Ethics in Marketplace

Ethics in marketplace

Market: Is any forum in which people come together for the purpose of exchanging ownership of goods and money.

Competition: Is any rivalry between two or more firms.

Market Competition: But market competition involves more than the rivalry between two or more firms

There are three models of describing three degrees of competition in the market:

1. Perfect Competition

2. Pure Monopoly

3. Oligopoly

Perfect Competition

Perfect Competition has the following characteristics:

Large no. of buyers and sellers.All buyers and sellers can freely enter or exit the

market.The goods being sold are so similar to each other.No external party like government set the price,

quality and quantity of the goods being bought or sold.

Free competitive markets also need:

A private property systemSystem of ownershipSystem of production

Equilibrium point:

Is the point at which the supply and demand curves meet, so the amount buyers want to buy equals amount seller wants to sell and price buyers are willing to pay equals price seller are willing to take.

Moral Outcomes Of Perfectly Competitive Market

Achieve a certain kind of justice i.e. Capitalist justice.

Maximize utility in the form of market efficiency.

Respect certain kind of moral standards.

Reason for downward sloping demand curve??

Principle of diminishing marginal utility

Ethics & perfectly competitive markets Capitalist justice (receive the value of what you

contribute) :-

1. Seller’s point of view: at equilibrium point, seller’s contribution is equal to the price

2. Buyer’s point of view: at equilibrium point, price consumer pays equals the worth of goods.

Maximizes utility of buyer & seller by leading them to allocate, use & distribute their goods with perfect efficiency:-

1.Motivates firms to invest resources in industries where consumer demand is high. ( effective allocation)

2.Encourages to minimize amount of resources consumed in producing a commodity. ( efficient use of resources)

3.Distributes commodities in a way buyer’s desire.

Respects the negative rights of buyers & sellers:-

1.All are free to enter & leave. ( negative right of freedom of opportunity)

2.All have full knowledge. ( negative right of freedom of consent)

3.No single buyer or seller dominates. ( negative right of freedom from coercion)

Cautions 1. Do not establish any other form of justice.

( ignore egalitarian justice)2. Maximizes the utility of participants of

markets, given the constraint of their budget.

3. Might diminish the positive rights of those outside ( who cannot compete)

4. Ignores & conflicts with the demands of caring.

MonopolyFeatures:-1.One seller2.High entry barriers3.Quantity below equilibrium4.Prices above equilibrium & supply curve5.Can extract monopoly profit

Will the monopoly firm necessarily choose to maximize its profits?????

Monopoly competition: Justice, Utility & RightsUnregulated monopoly markets fall short of

these 3 values.Ethical weaknesses of Monopolies:-1.Violation of capitalist justice2.Economic inefficiency3.Lack of respect for negative rights

Oligopolistic Competition1. ‘Impure’ market structures.2. Exercise some influence over price3. Easier for firms to unite ( & act as a single giant)4. Not open but closed instead of others sellers being able to "freely

and immediately enter" other sellers are prevented from entering due to

high start-up costs anticompetitive machinations of the oligopoly

firms long-term contracts with buyers etc.

6. Not distributed but concentrated instead of "numerous sellers, none of

whom has a substantial share of the market"

a few sellers have a near 100% share of the market

Horizontal mergers: the chief cause of oligopolistic conditions

Horizontal merger :-"unification of two or more companies that

were formerly competing in the same line of business"

e.g., Daimler, Disney-Times-Warner

Ethical consequences1. Violations of capitalist justice 2. Negative impacts on economic utility

distributive inefficiencies productive inefficiencies

3. Negative (economic freedom) rights violations

others are prevented from entering the market

sellers dictate terms buyers have no recourse

How do oligopoly industries affect the market?

Explicit AgreementsTacit Agreements &Bribery

Explicit agreements1. Price –fixing:Firms agree secretly to set their prices at

artificially high levels.

2. Manipulation of Supply: firms agree to limit their production result in artificially induced shortages hence in artificially high prices

3. Exclusive Dealing Arrangements: firms sell to retailers on condition that

retailers will not buy from certain other companies (contra openness)

or will not sell outside of a certain geographical area (contra distribution)

4. Tying Arrangements: The seller agrees to sell to buyer only on

condition that the buyer agrees to buy other products from the firm.

5. Retail Price Maintenance Agreements:

manufacturer sells to retailer only on the condition that they agree to charge the same set retail price for the goods.

Effects diminishes competition between retailers removes competitive pressure on the

manufacturer to lower prices decrease production costs

6. Price Discrimination: charging different prices to different buyers for identical goods.

Tacit Agreements:

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.

Bribery Bribes can be used to secure the sale of

products Serve to shut out other sellers & hence, are

anticompetitive Ethical rules for bribery :1. Is the offer of payment initiated by the payer? 2. Is the payment made to induce the payee to

act in a manner contrary to the duties or responsibilities of their office?

3. Are the nature and purpose of the payment considered ethically unobjectionable by the local culture?

BriberySituation:

Tom is the Purchasing Manager for Cyclone IndustriesTom’s job is to buy stuff for Cyclone

Carol is a Salesperson for Penn Corp.Alice is a Salesperson for Omega Corp.Penn Corp. and Omega Corp. are competitors

Carol and Alice are both trying to sell to CyclonePenn’s bid is better than Omega’s bidAlice offers Tom $1000 if he decides to award

the deal to OmegaWhat makes this a bribe?Is it ethical for Tom to accept the

bribe? Why?

Main Views of Oligopoly Power:Do-nothing ViewAntitrust ViewRegulation View

Do-nothing View

1. It is argued that although competition within industries has declined, it has been replaced by competition between industries with substitutable products.

2. The economic power of any large corporation may be balanced and restrained by the “countervailing power” of other large corporate groups in society.

3. Large corporations are good particularly in light of the globalization of business that has taken place during recent decades.

Antitrust ViewAssumptions:1. If an industry is not atomistic with many

small competitors, there is likely to be administrative discretion over prices.

2. Concentration results in recognized interdependence among companies, with no price competition in concentrated industries.

3. Concentration is due mostly to mergers.4. There is a positive correlation between

concentration and profitability.

Assumptions

5. Concentration is aggravated by product differentiation and advertising.

6. There is oligopolistic coordination by signaling through press releases or other means.

View: By breaking up large corporations into

smaller units, higher levels of competition will emerge in those industries that are currently highly concentrated, which results in decrease in explicit and tacit collusion, lower prices, greater innovation and increased development.

Regulation View

Concentration gives large firms an economic power that allows them to fix prices and engage in other forms of behavior that are not in the public interest. To ensure that consumers are not harmed by large firms, regulatory agencies and legislation should be set up to restrain and control the activities of large corporations.