Ethics in Marketplace -This chapter examines the ethics of anticompetitive practices(price fixing, monopolistic profit etc), the underlying

rationales for prohibiting them and the moral values that market competition is meant to achieve. When a market ceases to be competitive , it will result in injustice, a decline in social utility and restriction of peoples freedom of choice. -To get a clearer picture of the nature of market competition we examine 3 models describing 3 degree of competition in the market. No1. Perfect Competition -A market is any forum in which people come together for the purpose of exchanging ownership of goods for money.It can be small or temporary(pasar malam) nor quite large(oil market) -A perfectly competitive free market is one in which no buyer or seller has the power to significantly affect the prices of goods. Being exchanged. It has 7 features. a.Numerous buyers and sellers and none has a substantial share of the market. b.All buyers and sellers can freely and immediately enter or leave market

c.Every buyer and seller has full and perfect knowledge of what every other buyer or seller is doing, including knowledge of prices,quantities etc of goods sold and bought. d.The goods being sold in the market are so similar to each other that no one cares from whom each buys or sell. e.The cost 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. f.All buyers and sellers are utility maximizers:Each try to get as much as possible for as little as possible. g.No extrenal parties (such as government) regulate price,quantity or quality of any of the goods being bought and sold in the market. (qualifies as free market) -In addition to these 7 features, free competitive markets also need an enforceable private property system, an underlying system of contract and an underlying system of production.

In such a market, the price rises when fewer goods are available and these rising prices induce sellers to provide greater quantities. so with more goods, the prices tend to fall and this will lead to sellers to decrease quantities. So, the prices and quantities always move toward the equlibrium point. A point at which the amount of good buyers want to buy is equal to amount of goods sellers want to sell, at a price the highest a buyers willing to pay equals the lowest price sellers are willing to take.. Every seller finds a willing buyer and every buyer finds a willing seller. Here, this market satisfies three of the moral criteria:justice utility and rights. -The supply and demand curves can be used to explain how the 3 moral criteria are achieved. Equilibrium in Perfectly Competitive Markets. -A demand curve is a line on a graph indicating the most that consumers/buyers would be willing to pay for a unit of some product when they buy different quantities of those products. The fewer they buy , the more they are willing to pay. The curve slopes down to right. EX. They buy 600 m t of potates, they are willing to pay $1.

-Why consumer willing to pay less as they buy more potatoes?The principle of diminishing marginal utility states that each additional item a person consumes is less satisfying than each of the earlier items the person consumed.. Durian. -Consequently , if the price of a product were to rise above their demand curve, average buyers will see themselves as losers-that is paying out more for the product than it is worth to them. Buyers would have little motive to buy, and they would tend to leave the market to spend their money in other market. -At any point below the demand curve, they would see themselves as winners.paying less than what it is worth to them.here new buyers will flock in the market because they would perceive a chance to buy the product for less than what is worth to them. -A supply curve is a line on a graph indicating the prices producers must charge to cover the average costs(including normal profit)of supplying a given amount of a commodity.Beyond a certain point,, the more units producers make, the higher the average costs of making each unit. So, curve slopes upward to the right.Ex. It costs farmers on average $1 to grow 100 m t of potatoes.

Why increase costs and not decrease-economies of scale? -The principle of increasing marginal costs states that after a certain point, each additional item the seller produces costs more to produce than earlier items. Because of limited productive resources. farmers run out of naturally productive land. -The prices on the supply curve represent the minimum producers must receive to cover their ordinary costs and make normal profit. -When prices fall below the supply curve, producers see themselves as losers: they are receiving less than what it costs them to produce the product.. Here , they will tend to leave the market and invest their resources in other more profitable market. -If prices rise above the curve, new producers will come crowding into the market, attracted by the opportunity to invest their resources in a market where they can derive higher profits than higher market. -Sellers and buyer trade in the same market. So combine the graph.

