Business Ethics

Lecture 09+10:

Chapter four: Ethics in the marketplace

Source: Velasquez
 This chapter examines:

1. The ethics of anti-competitive practices,

2. The underlying rationales for prohibiting them,

3. The moral values the market competition is meant

to achieve.
 Free-Market Competition
Monopolistic
Competition
Oligopoly

One Many

Monopoly Perfect Competition

Sellers
Perfect Competition

Perfect competition exists when there are many

sellers in a market and no seller is large enough to
dictate the price of a product. Under perfect
competition, seller produce products that appear to
be identical.

➢Agricultural product (apples, potatoes)

Monopolistic Competition

Monopolistic competition exist when a large

number of sellers produce products that are very
similar but are perceived by buyers as different.
Product differentiation is a key to success in this
competition.

➢T-shirts, candy.
Oligopoly

An oligopoly is a form of competition in which just

a few sellers dominate a market.

➢Automobiles, tobacco, soft drinks, aircraft.

Monopoly

Monopoly is a market in which there is only one

seller for a product or service.

➢Natural gas, electricity, water, diamonds.

Feature of Perfect Competition

1. Numerous sellers and buyer, none having lion

share of a market,

2. There is insignificant or no entry / exit barrier,

3. Every buyers and sellers has full and perfect

knowledge of the product (prices, quantity and
quality).
Feature of Perfect Competition

4. The goods being sold in the market is so similar,

that no one cares from whom each buys or sells.

5. The cost and benefits of producing or using the

goods being exchanged are borne entirely by
buyers and sellers and not by any other external
parties,
Feature of Perfect Competition

6. All buyers and sellers want to get as much as

possible for as little as possible,

7. No external parties( Government) regulate the

price, quantity or quality (in a significant manner).
Equilibrium point

In a perfectly competitive market (where we can

find the 7 features that been stated earlier) prices
and quantities always move toward what is called
the equilibrium point.
Equilibrium point

EP is the point at which:

1. The amount of goods buyers want to buy

exactly equals the amount of goods sellers want
to sell, and

2. The highest price buyers are willing to pay

exactly equals the lowest price the sellers are
willing to take.
Equilibrium point (The Law of Demand)

The law of demand states that, if all other factors remain

equal, the higher the price of a good, the less people will
demand that good. The graph below shows that the curve is
downward sloppy.

The higher the price,

the lower the quantity
demanded
Equilibrium point (The Law of Supply)

the law of supply demonstrates the quantities that will be

sold at a certain price. But unlike the law of demand, the
supply relationship shows an upward slope.

The higher the price,

the higher the quantity
supplied
Equilibrium point
Equilibrium point

At the equilibrium point every seller finds a willing

buyer and every buyer finds a willing seller.

The perfectly competitive market satisfies three

moral criterions.
a) Justice,
b) Utility (Efficiency),
c) Rights.
Ethics & perfectly competitive market

Perfectly competitive market three major moral

values:

1. The drive that force buyers and sellers to

exchange goods in a way which is just,

2. They maximize the utility of buyers and sellers

by leading to allocate use and distribute their
goods with perfect efficiency.
Ethics & perfectly competitive market

3. They bring about these achievements in a way

that respects buyers’ and sellers' right of free
consent.
How Perfectly competitive market brings justice?

According to 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.
How Perfectly competitive market brings justice?
(From sellers’ point of view)
The supply curve indicates the price producers must
receive to cover what it costs them to produce given
quantities of good.

If prices and quantities fall below the sellers’

supply curve the buyers are unfairly short-charging
the sellers and if prices rise above the sellers’ supply
curve, the average seller is unfairly overcharging
consumers.
Equilibrium point
How Perfectly competitive market brings justice?
(From Buyers’ point of view)
The demand curve indicates the highest price the
consumers are willing to pay for given quantities of
goods.

If the prices and quantities of goods were to rise above

the consumer’s demand curve, the average consumer
would be contributing more for those goods; if prices fall
below the demand curve the average customers unfairly
contributes less to the sellers.
How Perfectly competitive market brings justice?
From the previous slides we can assume that there
is only one single point:“Equilibrium point”; Here
the prices on average are just both from the buyer’s
and sellers point of view.

So, the PCM reestablishes capitalist justice for its

participants by continually leading them to buy and
sell goods at the one quantity and the one price at
which each receives the value of what is
contributed.
How PCM helps to maintain an efficient market?

