Ethics and conduct of business boatright pdf

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Ethics and the Conduct of Business Eighth Edition

John R. Boatright Loyola University Chicago

Jeffery D. Smith Seattle University

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Library of Congress Cataloging-in-Publication Data Names: Boatright, John Raymond, 1941– author. | Smith, Jeffery David, 1971– author. Title: Ethics and the conduct of business / John R. Boatright, Loyola University Chicago, Jeffery D. Smith, Seattle University. Description: Eighth edition. | Boston: Pearson, [2017] Identifiers: LCCN 2015050453| ISBN 9780134167657 | ISBN 0134167651 Subjects: LCSH: Business ethics. | Social responsibility of business. Classification: LCC HF5387 .B6 2017 | DDC 174/.4—dc23 LC record available at http://lccn.loc.gov/2015050453

ISBN-10: 0-13-416765-1 ISBN-13: 978-0-13-416765-7

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iii

9 Health and Safety 182

10 Marketing and Advertising 208

11 Ethics in Finance 239

12 Corporate Social Responsibility 268

13 Governance, Accountability, and Compliance 297

14 International Business Ethics 325 References 357

Credits 380

Index 387

1 Ethics in the World of Business 1

2 Ethical Decision Making 21

3 Ethical Theories 46

4 Whistle-Blowing 65

5 Business Information and Conflict of Interest 82

6 Privacy 106

7 Discrimination and Affirmative Action 133

8 Employment Rights 156

Brief Contents

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v

3 Ethical Theories 46 Case: Big Brother at Procter & Gamble 46

3.1: Utilitarianism 48 3.1.1: Principle of Utility 48 3.1.2: Cost–Benefit Analysis 50

3.2: Kantian Ethics 52 3.2.1: Universalizability 52 3.2.2: Respect for Persons 53

3.3: Virtue Ethics 53 3.3.1: What Is Virtue? 54 3.3.2: Defending the Virtues 54 3.3.3: Virtue in Business 55

3.4: Rights 55 3.4.1: Meaning of Rights 55 3.4.2: Kinds of Rights 56

3.5: Justice 57 3.5.1: Nature and Value of Justice 57 3.5.2: Aristotle on Distributive Justice 58 3.5.3: Rawls’s Egalitarian Theory 59 3.5.4: Nozick’s Entitlement Theory 59

Conclusion: Ethical Theories 60

Case: Exporting Pollution

Case: Clean Hands in a Dirty Business

Case: Conflict of an Insurance Broker

Case: An Auditor’s Dilemma

4 Whistle-Blowing 65 Case: Time’s Persons of the Year 65

4.1: What Is Whistle-Blowing? 67

4.2: Justification of Whistle-Blowing 69 4.2.1: Loyal Agent Argument 69 4.2.2: Meaning of Loyalty 71 4.2.3: Conditions for Justification 71

4.3: Right to Blow the Whistle 73 4.3.1: Existing Legal Protection 73 4.3.2: Arguments against Protection 75 4.3.3: Arguments for Protection 75

4.4: Developing a Policy 76 4.4.1: Benefits and Dangers 76 4.4.2: Components of a Policy 76

Conclusion: Whistle-Blowing 77

Case: A Whistle-Blower Accepts a “Deal”

Case: A Whistle-Blower’s Quandary

Case: Who’s a Whistle-Blower?

Preface ix About the Authors xi

1 Ethics in the World of Business 1 Case: Merck and the Marketing of Vioxx 1

1.1: Business Decision Making 4 1.1.1: Nature of Business 5 1.1.2: Levels of Decision Making 6

1.2: Ethics, Economics, and Law 7 1.2.1: Ethics and Economics 7 1.2.2: Ethics and Law 9

1.3: Ethics and Management 11 1.3.1: Ethical Management and Management

of Ethics 11 1.3.2: Ethics and the Manager’s Role 12

1.4: Ethics in Organizations 13 1.4.1: Individual Decision Making 14 1.4.2: Organizational Decision Making 15

Conclusion: Ethics in the World of Business 16

Case: A Sticky Situation

Case: Beech-Nut’s Bogus Apple Juice

Case: Ethical Uncertainty at Bath Iron Works

Case: A Faked Résumé at Yahoo

2 Ethical Decision Making 21 Case: HP and the Smart Chip 21

2.1: Market Ethics 22 2.1.1: The Market System 22 2.1.2: Ethics in Markets 24 2.1.3: Breaches and Fraud 25 2.1.4: Wrongful Harm 26 2.1.5: Market Failure 27 2.1.6: Summary of Market Ethics 30

2.2: Roles, Relationships, and Firms 30 2.2.1: Agents and Principals 31 2.2.2: Fiduciaries and Professionals 31 2.2.3: Firms 32 2.2.4: Summary of Roles, Relationships,

and Firms 35

2.3: Ethical Reasoning 35 2.3.1: Philosophical Accounts 36 2.3.2: Psychological Accounts 37 2.3.3: Framework for Reasoning 38

Conclusion: Ethical Decision Making 41

Case: Lavish Pay at Harvard

Case: Broken Trust at Bankers Trust

Case: KPMG’s Tax Shelter Business

Contents

vi Contents

Case: Privacy of Text Messages

Case: Plugging Leaks at HP

Case: Information Handling at ChoicePoint

7 Discrimination and Affirmative Action 133

Case: Race Discrimination at Texaco 133

7.1: What Is Discrimination? 135 7.1.1: Civil Rights Act of 1964 135 7.1.2: Disparate Treatment/Impact 136 7.1.3: Forms of Discrimination 137

7.2: Sexual Harassment 138 7.2.1: Defining Sexual Harassment 138 7.2.2: Forms of Sexual Harassment 139 7.2.3: Further Issues 140

7.3: Objections to Discrimination 140

7.4: Preventing Discrimination 142 7.4.1: Analysis, Recruitment, and Assessment 142 7.4.2: Objective Tests 142 7.4.3: Subjective Evaluations 143 7.4.4: Sexual Harassment Programs 144

7.5: Affirmative Action 145 7.5.1: Affirmative Action Plans 146 7.5.2: Court Actions on Plans 146 7.5.3: Compensation Argument 147 7.5.4: Equality Arguments 149 7.5.5: Utilitarian Arguments 150 7.5.6: Problems with Affirmative Action 151

Conclusion: Discrimination and Affirmative Action 152

Case: Jacksonville Shipyards

Case: Sex Discrimination at Walmart

8 Employment Rights 156 Case: The Firing of Robert Greeley 156

8.1: Employment at Will 157 8.1.1: Property Rights Argument 158 8.1.2: Freedom of Contract Argument 159 8.1.3: Efficiency Argument 160 8.1.4: Exceptions 161

