Business Ethics

Ethics in the Marketplace

 Definition of Market
• A forum in which people come together to
exchange ownership of goods; a place where
goods or services are bought and sold.
 Free Market
• A free market is justified because
– They allocate resources and distribute
commodities that are just
– Maximize the economic utility of society’s
members
– Respect the freedom of choice of both byers and
sellers.
 Three Models of Market Competition
• 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.
• Pure monopoly
– A market in which a single firm is the only seller in the
market and new sellers are barred from entering.
• Oligopoly
– A market shared by a relatively small number of large
firms that together can exercise some influence on
prices.
 Perfect Competition
• A perfectly competitive free market is one in which no buyer or seller has the power to significantly
affect the prices at which goods are being exchanged.
• Characterized by seven defining features:
1. numerous buyers and sellers and 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.
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.
 Perfect Competition (Cont.)
• Free markets also need
• Enforceable private property system
• Underlying system of contracts
• Underlying system of production that generates
goods and services

• Prices and quantity always move towards

equilibrium point.
• It satisfies three of the moral criteria: Justice,
utility, and rights.
 Equilibrium in Perfectly
Competitive Markets
• Demand Curve: A line on a graph indicating the quantity of a product
buyers would purchase at each price at which it might be selling; the
demand curve also can be understood as showing the highest price buyers
on average would be willing to pay for a given amount of a product.
• Principle of diminishing marginal utility: generally each additional unit of
a good a person consumes is less satisfying than each of the earlier units
the person consumed.
• Supply curve: A line on a graph indicating the quantity of a product sellers
would provide for each price at which it might be selling; the supply curve
also can be understood as showing the price sellers must charge to cover
the average costs of supplying a given amount of a product.
• Principle of increasing marginal costs: after a certain point, each
additional unit a seller produces costs more to produce than earlier units.
• Price = Ordinary Cost of Production + Normal Profits
• Normal Profit: Average profit producers could make in other markets that
carry similar risk.
 Equilibrium in Perfectly Competitive Markets

Equilibrium point: In a market, the point at which the

quantity buyers want to buy equals the quantity sellers
want to sell, and at which the highest price buyers are
willing to pay equals the lowest price sellers are willing
to take.
 Ethics and Perfectly Competitive Free
Markets
• Achieve capitalist justice, but not other kinds
of justice like justice based on need.
• Satisfies a certain version of utilitarianism (by
maximizing utility of market participants but
not of all in the society)
• Respects some moral rights (negative rights
but often not positive rights)
Justice in Perfectly Competitive Market
• Perfectly competitive free markets embody justice (in
terms of capitalistic justice), since the equilibrium point is
the only point at which both the buyer and seller receive
the just price for a product.
• Price and quantity move to equilibrium in perfectly
competitive market because:
– If price rises above equilibrium, surplus appears and drives price
down to equilibrium.
– If price falls below equilibrium, shortage appears and drives
price up to equilibrium.
– If quantity is less than equilibrium, profits rise, attracting sellers
who increase quantity to equilibrium.
– If quantity is more than equilibrium, prices fall, driving sellers
out which lowers quantity to equilibrium.
 Utility in Perfectly Competitive
Markets
• Maximize the utility to buyers and sellers by leading
them to allocate, use, and distribute their goods with
perfect efficiency.
• They motivate firms to invest resources in industries with a
high consumer demand and move away from industries
where demand is low.
• They encourage firms to minimize the resources they
consume to produce a commodity and to use the most
efficient technologies.
• They distribute bundles of commodities among buyers so
that they receive the most satisfying commodities they can
purchase, given what is available to them and the amount
they have to spend.
 Rights in Perfectly Competitive
Markets
• perfectly competitive markets establish capitalist
justice and maximize utility in a way that respects
buyers’ and sellers’ negative rights.
– Perfectly competitive markets respect the right (of
buyer and seller both) to freely choose the business
one enters.
– In perfectly competitive markets, exchanges are
voluntary (complete knowledge and no external
force) and respects the right of free choice.
– In perfectly competitive markets, no seller exerts
coercion by dictating prices, quantities, or kinds of
goods consumers must buy.
 Cautions in interpreting Moral
Features of PCM
• Do not establish other forms of justice (need and ignore egalitarian
justice and may incorporate inequality).
• Maximize the utility of those who can participate in the market
given the constraints of each participants budget. Society?
• May diminish the positive rights of those outside or those whose
participation is minimal.
• Ignore and even conflict with the demands of caring (promotes
efficiency).
• May have a pernicious effect on people’s moral character and Can
encourage vices of greed and self-seeking and discourage virtues of
kindness and caring
• Can be said to embody justice, utility, and rights only if seven
defining features are present.
 Characteristics of Monopoly Markets
• One dominant seller controls all or most of the market’s product,
and there are barriers to entry that keep other companies out.
• Ex. Alcoa (Aluminum company of America), Standard Oil, American
Tobacco Company
• 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 below demand curve but
high above supply curve.
• High entry barriers keep other competitors from bringing more
product to the market.
• Entry Barriers: Legal barriers, strong brand or long-term customer
contracts, Low manufacturing costs, high start-up costs, high fixed
costs, high advertising costs, high R&D costs, network effects etc.
Why a Monopoly Does Not Have a Supply
Curve
We analyze the price in a monopoly market
using the market demand curve and the firm’s
cost curves. We have not made any mention
of the market supply curve. By contrast, when
we analyzed prices in competitive markets the
two most important words were always supply
and demand.

