It applies to packaged foods as well as fruits, vegetables, and raw seafood. 1) Meat, poultry, and egg products, which are regulated by the

Department of Agricultural, are exempt from the Act, as are restaurant food and prepared dishes sold in supermarkets or delicatessens.

d. It regulates the use of such terms as fresh and low-fat. Although many consumer groups argue that it should regulate even more terms.

e. It is administered by the FDA. C. Misleading Packaging

1. Purposely packaging items differently than competitors to try to mislead consumers presents a problem. a. Tall and narrow cereal boxes look larger than short, squat once but

actually contain more serial. b. Package terms such as large, extra-large, jumbo, economy size, and

value pack frequently confuse or mislead shoppers about what they are buying and how good a deal they are getting.

c. For example, a quantity surcharge occurs when a retailer sells an item packaged as “economy size” or other similar designation, but the per unit

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charge on the economy size package good is actually more than on a regular packaged good.

2. Even though there are no laws preventing retailers from continuing these practices as long as the package is properly labeled, it presents a moral issue when manufacturers or retailers purposely use such packaging to mislead consumers.

D. The Ethical Responsibilities of Business Regarding Labeling and Packaging 1. Again, simply obeying regulations and laws does not exhaust the moral

responsibilities of business in the area of labeling or packaging. 2. Sound moral conduct in this area must rest on a strong desire to provide

consumers with clear and usable information about the goods labeled and packaged so they can make intelligent comparisons and choices.

3. Those responsible for labeling and packaging would be well advised to consider at least the following questions, a negative answer to any of which could signal a moral problem: a. Is there anything about the packaging that is likely to mislead consumers? b. Have we clearly and specifically identify the exact nature of the product in

an appropriate part of the label? c. Is the net quantity prominently displayed? d. Is it readily understandable to those wishing to compare prices? e. Are ingredients listed so they can be readily recognized and understood? f. Have we indicated and represented the percentage of the contents that is

filler, such as the bone in a piece of meat? g. Have we identified any ingredients that may cause persons with dietary

restrictions or allergies a problem? h. These are just some of the questions but it gives you a good idea of a

business’s moral responsibility in this area.

VI. Pricing A. Overview

1. Pricing is one of the four components of a businesses’ marketing mix. a. A firm’s marketing mix is the planned mix of the controllable elements of

a product’s marketing plan commonly termed as 4Ps: product, price, place, and promotion.

b. These four elements are adjusted until the right combination is found that serves the needs of the product’s customers, while generating optimum income.

c. Note: Product Quality we discussed earlier is part of the “Product” consideration, and we will be discussing “Promotion” after this section.

2. Shaw and Barry break product pricing into three moral and legal categories: manipulative pricing, price fixing, and price gouging. a. I have also added two other important categories: price discrimination and

predatory pricing. 3. After discussing each of these areas, we will then look at the ethical

responsibilities of business regarding pricing like we have done in the previous sections.

B. Manipulative Pricing 1. Generally, any type of pricing that misleads consumers about a product’s true

cost is considered manipulative.

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a. Shaw and Barry discuss areas such as hidden charges, surcharges, and other stealth fees; suggested retail pricing; promotional pricing; and rebates.

b. The following are some of the main federal laws dealing with manipulative/deceptive pricing.

2. Price Misrepresentation – The Federal Trade Commission (FTC) has issued a series of guides against deceptive pricing that set forth certain principles by which the FTC will judge the merits of price claims. These guides are not law but are useful to avoid FTC attack. The FTC guidelines deal primarily with five different types of claims: a. Comparisons of the Sale Price to a Former Price – The comparison

must be truthful (e.g., An object with a $100 price tag that never sold for more than $95 cannot be marked “Formerly $100”) and, if such a comparison is otherwise properly made, the reduction must be at least 10%.

b. Comparable Products – One may compare only the identical merchandise, and the price quoted must be genuine (e.g., “The same lawn mower would cost you $400”).

c. Suggested Retail Price – A manufacturer may not assist a retailer in deceiving the public by listing a suggested price that is in fact well above the price that anyone charges in the area.

d. Bargain Based on the Purchase of Something Else – The FTC guidelines do not permit the seller to raise the original purchase price or to reduce the size or quality of the bargain product (e.g., “Buy one get one free”).

e. False Claims to Explain a Sale Price – A seller cannot use a false reason to place a product on sale nor can it classify something as a “limited time offer” if the offer goes on indefinitely (e.g., going-out-of-business sale).