So why does the amounts supplied and the amounts demanded all tend to move toward the point of equilibrium in a perfectly competitive market? If the price of potatoes rise above equilibrium point to $4., producers will supply more goods 500 mt than at equilibrium level 300mt. But at high price, consumers will purchase fewer goods 100mt than at equilibrium . To get rid of unsold surplus, sellers will be forced to lower prices and decrease production. Eventually,equilibrium prices and amounts will be reached. -in contrast, if price drops below the point of equil., say to $1, then producers will start losing money and will supply less than consumer want to pay at that price.this shortages will lead buyers to bid up the price. So prices will rise and the rising prices will attract more producers into the market thereby raising supply. Eventually equili is achieved -Supposed if amount supplied is 100mt,which is less than equil amount. The supplying costs is $1 and below ,consumer willing to pay $4.sellers will raise their price to $4 and make abnormally high profit of 43..This abnormal profit will attract outsiders into the market, increasing quantity and decreasing price consumers wiling to pay . Amount supplied will increase to equil point and price will drop to equil price.

-The opposite happens if amount being supplied is 500 mt. here sellers will lower their prices.producers will leave market, lower supply,raise price and establish equil. -Although the model of perfect competition does not describe any real market, it does provide use with a clear understanding of competition and understanding of why it is desirable to keep markets as competitive as possible. Ethics and Perfectly Competitive Market -Perfectly competitive free markets incorporate forces that inevitably drive buyers and sellers toward the so called point of equili. In doing so , they achieve 3 major moral values: a.they lead buyers and sellers to exchange their goods in a way that is just(justice based on contribution only); According to the capitalist criterion of justice, benefits and burden are distributed justly when individuals receive in return at least the value of the contribution that they made to an enterprise.thus the equili point is the one and only point at which prices on avaeage are just both from buyers and sellers point of view.

b.they maximise the utility of buyers and sellers by leading them to allocate , use and distribute their goods with perfect efficiency. c. they bring about these achievements in a way that respects buyers and sellers right of free consent/negative rights. They can leave and enter market with ease. All exchanges are fully voluntary. No single seller or buyer can dominate market. These values can only be achieved by free markets only if the have the 7 conditions that define perfect markets. -When interpreting these moral features of perfectly competitive markets, several cautions must be in order.: a.Perfect market does not establish other forms of justice, such as justice based on needs. Does not respond to needs of people outside market or those who have little to exchange. b. Competitive Markets maximises the utility of those who can participate in the market given the constrains of each participantss budget. However, this does not mean that societys total utility is necessary maximised because there are people that cannot participate in the market(poor, sick, old who have nothing to exchange). Goods only distributed to people who have money. Here, it is clear that although free competitive markets establish certain negative rights for those within the market, they actually diminish the positive rights of those outside the market. c.Free competitive markets ignore and even conflict with the demand of caring/ethics of care.the market pressures individuals to spend their resources 9time, labor, money) efficiently. Individuals are completely independent and takes no account of human relationships that may exist among them.

-Competitive pressures that forces manufacturers to reduce costs, employees to seek only employers with high salaries will diminish the virtues of loyalty , kindness and caring and encourage greed, self mindedness and calculative mentality. No2. Monopoly Competition -The opposite extreme of a perfectly competitive market is the free(unregulated) monopoly market.. 2 perfect market conditions not present. -In a monopoly, instead of having numerous sellers and none have substantial share, the monopoly has only one seller and 100% share. -In monopoly market other sellers cannot enter.. Barriers like patent laws, rights to produce a commodity, high entry cost,quotas by government. -Monopoly can be formed through merging of companies. -A seller in this market can control prices of available goods. -company fix its output at quantity less than equili and at which demand is high ands that it can get high profit.monoploy profit. It is assumed that without external regulatory agencies(such as government), companies will maximise their profits.