8.2: Right to Due Process 162 8.2.1: Support for Due Process 163 8.2.2: Law of Due Process 163

8.3: Freedom of Expression 164 8.3.1: Defining Freedom of Expression 165 8.3.2: Legal Protection for Expression 165 8.3.3: Arguments over Expression 166

8.4: Workplace Democracy 167 8.4.1: Participation and Democracy 167 8.4.2: Arguments for Democracy 168

8.5: Worker Compensation 169 8.5.1: Setting Wages 170

5 Business Information and Conflict of Interest 82

Case: Barbie vs. the Bratz Girls 82

5.1: Confidential Information 84 5.1.1: Duty of Confidentiality 85 5.1.2: Competitive Employment 86 5.1.3: Impact of Restrictions 87

5.2: Proprietary Information 88 5.2.1: Intellectual Property 88 5.2.2: Defining Trade Secrets 89 5.2.3: Property Rights Argument 90 5.2.4: Fair Competition Argument 91 5.2.5: Competitor Intelligence 92

5.3: Conflict of Interest 93 5.3.1: Defining Conflict of Interest 95 5.3.2: Some Relevant Distinctions 95 5.3.3: Kinds of Conflict of Interest 96 5.3.4: Managing Conflict of Interest 98

Conclusion: Business Information and Conflict of Interest 102

Case: The Aggressive Ad Agency

Case: Procter & Gamble Goes Dumpster Diving

Case: A Conflict-Laden Deal

6 Privacy 106 Case: Psychological Testing at Dayton Hudson 106

6.1: Challenges to Privacy 108 6.1.1: Privacy in the Workplace 108 6.1.2: Privacy in the Marketplace 109

6.2: Meaning and Value of Privacy 110 6.2.1: History of the Concept 111 6.2.2: Defining Privacy 111 6.2.3: Utilitarian Arguments 112 6.2.4: Kantian Arguments 113

6.3: Privacy Away from Work 114 6.3.1: Justifying Monitoring 114 6.3.2: Limits to Monitoring 115

6.4: Privacy of Employee Records 116 6.4.1: Ethical Issues with Records 117 6.4.2: Justifying a Purpose 117 6.4.3: Disclosure to Outsiders 118 6.4.4: Gathering Information 119 6.4.5: Accuracy, Completeness, and Access 120

6.5: Big Data Analytics 120 6.5.1: Data Collection 121 6.5.2: Ethical Issues with Big Data 122

6.6: Using the Internet 123 6.6.1: Information Collection 123 6.6.2: Ethical Issues with Internet Use 124 6.6.3: Protecting Privacy 125

Conclusion: Privacy 128

Contents vii

10.6: Irrational Persuasion 224 10.6.1: Threats to Free Choice 225 10.6.2: Dependence Effect 225

10.7: Impact of Advertising 226 10.7.1: Impact on Persons 226 10.7.2: Impact on Society 228

10.8: Internet Advertising 229 10.8.1: Online Placement 229 10.8.2: Ethics of Placement 230

10.9: Social Advertising 232 Conclusion: Marketing and Advertising 233

Case: McCormick’s Pricing Strategy

Case: Capital One’s Online Profiles

Case: Herbalife: A Pyramid Scheme?

11 Ethics in Finance 239 Case: Goldman Sachs and the Abacus Deal 239

11.1: Financial Services 241

11.1.1: Deception 242

11.1.2: Churning 243

11.1.3: Suitability 244

11.2: Financial Markets 245

11.2.1: Fairness in Markets 246

11.2.2: Derivatives and HFT 248

11.3: Insider Trading 251

11.3.1: Theories of Insider Trading 252

11.3.2: Evaluation of the Two Theories 253

11.3.3: Recent Insider Trading Cases 254

11.4: Hostile Takeovers 255

11.4.1: Market for Corporate Control 256

11.4.2: Takeover Tactics 257

11.4.3: Role of Directors 260 Conclusion: Ethics in Finance 261

Case: SCM Mutual Funds

Case: Merrill Lynch and the Nigerian Barge Deal

Case: Martha Stewart: Inside Trader?

Case: Oracle’s Hostile Bid for PeopleSoft

12 Corporate Social Responsibility 268 Case: Competing Visions at Malden Mills 268

12.1: The CSR Debate 270

12.1.1: Meaning of CSR 271

12.1.2: Examples of CSR 272

12.1.3: Related Concepts 273

12.2: Normative Case for CSR 274

12.2.1: Classical View 274

12.2.2: Friedman on CSR 276

12.3: Business Case for CSR 278

12.3.1: The Market for Virtue 278

12.3.2: Competitive Advantage 280

8.5.2: Market Outcomes 170 8.5.3: Minimum Wage 172

8.6: Executive Compensation 173 8.6.1: Criticism of CEO Pay 174 8.6.2: Justifying CEO Pay 174 8.6.3: Problems with Justification 175

Conclusion: Employment Rights 176

Case: Fired for Blogging at Google

Case: Worker Participation at Saturn

Case: Health Benefits at Walmart

9 Health and Safety 182 Case: The Ford–Firestone Brawl 182

9.1: Rights in the Workplace 184 9.1.1: Meaning of Health and Safety 184 9.1.2: Protecting Health and Safety 185

9.2: Hazardous Work 188 9.2.1: Justifying a Right to Refuse 189 9.2.2: Justifying a Right to Know 191

9.3: Reproductive Hazards 192 9.3.1: Scientific Background 193 9.3.2: Fetal Protection Policies 193 9.3.3: Charge of Discrimination 194 9.3.4: Defending against the Charge 195 9.3.5: Remaining Issues 195

9.4: Product Safety 196 9.4.1: Due Care Theory 196 9.4.2: Contractual Theory 198 9.4.3: Strict Liability Theory 200

Conclusion: Health and Safety 203

Case: Genetic Testing at Burlington Northern

Case: Johnson Controls, Inc.

