Research on the Moral Hazard of Modern Marketing Innovation in

ORIENT ACADEMIC FORUM
Research on the Moral Hazard of Modern Marketing Innovation in
Small and Medium-size Enterprises
LIU Chunyuan
Harbin University of Commerce, China, 150028
[email protected]
Abstract: With the widely used modern marketing methods in small medium-size enterprises, the
efficiency of enterprise marketing has been greatly improved. At the same time, there may happen the
problem on moral hazard in the procession of modern marketing, such as information gathering, product
quality, product pricing, marketing channels, product promotion and so on. In order to prevent behaviors
of moral hazard, this paper point that it should establish relevant laws and regulations, strengthen
supervision of marketing activities and the internal management of corporate marketing, and enhance
social media advocacy and monitoring.
Keywords: marketing, moral hazard, innovation
1
Introduction
By means of marketing tools and paths, the efficiency of enterprise marketing has been greatly
improved. However, moral issues from the modern marketing are also becoming increasingly apparent.
Because of the lack of external supervision and legal vacuum presentation, the behavior of marketing,
moral hazard is not given due attention. If it persists, it easily leads to “bad money drives out good
money” situation, that is to say, these who are good at heresy marketing can easily earn profits, while
those who obey the morality and regulations can’t, which results in the disruption of the normal
economic rules, making consumer welfare harmful. As small medium-size enterprises, due to smaller
scale and relatively weak competition, in order to survive in the market, many of them risked. The
unethical behavior of some enterprises in the marketing activities has caused a serious crisis of
confidence to the whole society. The paper will state the countermeasures on the analysis of the behavior
of moral hazard from modern marketing tool for small and medium-size enterprises.
2
Connotative Mechanism of Moral Hazard in Enterprises
2.1 Meaning of moral hazard in enterprises
In the market economy, business managements are faced with many risks, in particular, moral hazard as
one of the major business risks. The separation of ownership and management right leads to the agency
relationship and moral hazard is an inevitable product of the agency relationship. Agency relationship is
a contractual relationship, the basic content of which is that the agent takes action according to the
client’s interests and correspondently the agent gets the paid. Whenever the agent has a better
understanding of the operation conditions and is required to take action, the agent is likely to do as what
he wants and ignore the interests of the client, making moral hazard in agency relations. Moral hazard is
that due to the asymmetry of information and afterward action, the client can not observe the behavior of
the agent and the agent may be to harm the client interests. The moral hazard in enterprises is that the
immoral behavior from the employees and business enterprise customers (including customers) could
lead to the losses of operational efficiency and enterprise credit.
2.2 Root of moral hazard in enterprises
Yi Min (2008) stated that the reasons for moral hazard in enterprises are various, which has been
explained by classical economics, institutional economics, information economics and contract
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economics. However, it together comes from the inconsistency of the main body’s interests, information
asymmetries and incomplete contracts. The author believes that the main reason is the existence of the
self-interest of the agent and information asymmetry between the client and the agent. On the one hand,
according to the “economic man hypothesis” economic man is “a rational, self-interest or of utility
maximization person”; On the other hand, the development of the socialized production leads to the
separation of ownership and management right and thus the agency relationship is created.
Correspondently, the market of professional managers is developed. As the owner does not actually
participate in the daily management of the company, leading to the information asymmetry between the
client and the agent, there always exists the interest loss from the agent, so that moral hazard is
inevitable.
2.3 Harm of moral hazard in enterprises
2.3.1 The existence of moral hazard contributes to a variety of opportunistic behaviors, resulting in a
credibility crisis. On the one hand, it provides an opportunity for people to abuse of power, the pursuit of
short-term benefits and great profits; on the other hand, with the material interests and personal desires,
some operators who use the vulnerabilities of system make a big irregularities and treacherous and
selfish things, leading to rampant corruption and fraud. More seriously, this phenomenon does not only
further affect people relying on opportunistic and other means to achieve the purpose, but also make the
collapse of people’s fundamental moral beliefs.
2.3.2 The existence of moral hazard in enterprises impedes the development of market economy. If there
exists moral hazard, transaction costs will increase, thus inhibiting the extension of the scope of the
market and hindering the development of specialization and social division, finally impeding economic
development. In addition, the moral hazard in enterprises based on the fraud and violation of laws falls
away from the unified standard market rules based on the legislation and credibility, leading to chaos
and vicious competition among enterprises. Thus it can be harmful to the social and economic basis for
sustainable development, resulting in low efficiency of market operation.
2.3.3 The existence of moral hazard in enterprises leads to loss of social and economic benefits. Loss of
interests is mainly as follows: on the one hand, enterprises take improper means to evade the debt,
which directly gives the state, collectives and individuals loss of interests. On the other hand, in order to
prevent it from happening, the related management departments in our country emerge, such as the
China Securities Regulatory Commission and the Audit Commission, which make the supervision on the
securities market and state-owned large and medium-size enterprises.