C. Price-Fixing 1. Section 1 of the Sherman Antitrust Act – Section 1 outlaws certain

restraints of trade which can be broadly divided into horizontal restraints of trade and vertical restraints of trade. a. A horizontal restraint of trade occurs when two or more competitors at

the same level of distribution enter into a contract, combination, or conspiracy to restrain trade. Explain how “restraint of trade” is more than just pricing and “horizontal.”

b. A vertical restraint of trade occurs when two or more parties on different levels of distribution enter into a contract, combination, or conspiracy to restrain trade. Explain “vertical.”

c. Price-fixing can be either horizontal or vertical. 2. Horizontal Price-Fixing – Horizontal price-fixing occurs where the competitors

in the same line of business agree to set prices for goods and services they sell. a. Price-fixing is defined as raising, depressing, fixing, taking, or stabilizing

the price of a commodity or service. b. Illegal price-fixing includes setting minimum or maximum prices or fixing

the quantity of a product or service to be produced or provided. 1) My Example: Gasoline stations in Ada agreeing to sell gasoline at the

same price. c. Although most price-fixing agreements occur between sellers, an

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agreement among buyers to set the price they will pay for goods or services is also price-fixing.

d. Horizontal price-fixing is a per se violation of Section 1. 1) Under the Sherman Antitrust Act, a per se violation means that there

are no defenses or justifications of any kind—such as “the price-fixing helps consumers or protects competitors from ruinous competition”—that can prevent the per se rule from applying.

2) In other words, it is automatically illegal. 3. Vertical Price-Fixing – Vertical price-fixing (more commonly referred to as

“resale pricing maintenance”) occurs when a party at one level of distribution enters into an agreement with a party at another level to adhere to a price schedule that either sets or stabilizes prices. a. The definitions of price-fixing and illegal price-fixing remain the same as

in horizontal price-fixing. 1) My Example: A computer manufacturer that sells its computers only

two retailers that agree to resell them at the prices set by the manufacturer.

b. Vertical price-fixing is also a per se violation of Section 1. D. Price Gouging

1. Price gouging is better understood as a seller’s exploiting a short-term situation in which buyers had few purchase options for a much-needed product by raising prices substantially. a. All 50 states have laws prohibiting price gouging. b. For example, Oklahoma’s price-gouging law stipulates that prices cannot

jump more than 10 percent above the price charged immediately before the declaration, unless the spike is caused by non-emergency factors and does not result in a profit increase. 1) For Oklahoma’s Emergency Price Stabilization Act (i.e., Oklahoma’s

price gouging law), the Governor and Attorney General must declare an emergency.

2) Other states’ laws are similar to Oklahoma’s law. c. In non-emergency situations, price gouging is generally thought to be

unethical although there is disagreement about what it is and whether all instances of it are wrong. 1) The main reason why there is this disagreement is because the

question “What is a fair price?” is not an easy one to answer. 2) One must consider the costs of material and production, operating

and marketing expenses, profit margin, etc. E. Price Discrimination – Although not directly related to consumers as the previous

categories, occurrence of price discrimination would eventually affect consumer prices. 1. Section 2(a) of the Clayton Act as amended by the Robinson-Patman Act

– Section 2(a) prohibits price discrimination if it directly or indirectly substantially lessens competition such that it tends to produce a monopoly.

2. Direct price discrimination occurs if all of the following are present: a. Sales to two or more purchasers of a product at approximately the same

time, but at different prices; b. The goods sold must be of “like grade and quality”; and c. The plaintiff must have suffered actual injury because of the price

discrimination. 1) My Example: The injured party may be the purchaser who did not

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receive the favored price, that party’s customers to whom the lower price could not be passed along, and so on down the line.

3. Indirect price discrimination occurs when a purchaser is favored over another purchaser, other than through price differences (e.g., favorable credit terms or freight charges).

