132243 Business & Social

Responsibilities

Ethics In Marketplace

Issues Today
3 degrees of competition in a market
Perfect competition
Pure monopoly
Oligopoly

Ethics of anticompetitive practices

Perfect Competition
Features:
Numerous buyers and sellers, none has substantial
market share
No barriers to entry or to leave
Perfect information
Perfect substitutable goods
Buyers and sellers are utility maximizers
No external intervention on quantity, price, costs,
and benefits in the market

The first two characterize competitive feature,

the last characterizes free feature.
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Perfect Competition (cont.)

Free competitive markets also need (1) private
property system, (2) an underlying system of
contracts, and (3) an underlying system of
production.
In perfectly competitive markets, prices and
quantities always move toward the equilibrium
point.
The point at which the amount of goods buyers want
to buy exactly equals the amount of goods sellers
want to sell, and at which the highest price buyers
are willing to pay exactly equal the lowest price
sellers are willing to take.

Demand Curve in PC Markets

A demand curve is a line on a graph
indicating the most that consumers would
be willing to pay for a unit of some
product when they buy different
quantities of those products.
It is downward sloping because of the
principle of diminishing marginal utility; each
additional item a person consumes is less
satisfying than each of the earlier items the
person consumed.
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Demand Curve in PC Markets

(cont.)
If the price of a product is above the
demand curve, then
Consumers see themselves as losers, and
would leave the market and spend elsewhere.

The opposite is true if the price were to

fall below the demand curve

Supply Curve in PC Markets

A supply curve is a line on a graph
indicating the prices producers must
charge to cover the average costs of
supplying a given amount of a
commodity.
It is upward sloping because of the principle
of increasing marginal costs; after a certain
point, each additional item a seller produces
costs more to produce than earlier items.
The principle of increasing marginal costs
prevails because productive resources in the
world are limited.

Supply Curve in PC Markets

(cont.)
The costs of producing a commodity also
include the normal profits, apart from the
ordinary costs of labor, materials,
distribution, etc.
If the price is below the supply curve, then
Producers see themselves as losers, and would
leave the market and invest elsewhere.

The opposite is true if the price were to rise

above the supply curve.
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Equilibrium in PC Markets
Point of equilibrium is the point at which the
supply and demand curves meet.
When the price is above the equilibrium
surplus of goods will appear.
It is eventually eliminated because
sellers will be forced to lower their prices and decrease
production to get rid of unsold goods; and
the abnormally high profits will attract outside
producers into the market, and bring about a decrease
in the price consumers are willing to pay for larger
quantities.
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Equilibrium in PC Markets
(cont.)
When the price is above the equilibrium
shortage will appear.
It is eventually eliminated because
buyers will bid up the price, which will attract
more producers into the market; and
producers will leave the market because of the
loss, thereby lowering the supply, raising the
price.

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Ethics and PC Markets

PC markets incorporate forces that drive
buyers and sellers toward the point of
equilibrium, in doing so, they achieve:
Capitalist justice
Maximum utility of buyers and sellers

The aforementioned moral principles are

established in a way that respects of
buyers and sellers negative rights
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Justice from PC Markets

Capitalist Justice: fairness is getting paid
fully in return for what one can
contributes
is established because of the fact that
participants in PC markets tend to trade at
equilibrium.

From the sellers (buyers) point of view,

the price is fair only if it falls somewhere
on the sellers supply (buyers demand)
curve.
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Efficiency from PC Markets

Efficiency from the allocation of resources
Resources are allocated efficiently in accordance with
consumer demands and needs.

Efficiency from the use of resources

Firms are motivated to lower their costs to increase
profits.
Firms are motivated to reduce their profits to the
lowest levels to not lose buyers to other firms.

Efficiency from the distribution of commodities

Consumers are as happy as possible possible given
their budget and the range of available goods
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Rights from PC Markets

Negative right of freedom of opportunity
Participants are free to entry or leave as they
choose.

Negative right of consent

All exchanges are voluntarily.
No external parties force price and quantity.

Negative right from coercion

No single seller or buyer dominate the
market that other are forced to accept the
terms or go without.

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Criticisms on PC Markets
Other forms of justice are not established,
e.g. justice based on needs and
egalitarian justice.
Utility of others, e.g. the poor, the old,
the sick, the disabled, the young, may not
be maximized.
Positive rights of those outside the market
are diminished, i.e. rights to consume
goods outsiders need are diminished.
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Criticisms on PC Markets
(cont.)
Pressures toward economic efficiency can
conflict with the demands of caring.
The virtues of loyalty, kindness, and
caring all diminish, whereas the vices of
being greedy, self-seeking, avaricious,
and calculating are encouraged.
Real markets are not of the PC type.
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Monopoly Competition
Features that differ from PC markets:
One seller with 100% market share
Barriers to entry, e.g. patent laws, licenses, tariffs,
brand loyalty, low manufacturing costs, high entry
costs.

Monopolies can also be created through

mergers.
A monopoly seller can fix its output at a quantity
that is less than equilibrium and at which
demand is so high that It allows the firm to reap
an excess monopoly profit by charging prices
that are far above the supply curve and above
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the equilibrium price.

Monopoly Competition (cont.)

Do the monopoly profits always exist?
Not necessarily, if its managers are
motivated by altruism, or if it is regulated, or
if it is pressurized by an angry public, or if it
has to pay high wages, high salaries, and
high bonuses.
However there is an overwhelming evidence
which shows that monopoly companies often
seek monopoly profits.
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Justice and MC
Capitalist justice cannot be achieved
because the system does not operate at
equilibrium.
The average consumer would be contributing
more for those goods than what the goods
are worth.