Case: The Collapsing Crib

10 Marketing and Advertising 208 Case: Selling Hope 208

10.1: Marketing Ethics Framework 210

10.2: Sales Practices and Labeling 212 10.2.1: Deception and Manipulation 212 10.2.2: Information Disclosure 213 10.2.3: Labeling 214

10.3: Pricing and Distribution 215 10.3.1: Anticompetitive Pricing 215 10.3.2: Unfair Pricing 217 10.3.3: Distribution 218

10.4: Development and Research 219 10.4.1: Product Development 219 10.4.2: Marketing Research 220

10.5: Deceptive Advertising 222 10.5.1: Defining Deceptive Advertising 222 10.5.2: Applying the Definition 224

viii Contents

14 International Business Ethics 325 Case: Mattel’s Toy Woes 325

14.1: Different Standards 328 14.1.1: Relevant Differences 329 14.1.2: Variety of Outlooks 329 14.1.3: Right to Decide 330 14.1.4: Business Necessity 331

14.2: Guidelines for Multinationals 331 14.2.1: Rights 332 14.2.2: Welfare 333 14.2.3: Justice 333 14.2.4: International Codes 335

14.3: Wages and Working Conditions 336 14.3.1: Setting Wages 337 14.3.2: Working Conditions 339

14.4: Foreign Bribery 340 14.4.1: What Is Bribery? 341 14.4.2: What’s Wrong with Bribery? 342 14.4.3: Combating Bribery 343

14.5: Human Rights Abuses 346 14.5.1: Constructive Engagement 347 14.5.2: Liability for Abuses 348

Conclusion: International Business Ethics 349

Case: H. B. Fuller in Honduras

Case: Walmart in Mexico

Case: Google in China

References 357 Credits 380 Index 387

12.4: Implementing CSR 281 12.4.1: Program Selection and Design 281 12.4.2: Reporting and Accountability 283

12.5: Business with a Mission 285 12.5.1: Social Enterprise 286 12.5.2: Competing Successfully 287 12.5.3: Mission and Trust 289

Conclusion: Corporate Social Responsibility 290

Case: Starbucks and Fair Trade Coffee

Case: Timberland and Community Service

Case: Coca-Cola’s Water Use in India

13 Governance, Accountability, and Compliance 297

Case: Fraud at WorldCom 297

13.1: Corporate Governance 299 13.1.1: Shareholder Control 300 13.1.2: The Shareholders’ Contract 303 13.1.3: Shareholders and Stakeholders 305

13.2: Corporate Accountability 307 13.2.1: Financial Reporting 307 13.2.2: Executives and Directors 310 13.2.3: Criminal Prosecution 312

13.3: Corporate Compliance 313 13.3.1: Program Components 314 13.3.2: Program Benefits 314 13.3.3: Federal Sentencing Guidelines 315 13.3.4: Codes of Ethics 317

Conclusion: Governance, Accountability, and Compliance 319

Case: Sears Auto Centers

Case: Shareholder Rights at Cracker Barrel

Case: The Sale of Trans Union

ix

issues and the arguments for them are taken from a wide variety of sources, including economics and the law. The study of ethical issues in business is not confined to a sin- gle academic discipline or even to the academic world. The issues selected for discussion are widely debated by legis- lators, judges, government regulators, business leaders, journalists, and, indeed, virtually everyone with an inter- est in business.

An underlying assumption of this course is that ethi- cal theory is essential for a full understanding of the posi- tions and arguments offered on the main issues in business ethics. Fortunately, the amount of theory needed is rela- tively small, and much of the discussion of these issues can be understood apart from the theoretical foundation provided here. The text also contains a substantial amount of legal material, not only because the law addresses many ethical issues but also because management deci- sion making must take account of the relevant law. Many examples are used throughout the text in order to explain points and show the relevance of the discussion to real-life business practice.

New to the Edition Preparation of the eighth edition of Ethics and the Conduct of Business has provided an opportunity to incorporate new developments and to increase its value in the class- room. The major changes from the previous edition are as follows:

• Chapter 5 on business information has been expanded to provide greater coverage on confidential information and the duty of confidentiality.

• Chapter 6 on privacy has been expanded to include more on the protection of both employee and consumer privacy against intrusions, especially from advances in technology.

• The section on product safety has been moved from Chapter 10 on marketing and advertising to the cover- age of worker health and safety in Chapter 9. This change has allowed expanded treatment in Chapter 10 of emerging issues in marketing and advertising, espe- cially those related to the use of social media and data analysis, which have been facilitated by the Internet.

• Chapter 12 on corporate social responsibility includes a new section on the recent development of for-profit businesses, known as social enterprises, which operate with a mission to deliver vital social services.

The eighth edition of Ethics and the Conduct of Busi-ness has reached two significant milestones. The first achievement, which is obvious to anyone read- ing these words, is the transition to digital media. Through Pearson’s online platform REVEL, this text offers not only a new mobile reading experience—on computers, tablets, and even smartphones—but also a new approach to learn- ing, with many interactive features, videos, quizzes, and other educational tools. REVEL creates a new frontier in education for both students and instructors. It is exciting for us, as authors, to be pioneer participants in this promis- ing and innovative endeavor.

Users of previous editions will also note the appear- ance of a coauthor, Jeffery D. Smith. His collaboration in the eighth edition not only brings a fresh perspective to what is now a joint venture but also prepares for the future of this classic text, which first appeared more than 20 years ago. Under Jeffery’s guidance, Ethics and the Conduct of Business will hopefully continue to remain current and rel- evant through many new editions.

The eight editions of Ethics and the Conduct of Business have followed the development of the field of business ethics, which has grown in recent decades into an interdis- ciplinary area of study that has found a secure niche in both liberal arts and business education. Credit for this development belongs to many individuals—both philoso- phers and business scholars—who have succeeded in relating ethical theory to the various problems of ethics that arise in business. They have shown not only that busi- ness is a fruitful subject for philosophical exploration but also that future managers in the world of business can ben- efit from the results.

Ethics and the Conduct of Business, eighth edition, is a comprehensive and up-to-date discussion of the most prominent issues in the field of business ethics and the major positions and arguments on these issues. It is intended to be used as a text in business ethics courses on either the undergraduate or M.B.A. level. The substantial number of cases included provides ample opportunity for a case-study approach or a combined lecture–discussion format. There has been no attempt to develop a distinctive ethical system or to argue for specific conclusions. The field of business ethics is marked by reasonable disagree- ment that should be reflected in any good text for a course.

The focus of Ethics and the Conduct of Business is pri- marily on ethical issues that corporate decision makers face in developing policies about employees, customers, investors, and the general public. The positions on these

Preface

x Preface

have benefited from the support of the Banta Center for Business, Ethics and Society and my colleagues at the Uni- versity of Redlands. For everyone there I am grateful. My thanks also go to DePauw University’s Prindle Institute for Ethics for hosting me as the Nancy Schaenen Visiting Scholar while portions of the eighth edition were written. And I also owe so much to my lovely wife, Rita, who pro- vides support when I need it most and continues to keep me grounded.

John R. Boatright

Jeffery D. Smith

I, John Boatright, would like to express my gratitude for permission to use material from the following sources:

John R. Boatright, Ethics in Finance, 2nd ed. (Malden, MA: Blackwell Publishers, 2008), copyright © 1999, 2008 by John R. Boatright; Ethics in Finance, 3rd ed. (Malden, MA: Wiley Blackwell, 2014), copyright © 2014 by John Wiley & Sons, by permission of the publisher.