A market system is perfectly efficient when all

goods in all markets are allocated, used and
distributed in a way that produces the highest level
of satisfaction possible from those good.

A system of perfectly competitive markets achieves

such efficiency in the following three ways:

1. Allocation, 2. Usage, 3. Distribution

How PCM helps to maintain an efficient market?

1. A perfectly competitive market system motivates

firms to invest resources in those industries where
consumer demand is high and to move resources
away from industries where consumer demand is
low.
How PCM helps to maintain an efficient market?

At first the highly demanded goods has a higher

price above the equilibrium point (Because demand
is more than supply);

But eventually it falls at the equilibrium point,

when the other firms come to this region.
(ALLOCATION)
How PCM helps to maintain an efficient market?

2. PCM drives the seller to reduce price by forcing

them to use low price resources, modern technologies
and up-to-date manufacturing procedures.

This make sure that the manufacturer makes the

optimum usage of their allocated resources and also
make sure that the buyers money is used at the most
valued ways. (USAGE)
How PCM helps to maintain an efficient market?

3. PCM distributes commodities among buyers in a

way that all buyers receive the most satisfying
bundle of commodities they can purchase, given the
commodities available to them and the money they
can spend.
How PCM helps to maintain an efficient market?

When buyers have completed their buying, they will

know that they can’t improve on their purchases by
trading their goods with other consumers,

Because all consumers can buy the same goods at

the same price. (Distribution)
Rights: Positive Vs Negative

Negative: Negative rights are often some varietal of a

right to non-interference. They impose duties on others
to leave you alone and let you do things that are
important to you, like speak your mind or make your
own decisions.

Ex: Freedom of speech & private property, freedom

from coercion, slavery & violent crime, freedom of
worship, freedom of a fair trial.
Rights: Positive Vs Negative

Positive: Positive rights are usually rights to receive

some benefit.

Ex: police protection of person & property, right to

counsel, economic / social / cultural rights such as
food / housing / public education/ national security /
employment / military / health care / social security /
minimum standard of living.
How PCM respects buyers and sellers negative rights?

1. The buyers and sellers are neither forced into nor

prevented from engaging in a certain business. It
insures freedom of opportunity.
2. All exchanges are voluntary, that is participants are
not forced to buy or sell anything without their free
consent. No external agency (Government) forces them
to buy or sell goods they don’t want at prices they
don’t choose in quantities they don’t desire. It insures
freedom of consent.
How PCM respects buyers and sellers negative rights?

3. No single seller or buyer will so dominate the

perfectly competitive free market that others are
forced to accept the terms or go without. It insures the
freedom from coercion.
Critics of PCM while interpreting their moral issues
1. PCM don’t respond to the needs of those who are
outside the marketplace or who have little to
exchange. PCM impose no restrictions on how much
wealth each participants accumulates relative to the
others. So, they ignore Egalitarian justice and may
incorporate large inequalities. (JUSTICE)

2. PCM only maximizes utility for those people who

can participate in the marketplace. The utility of the
outsiders are not vibrated. So, the overall societal
welfare is not accomplished here. (UTILITY)
Critics of PCM while interpreting their moral issues
3. PCM might insure the negative rights for those
people who can participate in the marketplace. But
doing so at the same time they can violate the
positive rights of those people who are actually out
of the marketplace. (RIGHT)

4. PCM ignores and even conflict with the demands of

caring. If individuals divert their resources to spend
them on caring for those with whom they have close
relationships, instead of investing, using and
distributing them efficiently, they will lose out.
 Critics of PCM while interpreting their moral issues

5. PCM may have a pernicious effect on people’s moral

characters. Producers are constantly pressured to reduce
their costs, consumers are constantly pressured to
patronize sellers that provide the highest value, employees
are constantly pressured to seek out employers that pay
higher wages. These sort of traits develop character traits
associated with maximizing individual economic well-
being and neglect character traits associated with building
close relationships to others.
Critics of PCM while interpreting their moral issues

6. The three values of capitalist justice, utility, and

negative rights are produced by free markets only if
they embody the seven conditions that define Perfect
competition.

It is very unrealistic, that all the seven condition

would be maintained simultaneously.
Monopoly Competition

In monopoly market the two of the characteristics of

the PCM is not present; which are:

1. In monopoly market the seller is one who has all

the shares of market all by itself,

2. Unlike the PCM other sellers can’t enter due to

patent laws, high entry costs etc.
Monopoly Competition (Justice, Utility & Rights)
How justice is violated in MM?