-A monopoly market is one that deviates from the ideals of capitalist justice, economic utility and negative rights.. Instead of continually establishing a just equli, the market imposes unjustly high prices on the buyer and generates monopoly profits. Theres no motivation to maximise efficiency as no need to reduce cost and sellers can set high price. Instead of respecting negative rights of freedom, this market create an equality of power that allows the firm to dictate terms to the consumer.. Can force consumers to buy things that they dont want. If you want to buy X , you must also buy Y. No.3 Oligopolistic Competition -Few industries are monopolies. most industries are dominated by 4 or more firms. Oligopoly is a type of imperfect competitive markets. They are markets that lie somewhere on the spectrum between the two extremes of the perfectly competitive market and the pure monopoly market. 2 of seven perfect competition conditions not present: -Instead of many sellers, there are only a few significant sellers. Can come together and influence price. Each firm hold between 25%-90% share. No of firms may range from 2-25 in an industry. -Other sellers not able to freely enter the market.-high costs, sellers agreement with buyers,good brand recognition. Highly concentrated markets are oligopoly markets that are dominated by a few large firms (3 to 8)

-The most common causes of an oligopolistic market structure are horizontal mergers; which is the unification of two or more companies that were formerly competing in the same line of business. How does oligopoly industries affect the market? -by explicitly or tacitly agreeing to set to set their prices at the same levels and to restrict their output accordingly, the oligopolists can function much like a single giant firm. This unity and together with barriers to entry can result in the same high prices and low supply levels of a monopoly market. -If the justice, freedom and social utility that competitive markets achieve are important values for society, than the manager of the firms should not do such agreements and other things that restrict competition . -Price fixing:When firms operate in such oligopoly market, it is easy enough for their managers to meet secretly and agree to set their prices at artificially high levels. -Manipulation of supply:When firms in an industry agree 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. Official distributor/authorised agent. -Tying Arrangement:When : a manufacturer sells a buyer a certain good only on condition that the buyer agrees to purchase certain other goods from the firm. -Retail price Maintenance agreements: If a manufacturer sells to retailers only on condition that they agree to charge the same set retail prices for its goods. Recommended retail price. Forcing to follow the RRP will dampened competition between retailers. -Price discrimination: To charge different prices to different buyers for identical goods or services. Good or bad? -Sonnenfeld and Lawrence found that several industry and organisational factors tended to lead to price fixing, including the following: a.A crowded and Mature market: large number of new entrants or declining demand create overcapacity in a market, resulting in decline in revenues. S

b.Job order nature of business: If orders are priced individually so that pricing decisions are made frequently and at low levels of the organisation, collusion among low level salespeople is more likely. c.Undifferentiated products: When products are similar and the only a way to compete is y reducing prices, salespeople might feel that the only way to keep prices from collapsing is by getting together and fixing prices. d.Culture of business When organisations salespeople feel that price fixing is a common practice and is desired, condoned, accepted, rationalised and even encourage by the organisation. e.Personnel practices:When managers are evaluated and rewarded solely or primarily on the basis of profits and volume, so that bonuses, advancement and other rewards are dependent on these objectives, they will come to believe that the company wants them to achieve these objectives regardless of the means. f.Price decisions:When organisations are decentralised so that pricing decisions are pushed down into the hands of a lower part of the organisation, price fixing is more likely to happen.

g.Trade associations:Allowing sales people to meet with competitors in trade associations meeting will encourage them to talk about pricing and to begin to engage in price setting arrangements with their counterparts in competing firms. h.Corporate legal staff:When legal departments fail to provide guidance to sales staff until after a problem has occurred, price fixing problems are more likely. -Tacit Agreements.:The more common types of price setting in oligopolies are accomplished through some unspoken form of cooperation/undersstanding against which it is difficult to legislate. To coordinate their prices, some oligopoly industries will recognise one firm as the industry leader. Each firm will tacitly agree to set its prices at the levels announced by the leader, knowing that all other firms will also follow. Cigarretes price list. -Bribery:when used to secure the sale of a product, political bribery can also introduce diseconomies into the operations of markets. The product of the briber no longer competes equally with the product of other sellers on the basis of its price or merits.bribes can also be used to prevent other competitors from entering market. Government only buys from seller who bribes, it becomes monopoly seller. MNC bribing foreign gov.