John R. Boatright, “Financial Services,” in Michael Davis and Andrew Stark, eds., Conflict of Interest in the Professions (New York: Oxford University Press, 1999), copyright © 1999 by John R. Boatright.

John R. Boatright, “Corporate Governance,” Ency- clopedia of Applied Ethics, 2nd ed., Ruth Chadwick, ed. (Amsterdam: Elsevier, 2011), by permission of the publisher.

John R. Boatright, “The Shareholder Model of Corporate Governance,” in Robert W. Kolb, ed., Ency- clopedia of Business Ethics and Society (Thousand Oaks, CA: Sage Publications, 2008), by permission of the publisher.

• The Chapter 13 section on corporate governance has been completely rewritten for greater clarity and coherence.

• The eighth edition contains 58 short cases, including 12 new ones on such subjects as a falsified résumé at Yahoo, conflict of interest at Goldman Sachs, a firing at Google for blogging, profiling of Internet visitors by a major bank, variable pricing strategies in grocery stores, Herbalife’s unusual multilevel marketing scheme, Coca-Cola’s water use in India, and bribery by Walmart executives in Mexico.

Acknowledgments I, John Boatright, am grateful for the support of Loyola University Chicago and especially the Quinlan School of Business. I have benefited from the resources of the Raymond C. Baumhart, S.J., Chair in Business Ethics, which was created to honor a former president of Loyola University Chicago, who was also a pioneer in the field of business ethics. To Ray Baumhart I owe a special debt of gratitude. I am grateful as well to Jeffery Smith for graciously accept- ing my offer to become a coauthor of this edition and my ultimate successor in the preparation of future editions. Finally, my deepest expression of appreciation goes to my wife, Claudia, whose affection, patience, and support have been essential for the preparation of the eighth edition, as they were for the ones previous.

It goes without saying that I, Jeffery Smith, am excited to work with John Boatright on this important project and appreciate his generous offer to continue our collaboration on future editions. I hope to maintain the clarity, depth, and even-handedness that have made earlier editions so valuable to students and instructors. For over a decade, I

xi

Jeffery D. Smith is the Boeing Frank Shrontz Chair of Pro- fessional Ethics and Professor of Management in the Albers School of Business and Economics at Seattle Uni- versity, teaching ethics to management, accounting and finance students. He currently serves on the executive board of the Society for Business Ethics and the editorial board of the international journal of the Society, Business Ethics Quarterly. He is the editor of Normative Theory and Business Ethics (2008) and has published in a variety of business and philosophy journals. He received his Ph.D. from the University of Minnesota.

John R. Boatright is the Raymond C. Baumhart, S.J., Pro- fessor of Business Ethics in the Quinlan School of Business at Loyola University Chicago. He has served as the Execu- tive Director of the Society for Business Ethics, and is a past president of the Society. He was recognized by the Society in 2012 for a “Career of Outstanding Service to the Field of Business Ethics.” He is the author of the book Eth- ics in Finance, and has edited Finance Ethics: Critical Issues in Theory and Practice. He serves on the editorial boards of Business Ethics Quarterly, Journal of Business Ethics, and Business and Society Review. He received his Ph.D. in phi- losophy from the University of Chicago.

About the Authors

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1

Learning Objectives

1.1 Identify ethical issues created by diverse business situations and relationships and the level of decision making required to address them

1.2 Recognize the role of ethics in the conduct of business, with respect to economic principles and the law

1.3 Distinguish between ethical management and the management of ethics, and each of the three main roles of a manager

1.4 Analyze how ethical business conduct is challenged by decision making on individual and organizational levels

Chapter 1

Ethics in the World of Business

Case: Merck and the Marketing of Vioxx On September 30, 2004, Merck & Co. announced the with-

drawal of Vioxx, its highly profitable pain reliever for arthritis

sufferers, from the market.1 This announcement came only

seven days after company researchers found in a clinical trial

that subjects who used Vioxx more than 18 months had a sub-

stantially higher incidence of heart attacks. Merck chairman

and CEO Raymond V. Gilmartin described the action as “the

responsible thing to do.” He explained, “It’s built into the prin-

ciples of the company to think in this fashion. That’s why the

management team came to such an easy conclusion.”2 In the

lawsuits that followed, however, damaging documents

emerged casting doubt on Merck’s claim that it had acted

responsibly by taking appropriate precautions in the develop-

ment and marketing of the drug.

Development of Vioxx

For decades, Merck’s stellar reputation rested on the company’s

emphasis on science-driven research and development. Merck

employed some of the world’s most talented and best-paid

researchers and led other pharmaceutical firms in the publica-

tion of scientific articles and the discovery of new medicines for

the treatment of serious conditions that lacked satisfactory ther-

apies. For seven consecutive years in the 1980s, Merck was

ranked by Fortune magazine as America’s most respected com-

pany. Merck received widespread accolades in particular for the

decision, made in 1978, to proceed with research on a drug for

preventing river blindness (onchocerciasis), which is a debilitat-

ing parasite infection that afflicts many in Africa, even though the

drug was unlikely to pay for itself. Eventually, Merck decided to

give away the drug, called Mectizan, for as long as necessary at

a cost of tens of millions of dollars per year. This kind of princi-

pled decision making was inspired by the words of George W.

Merck, the son of the company’s founder: “We try never to forget

that medicine is for the people. It is not for the profits. The profits

follow, and if we have remembered that, they have never failed

to appear. The better we have remembered it, the larger they

have been.”

Vioxx is an example of Merck’s innovative research. Devel-

oped as a treatment for the pain of arthritis, the drug acts as an

anti-inflammant by suppressing an enzyme responsible for ar-

thritis pain. Other drugs in the class of nonsteroidal anti-inflam-

matory drugs (NSAIDs) inhibit the production of two enzymes

COX-1 and COX-2. However, COX-1 is important for protecting

the stomach lining, and so ulcers and stomach bleeding are

potential side effects of these drugs. The distinctive benefit of

Vioxx over other NSAID pain relievers, such as ibuprofen (Advil)

and naproxen (Aleve), is that it inhibits the production of only the

COX-2 enzyme, and not COX-1. After approval by the Food and

Drug Administration (FDA) in May 1999, Vioxx quickly became

a popular best seller. More than 20 million people took Vioxx

between 1999 and 2004, and at the time of the withdrawal, with

2 million users, Merck was earning $2.5 billion annually or 11 per-

cent of the company’s total revenues from the sale of the drug.