4. Defenses to Section 2(a) Price Discrimination: (Both direct and indirect) a. Cost Justification Defense – Any differences in the cost of manufacture,

sale, or delivery of the product qualify. 1) My Example: Quantity discounts and different shipping distances are

the best example. b. Meeting the Price of Competition Defense – The seller may lawfully

engage in price discrimination to meet a competitor’s price. 1) My Example: I recently flew to Denver, Colorado to attend a

conference. To fly directly from Oklahoma City to Denver on Southwest Airlines was $70 round-trip. To fly from Oklahoma City to Denver on American Airlines, with a stopover in Dallas, was $70. To fly directly from Dallas to Denver on American Airlines was $120. Obviously it costs American Airlines more to fly from Oklahoma City – Dallas – Denver than directly from Dallas – Denver, so why can they offer me a lower price to fly out of Oklahoma City could charge a higher price for someone to fly out of Dallas? They cannot use the cost justification Defense but they can use the meeting the price of competition defense.

c. Changing Market Conditions Defense – Price discrimination is not unlawful if it is in response to changing conditions in the market for the marketability of the goods. 1) My Example: The price of goods can be lowered to subsequent

purchasers to reflect the deterioration of perishable goods (e.g., fish), obsolescence of seasonable goods (e.g., winter coats sold in the spring), a distress sale pursuant to court order or discontinuance of a business.

F. Predatory Pricing – Although not directly related to consumers as the previous categories, occurrence of predatory pricing would eventually affect consumer prices. 1. Section 2 of the Sherman Antitrust Act – Section 2 outlaws monopolizing,

attempting to monopolize, and conspiring to monopolize any part of interstate or foreign commerce. a. Thus, two distinct types of behavior are subject to sanction under Section

2: monopolization and attempts to monopolize. 2. A tactic that may be involved in either offense is predatory pricing.

a. Predatory pricing occurs when one firm (the predator) attempts to drive its competitors from the market by selling its product at prices substantially below the normal costs of production.

b. Once the competitors are eliminated, the predator will raise its prices far above their competitive levels to recapture its losses and earn higher profits.

G. The Ethical Responsibilities of Business Regarding Pricing 1. Again, simply obeying regulations and laws does not exhaust the moral

responsibilities of business in the area of pricing. 2. Product price reflects in part the consuming public’s judgment of the relative

value of the good. a. Ideally, this judgment is formed in the open market in a free interplay

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between sellers and buyers. b. Therefore, for this process to function satisfactorily, buyers must be in a

position to exercise informed consent. c. Informed consent calls for the liberation and free choice, which require

intern that buyers understand all significant relevant facts about the goods and services they are purchasing.

3. Therefore, businesses’ main moral responsibility regarding pricing is to always provide clear, accurate, and complete information about pricing to consumers.

VII. Deception and Unfairness in Marketing Promotion/Advertising – I added the word

“Marketing Promotion” because most of these rules apply to more than just advertising (which is only one type of marketing promotion), especially the Federal Trade Commission Act discussed after the overview. A. Overview

1. Seller sometimes engage in unfair, deceptive, or abusive marketing promotion techniques. a. Shaw and Barry discuss four different types of techniques: ambiguity,

concealment of facts, exaggeration, and psychological appeals. 2. If these practices result in fraud, an injured consumer can bring a civil action to

recover damages. (In addition, the Lanham Act allows companies to sue competitors for false advertising if that competitor’s advertising in accurately portrays either companies’ goods or services.) a. However, such actions are not always brought because it is difficult,

costly, and time-consuming to prove fraud. b. Therefore, the federal government has enacted statutes to regulate

sellers’ behavior. c. These laws are administered by the FTC and will be discussed after

looking at the four different types of deceptive techniques. 3. Finally, a particularly troublesome area of marketing to children will be

discussed. B. Unfair, Deceptive, or Abusive Promotion Techniques – I changed this heading to

reflect the broader scope of unfair and abusive marketing promotion techniques along with deceptive techniques. 1. Ambiguity – This is a deceptive marketing promotion technique because it

conflicts with businesses’ responsibility to provide clear product information. a. Ambiguous marketing promotions occur when information provided by

the business can be understood in two or more ways. 1) Book Example: Continental Baking Company said that eating Profile

bread would lead to weight loss, but that’s because they sliced their pieces of bread more thinly, otherwise by ounce they were not less caloric.

2) Book Example: Listerine mouthwash effectively five bacteria and sore throats. Not so.

b. Aiding and abetting ambiguity is the use of weasel words, words used to evade or retreat from a direct or forthright statement. 1) Consider the weasel word “help.” Help means “aid” or “assist” and

nothing else. Yet as one author has observed, “ ‘help’ is one single word which, in all the annals of advertising, has done the most to say something that could not be said.” Because the word help is used to qualify, almost anything can be said after it. Thus we are exposed to ads for products that “help us keep young,” “help prevent cavities,”

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etc. 2) Other weasel words: like, virtual or virtually, can be, up to, as much

as. c. The fact that ads are open to interpretation does not exonerate marketing

promotions from the obligation to provide clear information. Indeed, this fact intensifies their responsibility, because the danger of misleading through ambiguity increases as the promotion is subject to interpretation.

