Ethics in the Marketplace

• Quiz 3 next Monday (Chapters 3 – 4)

• March 9 (1 – 3 pm)
• Plan ahead. Some of you will have two exams on the same day.
• Chapters 1 – 4 (Material covered till the coming Wednesday)
• Read the book and the slides
• Questions
Systemic Ethics Continued
• How should the businesses be organized at the social level?
Market
• A forum in which people come together to exchange ownership of
goods; a place where goods or services are bought and sold.
• Perfect Competition
• Monopoly
• Oligopoly
Perfect Competition
• A free market in which no
buyer or seller has the
power to significantly
affect the prices at which
goods are being
exchanged.
• Just outcomes (according
to capitalist justice).
• Respect of moral rights.
• Satisfy utilitarianism.
• So perfect competition is
morally desirable!
Perfect Competition: Defining Features
1. Numerous buyers and sellers, none of whom has a substantial share
of the market.

2. All buyers and sellers can freely and immediately enter or leave the
market.

3. Every buyer and seller has full and perfect knowledge of what every
other buyer and seller is doing, including knowledge of the prices,
quantities, and quality of all goods being bought and sold.
Perfect Competition
4. The goods being sold in the market are so similar to each other that no
one cares from whom each buys or sells.
5. The costs and benefits of producing or using the goods being exchanged
are borne entirely by those buying or selling the goods and not by any
other external parties.
6. All buyers and sellers are utility maximizers.
7. No external parties (such as the government) regulate the price,
quantity, or quality of any of the goods being bought and sold in the
market.
Supply
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eachprice
priceatatwhich
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Principle of increasing
diminishingmarginal
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utility
The principle that after a certain
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additional additional unity
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a person produced costs
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more to produce
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Market Firm

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$10 $10
8 8 Individual firm
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4 Market 4
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Ethical characteristics of perfect competition
• Achieves capitalist justice, but not other kinds of justice.

• What is capitalist justice?

• Benefits and burdens are distributed justly when individuals receive in

return at least the value of the contribution they made to an enterprise:
Fairness is getting paid fully in return for what one contributes.

• Why is the equilibrium point the only point of “justice”?

Ethical characteristics of perfect competition
• Satisfies a certain version of utilitarianism (by maximizing overall utility of
market participants).

• Lets consumers buy the most satisfying bundle of goods to maximize their
utility.

• Attracts resources when demand is high and drives them away when
demand is low, so resources allocated efficiently.

• Encourages firms to keep costs low & profits high.

Ethical characteristics of perfect competition
• Respects some moral rights (primarily negative rights).
• Free to enter or leave the market as they choose. No one is forcing you to
be in the market! (Freedom of opportunity)
• All exchanges are fully voluntary. You pay for what you want and not what
others want. (Freedom of consent)
• No single seller or buyer will dominate the market so others are forced to
accepted the terms or go without. (Freedom from coercion)
 Back to reality!
• What about other forms of justice.
• No restrictions on how much wealth each participant accumulates.
• Overall utility of market participants not all society is increased.
• Social welfare might be increased by giving more goods to those who can’t
participate in the market.
• What about positive rights of those who can’t compete in the market?
• Conflicts with demands of caring. Based on assumption that all of us are
atoms independent of each other.
• May have a pernicious effect on people’s moral character. Maximize
economic well-being at the cost of loyalty, kindness, and caring.
• What about the seven basic requirements. They are never happening!
Monopoly
• A market in which a single firm is the only seller in the market and
which new sellers are barred from entering.
• Examples ?
• (Big pharma, Cable companies, landline phone companies, public
utilities)
• Seller has the power to set quantity and price of its products on the
market.
• Seller can extract monopoly profit by producing less than equilibrium
quantity and setting price above supply curve.
• High entry barriers keep other competitors from bringing more
product to the market.
Monopoly
• Microsoft Windows (92% share)
• Microsoft Office (94% share)
• Barrier to entry: High start-up cost, fixed costs, advertising costs, R&D
costs.
• About $10 billion
• Economies of scale. Cost per unit of Microsoft is much lower than its
competitors.
• Brand loyalty.
• Network effect: Related apps and software.
Ethical Weaknesses of Monopoly
• Violates capitalist justice
• Charging more for products that producer knows they are worth.

• Violates utilitarianism
• Keeping resources out of monopoly market and diverting them to markets without such
shortages.
• Removing incentives to use resources efficiently.

• Violates negative rights.

• Right to enter and compete in the market.
• Right to purchase goods they do not want at the given price.
• Social Right to collectively choose the prices and quantities of a commodity offered for sale.
Monopoly
• Will the monopolist necessarily chose to maximize its profits?
• Would the managers of a monopoly altruistically forgo potential
profits and fix their prices at the equilibrium level (at the normal
profit level)?
• Of course, government can force a monopolist to reduce prices.
• In the absence of external regulatory authority or public pressure,
there is an overwhelming evidence that monopoly companies in fact
do seek monopoly profits.
• Up to half of a company’s monopoly profit is siphoned off as wages,
benefits, salaries, and bonuses.
Oligopoly
• Markets that are dominated by only a few firms.