3 Analysis on the Moral Hazard Behavior Resulting from Modern Marketing
Innovation in Small and Medium-size Enterprises
With the aggravation of the market competition, some small and medium-size enterprises in the short
sight driven by profit gain the maximum economic interests with the marketing method of immorality.
These behaviors are reflected in all kinds of aspects, such as product, price, promotion and distribution.
Immoral marketing behaviors undermine fair competition order, impair the interests of consumers and
society, and endanger the survival and development of enterprises. These immoral marketing behaviors
are adverse to consumers, society and the enterprises’ development in the long-term. Thus these
behaviors should be eliminated. The immoral marketing behaviors in these enterprises are as follows:
3.1 Moral hazard of marketing research
In the collecting process of products’ demand and consumers’ information, the use of modern marketing
innovation tools like e-commerce and internet marketing provides the accurate, efficient and low cost
information of consumers’ demand for enterprises. However, the negative effects of these modern
marketing techniques are obvious, for example in the investigation of online market, some enterprises
violate the consumers’ privacy and abuse the technology of customers’ information tracking and
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recording. Enterprises gain personal information of consumers on the internet without the consent of the
consumers. Some enterprises’ web sites gather information from the consumer’s registration information.
In the registering process, enterprises often provide agreements on using and keeping secrets, however,
some enterprises sell the investigation information of consumers to other enterprises at ease without the
permission of consumers. As consumers are in the inferior position, generally, they are unaware of the
process of violating privacy, which makes the moral hazard behavior of enterprises become subtle and
concealed, which aggravate the misuse of the collected information.
3.2 Moral hazard of product strategy
Online shopping has revolutionized the barriers of traditional marketing model, which not only for
consumers, enterprises but also for markets has great attraction and influence. Many small and
medium-size enterprises also carry out online marketing. However, at present online marketing is facing
many moral hazard problems. Because of the flaws and limitations in network technical, compared with
businessman, consumers are often in the information disadvantage and they can not examine the
characteristics of goods as clearly as in the true store. Therefore, the information disadvantage can easily
lead to moral hazard behavior of businesses. At this stage the threshold of online sales is quite low and
the good and bad are intermingled. Because the laws and regulations of e-commerce are unsound and
the integrity institution of online transactions has not been formed, some unscrupulous businesses can
easily abate the quality of goods by using the secret way. Some enterprises counterfeit and copy others’
products or registered trademarks, or use the names, packaging, trade mark and mark which are similar
to others’ well-known products (or services). Besides, they produce and sell the inferior products and
use the packaging which is not up to the standard. In the process of producing and marketing, they have
a weak awareness of environmental protection and destroy the environment seriously. With the serious
asymmetry of information, it is difficult for consumers to collect evidence which can testify the immoral
business behavior. Even if there is evidence to testify, they often give it up because of the lower target
and high cost of litigation.
3.3 Moral hazard of pricing strategy
With the development and application of science and technology, on the one hand, production costs of
enterprises are declining; on the other hand, new technology brings convenience to the business
management of enterprises such as product storage, outbound, returns, transfers, order, defective
management through strengthening information feedback. Thus enterprises can correctly apply the law
of value, supply and demand and competition to revise pricing strategy. In such cases with asymmetric
information, some enterprises announce false pricing information. In order to attract the attention of
consumers, they often claim that the product is free of charge in advance. When consumers click, it
often needs the registration and payment. The price policy of some network marketing companies is
unclear. Network companies, telecom companies and mobile companies deliberately put together a few
prices to fool consumers.
3.4 Moral hazard of channel strategy
E-commerce as a new marketing tool in business marketing has been applied widely. It is undeniable
that electronic networks can bring more business opportunities for enterprises. However, e-commerce
platform for enterprise marketing channels may also lead to moral hazard. Because of direct sales
network marketing, in network marketing channels the major ethical issue is how to fairly solve channel
conflict. If the network marketing enterprise can not correctly deal with the channel conflict between
traditional marketing channels and new network marketing channels, there may exist the equity of
channel members. Besides, if enterprises can not correctly deal with consumers’ information in the “one
to one” marketing mode, it may concern the invasion of consumer privacy. In addition, the network
marketing enterprise needs to properly handle the relationship between the flow of information and
logistics. If the firm receives payment without timely delivery, it will also cause marketing ethics.
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3.5 Moral hazard of promotion strategy in Internet marketing
There are prominent ethical issues in promotion strategy of Internet marketing. The phenomenon is that
contrary to the wishes of others business information is forced to release. The most typical behavior is
the distribution of spam (SPAM). Some enterprises change the sign of IE browser of MICROSOFT to
their own company logo, or the company logo is forced to leave in the used mailbox. Besides, the
pop-up banner ads suddenly come out when consumers browse the Web. Some companies use
advertising or other media to make the false or misunderstanding publicity about the quality of the
goods or services, composition, performance, usage, manufacturer, expiration date, place of origin,
sources and so on, in order to deceive consumers and destroy and belittle competitors’ reputation and
commodity (or service) in ads or promotion. Some companies often make accusations of their
competitors’ goods with defect under the guide of scientific research results in order to mislead
consumers.