2. Concealment of Facts – This is a deceptive marketing promotion technique because it conflicts with business’s responsibility to provide adequate and accurate product information. a. Marketing promotions that conceal facts suppressed information that is

unflattering to their products. b. They neglect to mention or they distract consumers’ attention away from

information, knowledge of which would probably make their products less desirable. 1) Book Example: Shell advertised that its gasoline had “platformate” but

did not inform the consumer that all other brands of gasoline also had “platformate.”

c. Problem: The moral demand for full information challenges almost all marketing promotions, especially advertising. 1) Even the best advertisements never point out the negative features of

their products or concede that there is no substantive difference between the product being advertised and its competitors, as is often the case.

2) Most advertisers would be shocked at the suggestion that honesty requires an objective presentation of the pros and cons of their products, and in fact consumers do not expect advertisers or salespeople to be impartial.

3) Nevertheless, Shaw and Barry state that it is not clear why this moral value should not be relevant to assessing marketing promotions.

3. Exaggeration – This is a deceptive marketing promotion technique because it conflicts with businesses’ responsibility to provide accurate information. a. Exaggeration is defined as making claims unsupported by evidence. b. Shaw and Barry say that if the exaggeration uses harmless superlatives it

is called “puffery”—for example, “breakfast of champions.” c. If the exaggeration is deliberate and not harmless, then it’s deception.

1) Book Example: To claim that an analgesic pain reliever is 50% more effective than all other analgesic pain relievers contradicts the fact that all analgesic pain relievers are effective to the same degree.

4. Psychological Appeals – A psychological appeal is a persuasive effort aimed primarily at emotion, not reason. a. Since this type of marketing promotion “bypasses” reason, it is potentially

the technique of greatest moral concern. 1) Book Examples: For instance, appeals to power, sex or prestige are

often psychological appeals. See examples on page 318. b. A special type of advertising designed to bypass a person’s ability to

reason is subliminal advertising. 1) Subliminal advertising is advertising that communicates at a level

beneath conscious awareness, where, some psychologists claim, the vast reservoir of human motivation primarily resides. a) My Example: In its technical form it involves messages designed

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to bypass a person’s consciousness: Every 10th frame of a movie says “Drink Coke” which cannot be perceived or a background message in a shopping mall recording of music that says “do not shoplift.”

b) It is a controversial subject in both its technical form and the broader form discussed by Shaw and Barry at the bottom of page 318.

C. The Federal Trade Commission’s Role 1. The Federal Trade Commission Act (FTCA) was enacted in 1914.

a. The Federal Trade Commission (FTC) was created the following year. b. The FTC is empowered to enforce the FTCA as well as other federal

consumer protection statutes. 1) For example, we discussed the FTC above when we talk about price

misrepresentation. 2. Section 5 of the FTCA prohibits unfair and deceptive practices.

a. To be deceptive, the representation, omission, or practice must be likely to mislead a reasonable consumer under the circumstances. (More later about the reasonable consumer standard.) 1) A reasonable consumer does not believe everything he/she hears or

reads. a) The FTC has stated that advertising a pastry baked in this country

as a “Danish pastry” is not deceptive merely because a few people believe that all Danish pastry is made in Denmark.

b) Likewise, vague generalities and obvious exaggerations are permissible. These claims are known as puffery. Pepsi and Harrier jet example.

2) However, a marketing promotion that appears to be based on factual evidence but in fact is not reasonably supported by some evidence will be deemed deceptive.

3) Likewise, marketing promotions containing “half-truths,” meaning that the presented information is true but incomplete and therefore leads consumers to a false conclusion, may be deceptive. a) Chevy versus Ford and Ford County, Indiana based on one

month’s data. 4) Finally, marketing promotions that contain an endorsement by a

celebrity may be deemed deceptive if a celebrity does not actually use the product.