-Bribes used to secure sale of products by shutting out other sellers differ, of course from bribes used for other purpose like a custom officer asks for tips to shorten processing time. -In determining the ethical nature of payments used for purposes other than to shut out other competitors from the market, the following considerations are relevant: a.Is the offer of payment initiated by the payer(bribe), or does the payee demand the payment by threatening injury to the payers interest?(this is extortion). Here ,the payer may not be morally responsible for the act or moral responsibility may at least be diminished.(subject to severity of threat) b.Is the payment made to induce the payee to act in a manner that violates the official sworn duty to act in the best interests of the public? Or is the payment made to induce the payee to perform what is already an official duty? If the payee is being induced to violate official duty, then the payer is cooperating in an immoral act because the payee has entered an agreement to fulfill these duties. c.Are the nature and purpose of the payment considered ethically unobjectionable in the local culture? If a form of the payment is a locally accepted public custom and there is a proportionately serious reason for making the payment(it is not intended to erect a market barrier nor to induce an official to violate public duties), then it would appear to be ethically permissible on utilitarian grounds.( but it might violate the Foreign corrupt practices act of 1977)

Oligopolies and Public Policies -Oligopolies are not a modern phenomenon. Toward the end of 19th century, companies that had previously competed with each other began uniting into gigantic Trusts (tobacco trust,Sugar trust, railroads trust)that would then monopolise their markets, raising prices for consumers, cutting prices for suppliers such as farmers. Price fixing, monopoly -In 1890 -The Sherman Antitrust Act was passed. (prohibits competitors from making agreements to fix prices, to divide up markets and territories or customers, restrict the quantity of goods they bring in, prohibits a company that already holds a monopoly from using its monopoly power to maintain its monopoly power or extend it to other markets.) It does not prohibit a company from acquiring a monopoly through legitimate business dealings like a better product or sheer luck) -Anti trust laws were expanded in 1914 by the Clayton Act. Prohibits price distcrimination, exclusive dealing contracts, tying agreements and mergers between companies where the effect may be to substantially lessen competition.

-Although the US has a long history of antitrust legislation, there is still a great deal of debate concerning what gov should do about the power of oligopoly and monopoly.The views are: a.The do nothing view: -Do nothing because the power of large oligopoly corporations is actually not as large as it may first appear. Although competitions within industry declines, it has been replaced by competition between industries with substitute products. Aluminum and cement industries. Apart from that,Galbraith once argued that the economic power of any large corporations may be balanced and restrained by countervailing power of other large corporate groups in society. Gov and unions and consumers groups. -The so called ChicagoSchool of antitrust has argued that markets are economically efficient even when there are as few as 3 significan rivals in a market.Gov should do something with outright price fixing and merger that can cause monopoly but dont try to break up good oligopoly firms. -Finally, others argue that big is particularly good in light of globalisation of business. Need to achieve economies of scale in order to compete with foreign companies.

b.The Antitrust view -Like trust busters in the 19th century, many contemporary economists and antitrust lawyers are suspicious of economic power exerted by oligopoly. They argue that prices and profits in concentrated industries are higher than they should be and that monopolists and oligopolists use unfair tactics against their competitors and suppliers. So, better to break them into smaller companies. By doing so , you get a decrease in exsplicit and tacit collusion, lower prices for consumers, greater innovation and the increased development of cost cutting technologies that will benefit all. c.The Regulation view -This view holds that oligopoly corporations should not be broken up because their large size has beneficial consequences that would be lost if the were forced to decentralised. -To ensure that consumers are not harmed by large firms, regulatory agencies and legislation should be set up to restrain and control activities of large organisation. -However, where some large firms cannot be effectively controlled by the usual forms of regulation, then there should be nationalisation.(government take over) -Critics say , nationalisation will lead to unresponsive and inefficient bureaucracies Public owned companies are not subject to competitive market pressures and this results in higher prices and costs.