4 Countermeasures to Moral Hazard of Modern Marketing Innovation in Small
and Medium-size Enterprises
4.1 Establishment and improvement of relevant laws and regulations
So far, China still lacks a national standard e-commerce business and specialized law. The solution to
the supervision of the behavior of moral hazard from the marketing tools for e-commerce currently only
comes from the present “Consumer Protection Law”, “Product Quality Protection Act”, “Civil Law”,
“Contract Law”, “Consumer Protection Law”, “Telecommunications Ordinance” and other laws and
regulations. However, the content overlaps each other, without strong operation making it difficult to
effectively solve the problem of moral hazard of marketing innovation. In addition, marketing
departments need to strengthen the institutionalization of moral regulation to cover the existing
regulatory loopholes, and to converge with the future regulatory requirements. Firstly, supervision
departments should establish a stronger consciousness of the legal intervention prior to the
administrative intervention. Secondly, in reference to advanced legislative experience, a code for
e-commerce should be developed closely to China’s national conditions at proper time. Thirdly, from a
legal point of view the right of personal information should be confirmed as soon as possible.
4.2 Strengthening the monitoring of marketing activities
Legal system should not expect overnight success, which needs to gradually be improved and perfected.
In the current circumstances of imperfect laws and regulations, regulatory authorities should strengthen
marketing activities, especially the monitoring of new marketing activities. Firstly, we should establish a
complete online shopping protection system of consumer rights. The relevant departments should
supervise the e-commerce sites, make strict access system for e-commerce and improve the credit rating
system. Secondly, we should establish a sound mechanism for dispute solution of e-commerce. The
e-commerce marketing activities should have a full range of monitoring from the complaints, legal
assistance, dispute mediation, government departments and so on. Thirdly, it should be clear that what
the main problem is in the regulatory supervision. For example, the main bodies should be clearly
confirmed in the session of network transactions, personal information, spam, TV shopping and so on.
4.3 Strengthening the internal management of enterprise marketing
Small and medium-size enterprises should play a role in self-discipline. First of all, enterprises should
establish the concept of social marketing. Small and medium-size enterprises can not take profits as the
only and ultimate goal but consider social responsibility achieving the balance between economic and
social benefits. Second, enterprises should strengthen the management of marketing process. Every step
in enterprises must be regulated, based on the business ethical rules from marketing strategy formulation,
market research, product development and production, to pricing, product distribution and promotions.
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Third, we should create a healthy corporate culture. Enterprise culture should be based on the marketing
moral standard as the core to form a “serious moral responsibility” atmosphere. Business leaders and
staff should take the marketing ethics as the primary responsibility. Fourth, we should improve the moral
quality of managers and staff. The state of enterprise marketing morality is directly dependent on the
moral quality of production directors and managers as commanders of production. Employees are the
main bodies in the activities of the company’s production, sales and other business activities, whose
overall quality should be improved in a variety of ways
4.4 Strengthening social media advocacy and monitoring
The social media advocacy and monitoring is the last line of defense of moral punishment formation.
First of all, we should enhance consumer right to know through media advocacy, for example the system
of the credibility in corporate marketing which is assessed by consumers themselves. Consumers can
learn much information like the corporate, products, qualification certificates, transactions, etc. by
clicking the credit system Web site. Second, the mainstream media should also help consumers’ legal
awareness through media publicity. In the process of consumption it is advocated that consumers should
be aware of keeping the relative evidence, so thus it is not only beneficial to protect their own rights but
also can punish the vicious marketing behavior of the enterprise. Third, social media should strengthen
the awareness of self-protection, such as shopping in those well-known sites, reading articles carefully
before shopping and so on. Once they experience online shopping fraud, consumers should promptly
report to the public security department. Consumers should also strengthen the awareness of protection
of personal information.
5
Conclusion
That small and medium-size enterprises disobey marketing ethics frequently has a great impact on the
healthy development of China’s economy as a huge obstacle. Therefore, it is urgent and necessary to
research on marketing ethics. As China stays in the social transition period, the main reasons why
marketing ethical problems frequently happen are the incompletion and inadequate enforcement of laws
and regulations, low cost on violations of marketing ethics, weak sense of corporate marketing ethics
and weak awareness of consumer self-protection. The solution to marketing ethical problems is a
systematic project, requiring together joint of consumers, businesses, the nation and the society to form
eternal social efforts. Especially, outside is the strict law key and enterprises’ self-discipline is the
foundation. The importance is the rational consumption.
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