In a MM the prices for goods are set above the

equilibrium level, and quantities are set at less than
the equilibrium amount.

The high prices the seller forces the buyer to pay are
unjust, and these unjustly high prices are the source of
the sellers excess profit.
Monopoly Competition (Justice, Utility & Rights)
How efficiency (Utility) is declined in MM?

In MM market efficiency declines in the following

three ways:

1. MM allows a firm to use resources in a way that

will produce shortages of those things that buyer
wants.( allocation)
Monopoly Competition (Justice, Utility & Rights)
How efficiency (Utility) is declined in MM?

2. MM don’t encourage suppliers to use the allocated

resources optimally and reduce cost using up-to-date
procedure or technology. Because the profit is high anyway.
(Usage)
3. MM allows the seller to introduce price differentials that
block some of the customers from putting together the most
satisfying bundle of commodities that they can purchase.
(Distribution)
Monopoly Competition (Justice, Utility & Rights)
How MM embody restriction on the negative rights?.

1. Sellers are not free to enter (Freedom of

opportunity)
2. MM may force the buyers to buy a goods that
they may not want in quantities they may not
desire. (freedom of consent)
3. MM is dominated by a single seller, who
determine the price and quantity and can force
others. (freedom from coercion)
Oligopoly Competition

It is an imperfectly competitive market, and it lies

somewhere on the spectrum between the two extremes
of PCM & MM.
It also lacks two of the PCM’s feature; namely:

1. Instead of many sellers there are only a few

significant sellers,
2. Other sellers are not able to freely enter the
market.
 Oligopoly Competition (Unethical Activities)
Explicit
Tacit Agreement Bribery
Agreement

• Price fixing
• Manipulation
of supply
• Exclusive
dealings,
• Tying up,
• Retail Price
Maintenance,
• Price
Discrimination
Oligopoly Competition (Unethical Activities)

Explicit Agreements: The manager of the few firms

operating in an oligopoly can meet and jointly agree to
some agenda that may maximize their benefits and
harm justice, utility (allocation, usage, distribution)
& right. The unethical practices are as follows:
1. Price fixing: An agreement between firms to set
their prices at artificially high levels. The
competitors meet in secret and then fix price level.
Ex: Syndication in Major Drug market of USA.
Oligopoly Competition (Unethical Activities)
3. Manipulation of supply: When firms in an oligopoly
industry agree to limit their production so that prices rise to
levels higher than those that would result from free
competition. Ex: Syndication of oil importers in Bangladesh.

4. Exclusive dealing Arrangements: When a firm sells to a

retailer on condition that the retailer will not purchase any
products from other competitors and / or will not sell
outside of a certain geographical area. Ex: Only Pepsi, then
4 extra bottles for every crate.
Oligopoly Competition (Unethical Activities)

5. 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. Ex: Console
with cartridge.

6. Retail price maintenance agreements: A manufacturer

sells to retailers only on condition that they agree to
charge the same set retail prices for its goods. Ex: A set
price for ready spice for all the retailers.
Oligopoly Competition (Unethical Activities)

7. Price discrimination: To charge different price to

different buyers for identical goods services.

Ex: Predatory Pricing or Dumping .. .

Oligopoly Competition (Unethical Activities)

Tacit agreement: it is an unspoken form of cooperation

among the sellers of oligopoly market. Here the
participating companies define one “price leader “ and
implicitly without any explicit agreement they continue to
set price at the level set by the price leader.
No overt collusion is required, only an unspoken
understanding that all firms will follow the price
leadership of the dominant firm and will not engage in
the price lowering tactics of competition.
Oligopoly Competition (Unethical Activities)

Bribery: Political briberies directed to Government or

Top Management of a certain organization, can also
introduce diseconomies into the operation of a market.
Impact of bribery:

a) Decline in market competition, briber becomes a

monopoly seller,
b) Can impose higher price, neglect quality, cost
control, & wastages.
Oligopoly Competition (Unethical Activities)
Aftermath of all these activities:

1) Consumers must pay the unjust price of

oligopolies, (Justice)
2) Resources are no longer efficiently allocated &
used; distribution to all the customers are also
hampered, (Efficiency)
3) Freedom of both the consumers and potential
competitors diminishes. (Rights)