• Imperfectly competitive as they lie between the two extremes of the perfectly
competitive and monopolistic markets.
• There are generally barriers to entry for new firms (high costs of starting, patents, long-
term contracts etc.)
• Oligopoly markets dominated by a few (3-8) large firms are said to be highly
concentrated.

• Car industry in Pakistan

Highly concentrated Markets
• Cereal breakfast foods 82, 93 • Washers and driers 90, NA

• Chocolate 73, 87 • Electric bulbs 90, 94

• Cigarettes 95, 99 • Batteries 90, 98

• Snack foods 64, 72 • Automobiles 87, 97

• Underwear 80, 97 • Vacuum cleaners 78, 96

• Men’s pants 84, 90 • Furniture 68, 80

• Greeting cards 85, 89 • House slippers 94, 99

• Computers 76, 89 • Glass constrainers 87, 96

Ethics in the Marketplace
• You own a company in a highly competitive market. You and other
owners are tired of the competition. The owners of other companies
approach you and present a proposal.
• Let us divide the market into different geographical areas according to
current share of different companies. Other competitors will move
out of that area.
• This will help all competitors in the economy.
Oligopoly and Public Policy
• Horizontal mergers: the unification of two or more companies that
were formerly competing in the same line of business.

• Vertical mergers: Two companies that produce separate services or

components along the value chain for some final product. Mergers
between such companies occur in an effort to reduce production
costs and increase efficiency for higher profits.
 2017 2018

Disney 21.8% 26%

Warner Bros 18.4% 16.3%

Universal 13.8% 14.9%

Fox 12% 9.1%

Sony/Columbia 9.6% 10.9%

Oligopolies and Public Policy
• Trust: An alliance of previously competitive oligopolisits formed to
take advantage of monopoly powers.
• Do-nothing:
• Competition across industries has replaced competition within industries
• Power of large corporation balanced and restrained by large governments,
unions, and buyers.
• Chicago School: Markets efficient even when few rivals (as few as 3). Better
than alternatives. So, government must not interfere.
• Large companies are needed to compete with foreign companies in a
globalized world.
Oligopolies and Public Policy
• Anti-Trust View:
• Large monopoly and oligopoly firms are anticompetitive and should
be broken up into small companies.
• Discretion over prices
• No price competition
• High degree of concentration is unnecessary for competition
• Positive correlation between concentration and profitability
• High barriers to entry
• Oligopolistic coordination through press releases and other means
Oligopolies and Public Policy
• Regulation View:
• Big companies are beneficial but need to be restrained by
government regulation.
• Sometimes in the form of nationalization
Anti-Competitive Behavior
• Fair ways to compete?
• Cutting costs
• Improving quality
• Competition is not always fair
• Because a highly concentrated oligopoly has a relatively small number of firms, it is
relatively easy for the managers of these firms to join forces and act as a unit.
• By explicitly or tacitly agreeing to set their prices at the same levels and to restrict their
output accordingly, the oligopolists can function much like a single giant firm.

• High price, low supply, (long-term suboptimal quality as well).

Price Fixing An agreement between firms to set their
prices at artificially high levels.
Manipulation of Supply: Agreement to limit production so prices rise to levels
higher than those that would result from competition.
Exclusive dealing Arrangements: Selling to a retailer on condition that the
retailer will not purchase any products from other companies and/or not sell
outside a certain area

• Do not buy from others

• Buy from us so much that you can’t buy from others.
• We will give you free refrigerators if you buy from us.
Bribery
• We all know this one!

• How does bribery reduce competition?

Tying Arrangements: Selling a buyer a certain good only on condition
that the buyer agrees to purchase certain other goods from the firm.
Resale price maintenance agreements: Selling to a retailer only on condition
that retailer agrees to charge the same set retail prices for its goods.
Bid Rigging: A prior agreement that a specific party will get a contract
even though all parties will submit bids for the contract.
Predatory price discrimination:
Price discrimination aimed at running a competitor out of business.
Market Allocation: Dividing up the market among few firms.
 • Crowded & Mature Incentives &
markets: Increased
pressure to perform
Pressures • Dependence on
• Undifferentiated salespeople to
products: Competing price their orders
on price alone individually.
• Personnel practices: • Decentralized
Organizational pricing decisions
pressures and control • Industry or Trade
systems
Fraud Associations
Triangle
Rationalization Opportunities
• Inactive Corporate
Legal or HR staff
• Organizational Culture
of Business