Competitive Environment

The success of Vioxx came at a critical time for Merck. Not only

were the patents on several profitable drugs due to expire, open-

ing the way for generic competition, but also the competitive

2 Chapter 1

More significant evidence that Vioxx might contribute to

heart attacks was produced by a study concluded in 2000 that

was designed to compare the gastrointestinal effects of Vioxx and

naproxen in order to improve the label of the Merck product by

proving that Vioxx was less harmful to the stomach lining. Although

the study, called VIGOR (for Vioxx Gastrointestinal Outcomes

Research), showed that Vioxx users had heart attacks at a rate

four to five times that of the naproxen group, researchers were

uncertain whether the difference was due to an adverse effect of

Vioxx in causing heart attacks or a beneficial effect of naproxen in

preventing them. The heart attacks in the trial occurred mainly in

the Vioxx subjects who were already at greatest risk of heart

attacks, and all subjects were prohibited from taking aspirin (which

is known to prevent heart attacks) in order to gain reliable results

from the study since aspirin affects the stomach. When the results

of the VIGOR study were published in the November 2000 issue of

the prestigious New England Journal of Medicine, the beneficial

effects of naproxen were emphasized in a way that implied that

Vioxx was safe for people without the risk factors for heart attacks.

After initially resisting pressure by the FDA to include a warning on

the Vioxx label, Merck finally agreed in April 2002 to add the evi-

dence of an increased incidence of heart attacks. However, the

language on the label emphasized, again, the uncertainty of the

cause and recommended that people at risk of heart attacks con-

tinue to use an anti-inflammant for protection.

In the meantime, Merck continued its aggressive market-

ing campaign. Between 1999 and 2004, Merck spent more than

$500 million on DTC television and print advertising. This

expenditure was intended to keep pace with the heavy spend-

ing by Pfizer for its competing COX-2 inhibiter Celebrex. Merck

also maintained a 3,000-person sales force to meet with doc-

tors for face-to-face conversations about Vioxx. To support this

effort, Merck developed materials that provided salespeople

with responses to questions from skeptical physicians.3 One

document, called an “obstacle handling guide,” advised that

questions about the risk of heart attacks be answered with the

evasive explanations that Vioxx “would not be expected to

demonstrate reductions” in heart attacks and was “not a substi-

tute for aspirin.” Another document titled “Dodge Ball Vioxx”

concluded with four pages that were blank except for the word

“DODGE!” in capital letters on each page. Company docu-

ments also describe an effort to “neutralize” skeptical doctors

by enlisting their support or at least defusing their opposition by

offers of research support or engagements as consultants.4

The timeline below outlines key events in the development,

approval, and marketing of Vioxx and the outcome for Merck.

The History of Vioxx The Food and Drug Administration (FDA) has a multi-phase

approval process to evaluate the testing, safety, and labeling of all

new prescription drugs to be sold in the United States. The FDA

also monitors the “post-marketing” safety of approved drugs, to

ensure that the public is informed of any new health risks that are

revealed by widespread use and additional studies.

environment of the entire pharmaceutical industry was

undergoing rapid change. Competition from generic drugs

increased dramatically due to federal legislation and also due

to the rise of large, powerful managed care organizations,

which sought to cut the cost of drug treatments through the

use of formularies that restricted the drugs doctors could

prescribe. The development of new drugs was increasingly

shifting to small entrepreneurial research companies focused

on specific technologies, which reduced the competitive

advantage of the traditional large pharmaceutical firms. Mer-

ck’s competitors responded to changes in the competitive

environment by acquiring small companies, developing new

products that duplicated ones already on the market (so-

called “me-too” drugs), entering the generics market, seek-

ing extensions of patents after making only slight

improvements, and engaging in aggressive marketing,

including the use of controversial direct-to-consumer (DTC)

advertising.

The first four strategies—growth by acquisition, the de-

velopment of “me-too” drugs, the production of generics, and

making improvements merely to extend patents— conflicted

with Merck’s culture and values. However, under the previous

CEO, Roy Vagelos (who guided Merck through the develop-

ment of Mectizan for river blindness), the company greatly

increased its emphasis on marketing. This increase in em-

phasis was considered necessary given the short time avail-

able to sell a drug before the patent expired. In particular,

evidence was needed not only to prove a product’s safety

and effectiveness in order to gain FDA approval but also to

persuade physicians to prescribe it instead of the competi-

tors’ medications. Since much of the information that could

persuade doctors was part of a drug’s label, marketers need-

ed to be involved in the development of a product from the

earliest research stages in order to prepare a persuasive la-

bel. The label could be improved further by conducting tests,

which were not scientifically necessary but which generated

clinically proven results that could be useful in persuading

physicians. Under Gilmartin, the company’s formally stated

strategy became: “Turning cutting-edge science into novel

medicines that are true advances in patient care with proven

clinical outcomes.”

Decision to Withdraw In announcing the withdrawal of Vioxx, Gilmartin described

the evidence of increased risk of heart attacks as “unex-

pected.” In the first lawsuits against Merck that came to trial,

evidence was presented to show that company scientists had

considered the potential heart problems with Vioxx as early

as 1997. The first hint of trouble came in that year as Merck

scientists noticed that Vioxx appeared to suppress the pro-

duction of a substance in the body that acted naturally to

reduce the incidence of heart attacks. Although the signifi-

cance of this discovery was recognized, no follow-up investi-

gations were undertaken.

Ethics in the World of Business 3

Timeline December 1994 Merck seeks FDA approval to begin Vioxx clinical trials (on human subjects),

based on the success of animal testing.

1997 Merck scientists discover the first signs that Vioxx may cause cardiovascular problems.

November 1998 Merck applies for FDA approval to market Vioxx for the treatment of acute pain, dysmenorrhea (menstrual cramps), and osteoarthritis. The application includes the results of about 60 studies, none of which points to potential cardiovascular risks.

January 1999 Merck begins the Vioxx Gastrointestinal Outcomes Research study (VIGOR) to determine whether Vioxx is safer for the digestive system than naproxen, an older painkiller. This later becomes a key selling point for the drug.

May 1999 After a six-month review, the FDA approves Vioxx for the three uses Merck speci- fied in its application.

October 1999 – December 1999 The data and safety monitoring board for Merck’s VIGOR study meets several times to discuss its findings. Although Vioxx appears to increase the risk of heart problems in test subjects, the board votes to continue the study and keep market- ing Vioxx to the public.

November 2000 Merck’s VIGOR study is published in the New England Journal of Medicine, but Merck does not include all observed instances of heart attacks and downplays the cardiovascular risks.