What happened to the supply curve? Although monopoly firms make decisions about what quantity to
supply, a monopoly does not have a supply curve. A supply curve tells us the quantity that firms choose
to supply at any given price. This concept makes sense when we are analyzing competitive firms,
which are price takers. But a monopoly firm is a price maker, not a price taker. It is not meaningful to
ask what such a firm would produce at any price because the firm sets the price at the same time it
chooses the quantity to supply. Indeed, the monopolist’s decision about how much to supply is
impossible to separate from the demand curve it faces. The shape of the demand curve determines the
shape of the marginal-revenue curve, which in turn determines the monopolist’s profit- maximizing
quantity. In a competitive market, supply decisions can be analyzed without knowing the demand curve,
but that is not true in a monopoly market. Therefore, we never talk about a monopoly’s supply curve.
Ethical Weaknesses of Monopolies
• Violates capitalist justice.
– charging more for products than producer knows they are worth
• Violates utilitarianism.
– keeping resources out of monopoly market and diverting them to
markets without such shortages (entry barriers)
– removing incentives to use resources efficiently
– Allow the seller to introduce price differentials (Ex. Based on the
desire)
• Violates negative rights.
– forcing other companies to stay out of the market
– letting monopolist force buyers to purchase goods they do not want
– letting monopolist make price and quantity decisions that consumer is
forced to accept
 Oligopolistic Markets
• Major industrial markets are dominated by only a few
firms.
• Oligopolistic markets are “imperfectly competitive”
because they lie between the two extremes of the
perfectly competitive and monopolistic markets.
• Two of the seven conditions of PCM are not present:
– Instead of many sellers, there are few significant sellers.
– Other sellers are not able to freely enter the market.
• Oligopoly markets which are dominated by few (3-8) large
firms are said to be highly concentrated.
• Most common cause of Oligopoly market structure is
horizontal merger.
Unethical Practices in Oligopolistic
Markets
• Managers of these firms are motivated to join forces and act as a
unit by explicit or tact agreements. (price leader)
– Price-fixing: at artificially higher levels
– Manipulation of supply: limit production
– Exclusive dealing arrangements: product or geography
– Tying arrangements: buyer agree to purchase certain other goods
– Retail price maintenance agreements
– Predatory price discrimination
– Market allocation
– Bid rigging
• Like monopoly can fail to exhibit just profit levels, can generate a
decline in social utility, and can fail to respect economic
freedoms.
 The Fraud Triangle
• The pressures or strong incentives to do
wrong, such as organizational pressure, peer
pressure, company needs, personal
incentives.
• The opportunity to do wrong, which includes
the ability to carry out the wrongdoing, being
presented with circumstances that allow it,
low risk of detection.
• The ability to rationalize one’s action by
framing it as morally justified.
 Oligopoly and Public Policy
• Do-nothing view.
– Since power of oligopolies is limited by competition between
industries and by countervailing power of large groups
– Oligopolies are competitive and big companies are good
international competitors.
• Antitrust view.
– Large monopoly and oligopoly firms are anticompetitive and
should be broken up into small companies (The Sherman
Antitrust Act, 1890; Clayton Act, 1914; MRTP Act, The
Competition Act, 2002)
• Regulation view.
– Big companies are beneficial but need to be restrained by
government regulation. (should not be broken)
Fixing the Computer Memory Market
All personal computers need memory chips, called DRAM for dynamic random access
memory, which were often sold in 128- Mb units. The $ 20 billion per year DRAM market is
dominated by Micron, Infineon, Samsung, Hynix, and a few smaller companies who sell their
DRAM to computer makers such as Dell, Compaq, Gateway, and Apple. In the late 1990s,
the DRAM makers invested in bigger factories leading to a market glut, large inventories,
and intense price competition. By February 2001, unsold inventories and a recession took
DRAM prices into a steep fall ( see chart), dropping to about $ 1 a unit by the end of 2001, a
price well below manufacturing costs. In early 2002, while inventories were still high and the
recession was in full swing, prices strangely rose and peaked at about $ 4.50 a unit in April (
see chart). That month, Michael Dell of Dell Computers accused the companies of cartel- like
behavior, and the Department of Justice ( DOJ) began to investigate the possibility of price-
fixing. Prices now reversed, falling to $ 2 by the end of 2002, about 20 40 percent below
manufacturing costs. The DOJ later released a November 26, 2001 e- mail written by Kathy
Radford, a Micron manager, in which she described plans by Micron, Infineon, and Samsung
to move their prices upward in unison: the consensus from all [ DRAM] suppliers is that if
Micron makes the move, all of them will do the same and make it stick. On September 2004,
Infineon pled guilty to participating in meetings, conversations, and communications with
other DRAM makers during 2001 and agreeing during those meetings, conversations, and
communications to fix the prices for DRAM. Infineon paid
the U. S. government $ 160 million in fines. The DOJ
announced it was investigating the other DRAM makers.
Estimate the equilibrium price from the chart.
Who ultimately paid for any monopoly profits
above the equilibrium price?