b. Additionally, the representation, omission, or practice must be material. 1) Something is material if it is important to reasonable consumers and

is likely to affect their choice of a product or service. a) Example: Ice-Cream Company prepares a television marketing

campaign. For practical reasons of filming in a desert, it uses a scoop of mashed potatoes in a cone to represent its product. If the camera zooms in for a close-up of the mashed potatoes inviting the viewer, explicitly or implicitly, to see for him/herself the truth of the claims about the ice cream’s rich texture and full color, and perhaps comparing the texture and color with those of a (soggy) rival’s product, the advertisement contains a material misrepresentation. i) Mere depiction of actors delightedly eating ice cream that is in

fact mashed potatoes would probably not, however, constitute

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material misrepresentation. ii) An FTC order prohibiting Ice-Cream Company from engaging

in marketing practices similar to the close-up texture and color advertising with respect to any of its products would probably be upheld by the courts.

b) The FTC considers express statements to be material. c. The FTC may proceed against any marketing promotion that is “unfair,

even if it is not deceptive.” A marketing promotion is considered unfair if it: 1) Offends public policy; Example: Advocates violence. 2) Is immoral, unethical, or unscrupulous; or Example: Use of nudity in

advertisements in the United States. 3) Is likely to cause substantial consumer injury that consumers could

not reasonably avoid and that is not outweighed by the benefit to consumers or competition. Example: Ads directed at children discussed in the next section.

d. Reasonable-Consumer Standard versus Ignorant-Consumer Standard – There is an ongoing debate on which standard the FTC should use in determining whether an advertisement is deceptive. 1) If the FTC uses the reasonable-consumer standard, it would

prohibit only advertising claims that would deceive reasonable people. 2) If the FTC uses the ignorant/gullible-consumer standard, it would

prohibit advertising claims that might mislead someone who is ill informed and naïve.

3) In the FTC v. Standard Education (1937) the U.S. Supreme Court advocated a change of standard to something like the ignorant-consumer standard. a) As Ivan Preston notes, this led the FTC to apply the ignorant-

person standard liberally, even in cases in which there was no intent to deceive.

b) Eventually, however, the FTC abandoned the ignorant-consumer standard in its extreme form and stopped trying to protect every body from everything that might possibly deceive them.

c) The FTC now uses what Shaw and Barry term the modified ignorant/gullible-consumer standard: i) The reasonable-consumer standard applies to most ads aimed

at average adults. ii) When ads are targeted to “vulnerable groups,” the FTC judges

the complaint from the perspective of an average member of that group. This is a stricter standard of deception.

e. Note: The Supreme Court has given commercial speech such as advertising a significant degree of First Amendment protection. However, the constitutional safeguards afforded by the First Amendment do not extend to unfair or deceptive marketing promotional practices.

3. Bait-and-Switch Advertising a. A common deceptive retail trade practice is the bait and switch.

1) The retailer baits the prospective customer by advertising an attractive sale (e.g., “A genuine flawless 3-carat diamond—only $1,000—hundreds to choose from”).

2) But when the customer arrives, he/she finds that the advertised product is sold out or, if not, that the salesperson disparages the

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product and switches the customer to a more profitable item. b. The FTC guides list several unfair trade practices with respect to bait

advertising, including: 1) Deliberately discouraging the potential buyer from purchasing the

advertised product; 2) Refusing to show or demonstrate the advertised product; 3) Disparaging the product; 4) Failing to stock enough of the advertised product to meet anticipated

demand (e.g., a national advertising campaign by a retail electronics store chain when each store has only two of the advertised items in stock);

5) Demonstrating a defective product; or 6) Stating that delivery of the advertised product will take an

unreasonable amount of time. 4. Online Deceptive Advertising

a. The FTC has issued guidelines to help online businesses comply with existing laws prohibiting deceptive advertising.

b. These guidelines include three basic requirements: 1) All ads—both online and off-line— must be truthful and not

misleading. 2) Any claims made in an ad must be substantiated (i.e., advertisers

must have evidence to back up their claims). 3) Ads cannot be “unfair.”

c. The guidelines also call for “clear and conspicuous” disclosure of any qualifying or limiting information. 1) The FTC suggests that advertisers should assume that consumers

will not read an entire Web page. 2) Therefore, to satisfy the “clear and conspicuous” requirement, online

advertisers should place the disclosure as close as possible to the claim being qualified or include the disclosure within the claim itself.

3) If such placement is not feasible, the next best location is on a section of the page to which a consumer can easily scroll.

4) Generally, hyperlinks to disclosures are recommended only for lengthy disclosures or for disclosures that must be repeated in a variety of locations on the Web page.

D. Ads Directed at Children 1. Advertising to children is big business.

a. Every year children under 12 spent $33 billion and teenagers a whopping $155 billion.

b. Advertisers now spend more than $1.5 billion a year on ads for children through various means.