2001 The FDA publishes the full VIGOR study results and additional studies conducted by independent parties also indicate that there is a real risk of cardiovascular problems. In September, the FDA warns Merck that the Vioxx marketing cam- paign and label do not adequately represent its health risks.

April 2002 Merck changes the drug’s label to better reflect the dangers and necessary precau- tions for prescribing doctors and users, based on the VIGOR study. The FDA also approves Vioxx for an additional use: the treatment of rheumatoid arthritis.

September 2004 Merck’s APPROVe (Adenomatous Polyp Prevention on Vioxx) study conclusively shows that Vioxx increases the risk of heart attacks and strokes after 18 months of treatment. Merck then voluntarily stops the sale of Vioxx.

January 2005 A British medical journal publishes a study that estimates Vioxx caused heart at- tacks in 88,000–140,000 Americans and fatal heart attacks in 38,000. Study author David Graham is an FDA scientist who also affirmed the correlation between Vioxx and heart attacks in his earlier testimony to Congress.

November 2007 After facing multiple lawsuits, Merck agrees to pay $4.85 billion to settle about 47,000 personal injury claims from former Vioxx users.

December 2011 Merck pleads guilty to promoting Vioxx as a treatment for rheumatoid arthritis before it received FDA approval for this use in 2002. The company agrees to pay a fine of $628 million in the civil settlement.

April 2012 A U.S. district court orders Merck to pay an additional $322 million as a criminal penalty for its misleading promotion and marketing of Vioxx.

Additional sources: “Sequence of Events with VIOXX, Since Opening of IND,” U.S. FDA Advisory Committees Briefing, 9 April 2005; Snigdha Prakash and Vikki Valentine, “Timeline: The Rise and Fall of Vioxx,” National Public Radio, 10 November 2007; “U.S. Pharma- ceutical Company Merck Sharp & Dohme Sentenced in Connection with Unlawful Promotion of Vioxx,” U.S. Department of Justice Press Release, 19 April 2012.

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These ethical issues are often only part of a complex set of challenges facing the whole of society.Points to Consider…

The Vioxx crisis was an unusually difficult and damaging experience for Merck, which has both a history of responsi- ble conduct and a commitment to the highest standards of ethics. Although Merck’s culture is built on strong values, these were not enough to prevent a series of decisions that, right or wrong, seriously damaged the company’s care- fully built reputation. Merck executives appear to have considered carefully the possible health risk posed by Vioxx, and yet the push for profits may have led them to conclude too easily that Vioxx was not the cause of the heart attacks suffered by test subjects and that further stud- ies were not necessary. The increased role of marketing, including heavy consumer advertising, in a traditionally science-driven culture was probably a factor in whatever mistakes were made, as was the change in strategy to seek evidence of the products’ superiority as part of a market- ing campaign to influence physicians. However, Merck’s strategy could not have avoided some adjustment given the changed competitive environment that was created by forces outside the company’s control.

All business organizations face the daunting challenge of adhering to the highest standards of ethics while, at the same time, remaining competitive and providing the prod- ucts and services that the public demands. The task of managers in these organizations is to make sound business decisions that enable a company to achieve its mission. Some of these decisions involve complex ethical issues that may not be readily apparent, and success in making sound business decisions may depend on understanding these ethical issues and resolving them effectively. Ethical issues are considered by managers in the ordinary course of their work, but they are also matters that are discussed in the pages of the business press, debated in the halls of Con- gress, and scrutinized by the courts. This public concern arises because ethical issues in business are closely tied to important matters of public policy and to the legislative, administrative, and judicial processes of government.

An editorial in the New York Times declared that “companies

must jump at the first hint of risk and warn patients and doctors

of any dangers as clearly and quickly as possible. They should

not be stonewalling regulators, soft-pedaling risk to doctors or

promoting drugs to millions of people who don’t need them.”9 A

179-page report commissioned by the Merck board concluded,

by contrast, that executives and researchers acted with integrity

in addressing incomplete and conflicting evidence and that

“their conclusions were reached in good faith and were reason-

able under the circumstances.”10 The report closed with the

observation that the quick response after the APPROVe study

“is not consistent with the view that Merck’s corporate culture

put profits over patient safety.”11

Criticisms and Defenses The study that conclusively established that Vioxx increased the

risk of heart attacks was called APPROVe (Adenomatous Polyp

Prevention on Vioxx), which, according to critics, had only a

marketing and not a legitimate scientific purpose.5 Although the

company could have delayed the withdrawal until ordered to do

so by the FDA, Merck acted voluntarily. Gilmartin said that the

company “was really putting patient safety first.”6 However, one

critic replied, “If Merck were truly acting in the interest of the

public, of course, they should have done more studies on

Vioxx’s safety when doubts about it first surfaced.”7 Another

critic observed that such studies could have been conducted for

a fraction of the cost of the $500 million spent on advertising.8

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WRITING PROMPT

Decisions by Multiple Parties

After Vioxx was taken off the market, Congress began investigating the effectiveness and integrity of the FDA’s drug approval process along with Merck’s own actions. What are the costs and benefits of approving new drugs for sale as quickly as possible? Why might the FDA be reluctant to acknowledge a problem with, or recall, a drug that it had previously approved?

1.1: Business Decision Making 1.1 Identify ethical issues created by diverse business

situations and relationships and the level of decision making required to address them

Although ethical issues in business are very diverse, the following examples provide a useful starting point.

1. The Sales Rep A sales representative for a struggling computer sup- ply firm has a chance to close a multimillion-dollar deal for an office system to be installed over a two-year period. The machines for the first delivery are in the company’s warehouse, but the remainder would have to be ordered from the manufacturer. Because the man- ufacturer is having difficulty meeting the heavy demand for the popular model, the sales representa- tive is not sure that subsequent deliveries can be made on time. Any delay in converting to the new system would be costly to the customer; however, the blame could be placed on the manufacturer.

Ethics in the World of Business 5

These four examples give some idea of the ethical issues that arise at all levels of business. The individuals in these cases are faced with questions about ethics in their relations with customers, employees, and members of the larger society. Frequently, the ethically correct course of action is clear, and people in business act accordingly. Exceptions occur, however, when there is uncertainty about ethical obligations in particular situations or when considerations of ethics come into conflict with the practi- cal demands of business. The sales representative might not be sure, for example, about the extent to which he is obligated to provide information about possible delays in delivery. And the director of research, although convinced that discrimination is wrong, might still feel that he has no choice but to remove the woman as head of the team in order to get the job done.

Ethical Issue: Should the sales representative close the deal without advising the customer of the deliv- ery problem?