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Efficiency and MC
Inefficiency from the allocation of
resources
Shortage will appear and cannot be
eliminated. Resources are therefore deflected
into other nonmonopoly markets that already
have an adequate supply of goods.

Inefficiency from the use of resources

A monopoly firm is not encouraged to reduce
its costs and is therefore not motivated to
find less costly methods of production.
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Efficiency and MC (cont.)

Inefficiency from the distribution of goods
Price differentials are allowed that can
prevent consumers to be as happy as
possible given their budget and range of
available goods.

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Rights and MC
MC markets incorporate restrictions on
the negative rights that PC markets
respect
Rights to entry and leave
Rights to buy goods buyers want in
quantities they desire
Rights to choose without coercion

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Oligopolistic Competition
Imperfectly competitive markets are
markets that lie somewhere on the
spectrum between the two extremes of
the PC market and the pure monopoly.
In an oligopoly, 2 features of PC markets
are not presented:
A few significant sellers, each with
substantial market share (maybe between
25% - 90%)
New sellers find it difficult to entry due to
e.g. high start-up costs, brand-loyalty, etc.

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Oligopolistic Competition
(cont.)
Oligopoly markets that are dominated by a few,
e.g. 3-8, large firms are said to be highly
concentrated markets.
Oligopolies are usually caused by horizontal
mergers: the unification of two or more
companies with similar line of business.
By explicitly or tacitly agreeing to fix prices and
outputs, together with barriers to entry,
oligopoly can function much like the monopoly,
and therefore can fail to achieve justice, social
utility, some economic freedoms
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Explicit Agreements
The greater the degree of market
concentration, the fewer the managers,
the easier it is for them to come to an
explicit meeting to agree on price fixing.

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Tacit Agreements
When one company decides it has a
reason to raise or lowers its product
prices, other companies will always follow
suit within a short period of time.
No official meeting, each realizes that all will
benefit so long as they cooperate.

Price leader is the firm recognized as the

industry leader in oligopoly industries for
the purpose of setting prices based on
levels announced by that firm.
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Unethical Practices In OC
Markets
Price-fixing: an agreement between firms to set
their prices at artificially high levels Unethical
practices from explicit agreements (cont.)
Manipulation of supply: an agreement between
firms to limit their production so that prices rise
to levels higher than those that would result
from free competition
Exclusive dealing arrangements: when a firm
sells to a retailer on condition that the retailer
will not purchase any products from other
companies and/or will not sell outside of a
certain geographical area
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Unethical Practices In OC
Markets
Tying arrangements: when a firm sells a buyer a
certain good only on condition that the buyer
agrees to purchase certain other goods from the
firm
Retail price maintenance agreement: a
manufacturer sells to retailers only on condition
that they agree to charge the same set retail
prices for its goods
Price discrimination: to charge different prices to
different buyers for identical goods or services
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Factors Which Lead to Price

Fixing
A crowed and mature market
Job-order nature of business
Undifferentiated products
Culture of the business
Personnel practices
Pricing decisions
Trade associations
Corporate legal staff
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Bribery
Bribes used to secure the sale of products by
shutting out other sellers results in a decline in
market competition, and therefore are unethical.
Bribes used for other purposes, e.g. a tip to
accelerate the process, a tip to lower a costly
tariff, will not have the same effects. Bribes of this
sort are unethical if
The offer of a payment is initiated by the payer; and
The payment made to induce the payee to not act in
the best interests of the pubic; and
The nature and purpose of the payment are considered
ethically objectionable in the local culture
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Antitrust Laws
Sherman Antitrust Act 1890
Prohibits competing companies from making
agreements to fix prices, to divide up territories
or customers, or to restrict the quantity of
goods they bring to market
Prohibits a company that already holds a
monopoly from using its monopoly power to
maintain its monopoly or to extend its
monopoly into other markets
Does not prohibit a company from acquiring a
monopoly through legitimate business dealings,
e.g. having a better product, a shrewd
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strategy, or sheer luck.

The Do-Nothing View on OC

Oligopoly should be left alone because:
high level of competition is still maintained
by its relation to other competing industries;
and
the economic power of any large corporation
may be balanced and restrained by the
countervailing power of other large corporate
groups in society; and
some oligopolies are providing consumers
with products they freely choose to buy and
therefore are efficiently using economic
resources to improve consumer welfare; and
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big is good (economies of scale).

The Antitrust View on OC

assumptions:
discretion over prices is likely in OC markets
concentration leads to a decline in price competition;
and
high degree of concentration is unnecessary, each
should not earn more than 3%-5% of market share
monopoly profits always appear in highly
concentrated market
concentration is aggravated by product
differentiation and advertising, and advertising leads
to high profits
press release or other means signal oligopolistic
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coordination

The Antitrust View on OC

Prices and profits of concentrated
industries are higher than they should be
and that monopolists and oligopolists use
unfair tactics against their competitors
and suppliers.
By breaking up large corporations into
smaller units, higher levels of competition
will emerge.
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The Regulation View on OC

Oligopoly corporations should not be
broken up because their large size has
beneficial consequences:
Mass production and distribution are possible
Economies of scale

Oligopoly corporations should be

regulated to prevent unethical practices
Nationalization?
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CONTACT
Nattawoot Krongkajonsook
Email: fbusnwk@ku.ac.th
Homepage :

http://fin.bus.ku.ac.th/16/nattawoot.htm

Mobile: 01- 6394990

Office:
Department of Finance, 4th Floor of Faculty of
Business Administration, Kasetsart University
Tel: 02-9428777 Ext. 356

Office Hours:
Monday and Wednesday, 10 am 2 pm.
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