2. Marketing promotions to children attend to accomplish two goals: a. Cause the child to directly buy the product and/or build future brand

loyalty. b. Especially for younger children, rely on the child to pester his/her parents

to buy the product instead of marketing to the parents directly. 3. Problem: Children are particularly susceptible to the exaggerations of

advertising. They tend to interpret ads literally. a. Some writers contend that it is ethical to advertise toys, sugar-loaded

cereal or non-violent games to children as long as it is truthful and as long as children understand the message.

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b. Most ethicists believe that this overlooks children’s special susceptibilities and the need to protect them from manipulation and endless commercial enticement.

4. Childhood Obesity – The Institute of Medicine’s 2005 report, reviewing 123 research studies over 30 years, showed that exposure to TV ads is “associated” with obesity in children under twelve. a. Meanwhile, legal and political pressure has been building on food

companies, which spend $11 billion a year marketing to kids, to change their ways and rein in their advertising of nutritionally empty calories to children.

b. Problem: If companies fail to act morally in advertising to children, they risk the federal government passing a law regulating what they can promote and how they can promote products to children.

VIII. The Debate over Advertising – A discussion of the ethical responsibilities of business regarding advertising and marketing promotion. A. Consumer Needs

1. Some defenders of marketing promotions in general and advertising specifically concede that images of glamour, sex, or adventure sell products, but they argue that these images are what consumers want. a. Theodore Levitt has drawn an analogy between advertising and art

stating that both take liberties with reality but help people modify, transform, embellish, enrich, and reconstruct the world around them. Without distortion, embellishment, and elaboration life would be drab, dull, anguished, and at its existential worst.

2. Critics of Levitt point out that the imaginative, symbolic, and artistic content of advertising, which Levitt sees as answering real human needs, is viewed by critics as manipulating, distorting, and even creating those needs. a. John Kenneth Galbraith agrees stating that producers create both the

goods and the demand for those goods. b. Accordingly, Galbraith rejected the economist’s traditional faith in

consumer sovereignty (the idea that consumers should and do control the market through their purchases) saying it is the other way around.

c. According to Galbraith, as a society becomes increasingly affluent, wants are increasingly created by the process by which they are satisfied. He dubbed this the dependence effect.

3. According to Galbraith, this leads to two consequences: a. One consequence is that our system of production cannot be defended

on the ground that it is satisfying urgent or important wants. b. Another consequence is our general preoccupation with material

consumption which causes us to neglect important public goods and services.

4. Galbraith’s critics have concentrated on a couple of points: a. First, Galbraith never shows that advertising has the power he attributed

to it. b. Second, critics have attacked Galbraith’s assumption that the need

supposedly created by advertisers and producers are, as a result, “false” or “artificial” needs and therefore less worthy of satisfaction.

B. Market Economics 1. Defenders of advertising see it as an aspect of free competition in a

competitive market, which ultimately works to the benefit of all. They also contend that advertising is necessary for economic growth, which benefits us

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all. 2. However, this simple free-market defense of advertising has weaknesses:

a. First, advertising does not fit too well into the economist’s model of the free market. This model assumes that everyone has full and complete information which, if true, would mean advertising would be pointless.

b. Second, it is doubtful that advertising moves one closer to the ideal of full information because, even if truthful and non-manipulative, it enhances brand loyalty which generally works to thwart price competition.

c. Third, since the goal of advertisers is to sell products and to make money, there is no reason to think that advertising tends to maximize the well-being of consumers.

d. Fourth, critics maintain that advertising is a waste of resources and serves only to raise the price of advertised goods.

e. Fifth, Galbraith and others contend that advertising in general reinforces mindless consumerism.

C. Free Speech and the Media 1. Shaw and Barry discussed to final issues related to advertising in this section:

free speech and the subsidizing of the media by advertising. 2. Defenders of advertising claim that, despite criticisms, advertising enjoys

protection under the First Amendment as a form of speech. a. As previously mentioned, the Supreme Court has ruled that the

constitutional safeguards afforded by the First Amendment do not extend to unfair or deceptive marketing promotional practices including advertising.

3. Defenders of advertising claim that it subsidizes the media. a. Although a positive, it is far from conclusive consideration in its favor. b. For example, the fact that American television is free results in far more

consumption than would otherwise be the case and probably, as many think, far more than is good for us.