2. The Research Director The director of research in a large aerospace firm recently promoted a woman to head an engineering team charged with designing a critical component for a new plane. She was tapped for the job because of her superior knowledge of the engineering aspects of the project, but the men under her direction have been expressing resentment at working for a woman by sub- tly sabotaging the work of the team. The director believes that it is unfair to deprive the woman of advancement merely because of the prejudice of her male colleagues, but quick completion of the designs and the building of a prototype are vital to the success of the company.

Ethical Issue: Should the director remove the woman as head of the engineering team?

3. The Marketing Director The vice president of marketing for a major brewing company is aware that college students account for a large proportion of beer sales and that people in this age group form lifelong loyalties to particular brands of beer. The executive is personally uncomfortable with the tasteless gimmicks used by her competitors in the industry to encourage drinking on campuses, including beach parties and beer-drinking contests. She worries about the company’s contribution to underage drinking and alcohol abuse among college students.

Ethical Issue: Should the marketing director follow the competition’s troubling practices?

4. The CEO The CEO of a midsize producer of a popular line of kitchen appliances is approached about merging with a larger company. The terms offered by the suitor are very advantageous to the CEO, who would receive a large severance package. The shareholders of the firm would also benefit because the offer for their stock is substantially above the current market price. The CEO learns, however, that plans call for closing a plant that is the major employer in a small town. The firm has always taken its social responsibility seriously, but the CEO is now unsure of how to balance the welfare of the employees who would be thrown out of work and the community where the plant is located against the interests of the shareholders. He is also not sure how much to take his own interests into account.

Ethical Issue: Should the CEO support a merger that harms the community but benefits the shareholders and himself?

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WRITING PROMPT

Judgment Calls on the Job

Describe a situation where you needed to make a decision in which the “right” choice had negative consequences for others or yourself personally. Explain your decision and the reasoning for it.

1.1.1: Nature of Business In deciding on an ethical course of action, we can rely to some extent on the rules of right conduct that we employ in everyday life. Deception is wrong, for example, whether we deceive a friend or a customer. And corporations no less than persons have an obligation not to discriminate or cause harm. However, business activity also has some fea- tures that limit the applicability of our ordinary ethical views. In business settings, we encounter situations that are significantly different from those of everyday life, and business roles place their own obligations on us. For exam- ple, CEOs, by virtue of their position, have responsibilities to several different constituencies, and they face ethical challenges in finding the proper balance among these pos- sibly conflicting responsibilities.

One distinguishing feature of business is its economic character. In the world of business, we interact with each other not as family members, friends, or neighbors, but as buyers and sellers, employers and employees, and the like. Trading, for example, is often accompanied by hard bar- gaining, in which both sides conceal their full hand and perhaps engage in some bluffing. And a skilled salesper- son is well versed in the art of arousing a customer’s atten- tion (sometimes by a bit of puffery) to clinch the sale. Still,

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1.1.2: Levels of Decision Making Decision making in business occurs on three distinct levels:

• the level of the individual

• the level of the organization

• the level of the business system

Situations that confront individuals in the workplace and require them to make a decision about their own response are on the level of individual decision making. An employee with an unreasonably demanding boss, for example, or with a boss who is discovered padding his expense account faces the question: “What do I do?” Whether to live with the difficult boss or to blow the whis- tle on the padding is a question to be answered by the indi- vidual and acted on accordingly.

Many ethical problems occur at the level of the organ- ization in the sense that the individual decision maker is acting on behalf of the organization in bringing about some organizational change. Sexual harassment, for example, is an individual matter for the person suffering the abuse, but a manager in an office where sexual harass- ment is happening must take steps not only to rectify the situation but also to ensure that it does not occur again. The decision in this case may be a disciplinary action, which involves a manager acting within his or her organi- zational role. The manager may also institute training to prevent sexual harassment and possibly develop a sexual harassment policy, which not only prohibits certain behavior but also creates procedures for handling com- plaints. Responding to harassment as a manager, as opposed to dealing with harassment as a victim, involves decisions on the organizational level rather than the indi- vidual level. The question here is, “What do we as an organization do?”

Problems that result from accepted business practices or from features of the economic system cannot be effec- tively addressed by any single organization, much less a lone individual. Sales practices within an industry, for example, are difficult for one company to change single- handedly because the company is constrained by competi- tion with possibly less-ethical competitors. The most effective solution is likely to be an industry-wide code of ethics, agreed to by all. Similarly, the lower pay for women work results from structural features of the labor market, which no one company or even industry can alter. A single employer cannot adopt a policy of comparable worth, for example, because the problem of lower pay for women is systemic, and consequently any substantial change must be on the level of the system. Systemic problems are best solved by some form of regulation or economic reform. On the systemic level, the relevant question is, “What do we as a society do?”

Use Table 1.1 to review these concepts.

there is an “ethics of trading” that prohibits the use of false or deceptive claims and tricks such as “bait-and-switch” advertising.

Employment is also recognized as a special relation- ship, with its own standards of right and wrong. Employ- ers are generally entitled to hire and promote whomever they wish and to lay off or terminate workers without regard for the impact on the people affected. (This right is being increasingly challenged, however, by those who hold that employers ought to fire only for cause and to follow rules of due process in termination decisions.) Employees also have some protections, such as a right not to be discriminated against or to be exposed to workplace hazards. There are many controversies about the employ- ment relationship, such as the rights of employers and employees with regard to privacy and freedom of speech, for example.

The ethics of business, then, is at least in part the ethics of economic or market activity, such as the conduct of buy- ers and sellers in a market and of employers and employ- ees in the workplace. So we need to ask, what are the ethical rules or standards that ought to govern these kinds of activities? And how do these rules and standards differ from those that apply in other spheres of life?

A second distinguishing feature of business is that it typically takes place in organizations. An organization, according to organizational theory, is a hierarchical system of functionally defined positions designed to achieve some goal or a set of goals. Consequently, the members of a busi- ness organization, in assuming a particular position, take on new obligations to pursue the goals of a firm. Because business involves economic transactions and relationships that take place in markets and also in organizations, it raises ethical issues for which the ethics of everyday life has not prepared us. Although the familiar ethical rules about honesty, fairness, promise keeping, and the like are applicable to business, it is necessary in many cases to rethink how they apply in business situations. This is not to say that the ethics of business is different from ethics in everyday life, but only that business is a different context, and it presents us with new situations that require us to think through the ethical issues.

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WRITING PROMPT

A Business Mindset

What do people usually mean when they defend a business decision by saying, “Business is business”? By what standards should busi- ness decisions be evaluated, and how do these compare to the standards in your personal life?

Ethics in the World of Business 7

primarily to provide goods and services, as well as jobs, and their success depends on operating efficiently and com- petitively. In a capitalist system, firms operate in an open market by providing goods and services that customers want and by doing so at a low price. This is possible only when the desired goods and services are produced by mul- tiple firms competing to attract customers. Thus, profit is not the end or purpose of business, as is commonly asserted, but is merely the return on the investment in a business that is possible only when the business is competitive. Business has often been described as a game, in which the aim is to make as much profit as possible while staying within the rules of the game, which are set mainly by government through laws and regulations.13 On the view of business as a game, profit is a measure and the reward of success, but it cannot be gained without also aiming to be competitive. Moreover, it is necessary, in pursuing profits, to observe cer- tain ethical standards, as well as laws and regulation, as a means to the end of profit making.

Both economics and law are critical to business deci- sion making, but the view that they are the only relevant considerations and that ethics does not apply is plainly false. Even hard-fought games like football have a code of sportsmanship in addition to a rule book, and business, too, is governed by more than the legal rules. In addition, a competitive business system, in which everyone pursues his or her self-interest, depends for its existence on ethical behavior and is itself justified on ethical grounds. How- ever, the relationships of business ethics to economics and the law are very complicated and not easily summarized. The following discussion is intended to clarify these rela- tionships.

1.2.1: Ethics and Economics According to economic theory, firms in a free market uti- lize scarce resources or factors of production (labor, raw materials, and capital) in order to produce an output (goods and services). The demand for this output is deter- mined by the preferences of individual consumers who select from among the available goods and services so as to maximize the satisfaction of their preferences, which is called “utility.” Firms also seek to maximize their prefer- ences or utility by increasing their output up to the point where the amount received from the sale of goods and ser- vices equals the amount spent for labor, raw materials, and capital—that is, where marginal revenues equal marginal costs. Under fully competitive conditions, the result is eco- nomic efficiency, which means the production of the maxi- mum output for the least amount of input.

Economics thus provides an explanatory account of the choices of economic actors, whether they be individu- als or firms. By this account, the sole reason for any choice is to maximize utility. However, ethics considers many

Identification of the appropriate level for a decision is important because an ethical problem may have no solution on the level at which it is approached. The beer marketer described earlier may have little choice but to follow the competition in using tasteless gimmicks because the prob- lem has no real solution on the individual or organizational level. An effective response requires that she place the prob- lem on the systemic level and seek a solution appropriate to that level. Richard T. DeGeorge has described such a move as “ethical displacement,” which consists of addressing a problem on a level other than the one on which the problem appears.12 The fact that some problems can be solved only by displacing them to a higher level is a source of great dis- tress for individuals in difficult situations because they still must find some less-than-perfect response on a lower level.

Table 1.1 Levels of Decision Making in Business Review the type of problem that should be resolved at each level of decision making and the relevant question for each. Then hide the cells in the table to quiz your understanding of these situations.

Level Type of Problem Relevant Question

The Individual The problem confronts an individual and requires that person to make a decision about his or her own response.

What do I do?

The Organization

The problem requires that the individ- ual decision maker act on behalf of the organization to resolve the situation and possibly bring about some organi- zational change.

What do we as an organi- zation do?

The Business System

The problem results from accepted business practices or from features of the economic system which cannot be effectively addressed by any single individual or organization.

What do we as a society do?

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WRITING PROMPT

The Authority to Decide

An angry customer is speaking on the phone with a customer ser- vice representative. The customer demands a full refund for the defective item she purchased online, although it is past the 30-day period allowed for returns. Describe a possible solution that could be offered at each level of decision making, and explain which level is required to resolve the problem to the customer’s satisfaction.

1.2: Ethics, Economics, and Law 1.2 Recognize the role of ethics in the conduct of business,

with respect to economic principles and the law

Businesses are economic organizations that operate within a framework of law and regulation. They are organized

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arise when these conditions for the operation of a free market are not satisfied.

CONDItIONS fOR fREE MARkEtS A common view is that ensuring the conditions for free markets and correct- ing for their absence are jobs for government. It is govern- ment’s role, in other words, to create the rules of the game that allow managers to make decisions solely on economic grounds. However, the task of maintaining the market- place cannot be handled by government alone, and the fail- ure of government to do its job may create an obligation for business to help. Although government does enact and enforce laws against theft and fraud, including such spe- cialized forms as the theft of trade secrets and fraud in securities transactions, there are many gray areas in which self-regulation and restraint should be exercised in order to preserve a well-functioning marketplace.

An example of a gray area in law is the “hardball” tac- tics employed by Toys “R” Us.15

Case: Toys “R” Us

Toys “R” Us employees allegedly bought inventory off the shelves of a competitor, Child World, during a promotion in which customers received $25 gift certificates for buying merchandise worth $100. The employees of Toys “R” Us were accused of selecting products that Child World sold close to cost, such as diapers, baby food, and infant for- mula. These items could be resold by Toys “R” Us at a profit because the purchase price at Child World was barely above what a wholesaler would charge, and then Toys “R” Us could redeem the certificates for additional free merchandise, which could be resold at an even higher profit. Child World claimed that its competitor bought up to $1.5 million worth of merchandise in this undercover manner and received as much as $375,000 worth of gift certificates.

Hardball tactics like those allegedly employed by Toys “R” Us are apparently legal, although Child World stated that the promotion excluded dealers, wholesalers, and retailers. Executives at Toys “R” Us did not deny the accu- sation and contended that the practice is common in the industry. Child World may have left itself open to such a hardball tactic by slashing prices and offering the certifi- cates in an effort to increase market share against its larger rival. Still, many companies would consider such deliberate sabotage of a competitor to be an unacceptable business practice that is incompatible with the market system— especially when it is their competitors who play hard ball.

fAIRNESS IN fREE MARkEtS Recent work in econom- ics has revealed the influence of ethics on people’s eco- nomic behavior. Economists have shown how a reputation for honesty and trustworthiness, for example, attracts cus- tomers and potential business partners, thus creating eco- nomic opportunities that would not be available otherwise. Similarly, people and firms with an unsavory reputation

other kinds of reasons, including rights and justice and other noneconomic values. To make a choice on the basis of ethics—that is, to use ethical reasons in making a deci- sion—appears at first glance to be incompatible with eco- nomic choice. To make decisions on economic grounds and on ethical grounds is to employ two different kinds of reasoning. This apparent incompatibility dissolves on closer inspection. If the economists’ account of economic reasoning is intended to be merely an explanation, then it tells us how we do reason in making economic choices but not how we ought to reason. Economics as a science need do no more than offer explanations, but economists gen- erally hold that economic reasoning is also justified. That is, economic actors ought to make utility-maximizing choices, which is an ethical, and not merely an economic, judgment.