Chapter 4

Ethics in the Marketplace

Class: MAN3509 Business Ethics
Instructor: Sudiyanti, S.E., M.Sc.
Department of Management
Faculty of Economics and Business
Gadjah Mada University
Chapter Outline
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Why is a perfectly competitive free market said
to be so desirable from an ethical point of view?
What is a monopoly market and why are such
markets seen as ethically questionable?
How do oligopoly markets provide opportunities
for anticompetitive behaviors that are ethically
questionable?
Can we do anything to remedy the ethical
shortcomings of monopolies and oligopolies?
Key Concepts
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Perfect Competition
A free market in which no buyer or seller has the
power 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 which new sellers are bared from
entering
Oligopoly
A market shared by a relatively small number of
large firms that together can exercise some
influence on prices
Perfect Competition
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Market
Any forum in which people come together for the
purpose of exchanging ownership of goods or
money
Characteristics of Perfectly Competitive Free
Markets:
1. Numerous buyers and sellers with no
substantial share of the market
2. All buyers and sellers are easy to enter or leave
the market
3.
Perfect Competition (cont.)
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Characteristics of Perfectly Competitive Free
Markets:
3. Every buyer and seller has perfect knowledge of
the prices, quantities, and quality of all goods
being bought and sold
4. The goods being sold are so similar to each other
5. The costs and benefits of producing or using the
goods are borne entirely not by other external
parties
6. All buyers and sellers are utility maximizers
7. No external parties regulate the price, quantity or
quality
Equilibrium in Perfectly Competitive
Market
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Demand Curve
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
Supply Curve
A line on a graph indicating
the prices producers must
charge to cover the average
costs of supplying a given
amount of a commodity
Equilibrium in Perfectly Competitive
Market (cont.)
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Principle of Diminishing Marginal Utility
Each additional item a person consumes is less
satisfying than each of the earlier items the person
consumed.
Principle of Increasing Marginal Costs
After a certain point, each additional item a seller
produces costs more to produce than earlier items.
Point of Equilibrium
The point at which the supply and demand curves
meet, so amount buyers want to buy equals amount
sellers want to sell and price buyers are willing to pay
equals price sellers are willing to take.
Ethics and Perfectly Competitive
Markets
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Moral Outcomes of Perfectly Competitive
Markets
Achieve a certain kind of justice
Satisfy a certain version of utilitarianism
Respect certain kinds of moral rights
Monopoly Competition
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Monopoly Market Characteristics
One seller
High entry barriers
Quantity below equilibrium
Price above equilibrium and supply curve
Can extract monopoly profit
Monopoly Competition: Justice, Utility,
and Rights
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Ethical Weaknesses of Monopolies
Violation of capitalist justice
Economic inefficiency
Lack of respect for negative rights
Oligopolistic Competition
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Imperfectly Competitive Markets
Markets that lie somewhere on the spectrum
between the two extremes of the perfectly
competitive market with innumerable sellers and
the pure monopoly market with only one seller.
Highly Concentrated Markets
Oligopoly markets that are dominated by a few
large firms (e.g. 3 to 8).
Oligopolistic Competition (cont.)
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Horizontal Merger
The unification of two or more companies that
were formerly competing in the same line of
business.
Explicit Agreements
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Price Fixing
An agreement between firms to set their prices at
artificially high levels.
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.
Explicit Agreements (cont.)
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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.
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.
Explicit Agreements (cont.)
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Retail Price Maintenance Arrangements
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.
Explicit Agreements (cont.)
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Unethical Practices in Oligopoly Industries
Price-fixing
Manipulation of supply
Exclusive dealing arrangements
Tying arrangements
Retail price maintenance agreements
Price discrimination
Tacit Agreements
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Price Leader
The firm recognized as the industry leader in
oligopoly industries for the purpose of setting
prices based on levels announced by that firm.
Bribery
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Some considerations in determining the ethical
nature of payments used for purposes other than
to shut out other competitors from a market:
1. Is the offer of a payment initiated by the payer or
does the payee demand the payment by
threatening injury to the payers interests? If the
threatened injury is large enough, the payer may
not be morally responsible for the act, or the moral
responsibility may at least be diminished.
Bribery (cont.)
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2. 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? 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
Bribery (cont.)
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3. Are the nature and purpose of the payment
considered ethically unobjectionable in the local
culture? If a form of payment is a locally accepted
public custom and there is a proportionately
serious reason for making the payment, then it
would appear to be ethically permissible on
utilitarian grounds.
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Bribery (cont.)
Main Views on Oligopoly
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Antitrust view
Do-nothing view
Regulation view
Oligopolies and Public Policy
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Trust
An alliance of previously competitive oligopolists
formed to take advantage of monopoly powers.
The Anti-trust View
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Assumptions:
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
because the most efficient scale of operation is
not more than 3 to 5% of the industry. A high
degree of concentration is unnecessary.
The Anti-trust View (cont.)
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Assumptions:
4. There is a positive correlation between
concentration and profitability that gives
evidence of monopoly power in concentrated
industries-the ability to elevate prices and the
persistence of high profits.
5. Concentration is aggravated by product
differentiation and advertising. Advertising is
correlated with higher profits.
6. There is oligopolistic coordination by signaling
through press releases of other means.
The Do-Nothing View
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1. 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
balanced and restrained by the countervailing
power of other large corporate groups in society.
3. Markets are economically efficient even when there
are as few as three significant rivals in the market
(Chicago School of Anti-trust).
4. Big is good particularly in light of the globalization
of business that has taken place during recent
decades.
The Regulation View
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Mass production and mass distribution of goods
can be carried out only by using the highly
centralized accumulation of assets and personnel
that large corporation makes possible.

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 ensure consumers are not harmed.

The nationalization is not in the public interest
unresponsive and inefficient bureaucracies.
Case for Discussion
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Nestle
* Infant formula
* dangerous if used with poor water
* a scientific product from the rich
world
* irregular use is dangerous
* customers with limited
understanding of their interests
* legal, unregulated product
* boycott for some 15 years in the
US and in Europe
* Nestl changed, but not quite
enough
Big firms have a lot of
power (define).
Why should we allow
firms to generate this
power?
How can we keep
them from abusing
their power?
Sources
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M.Sc.
Falkenberg, Andreas W., 2008, ORG408 - Ethics
and Culture, Universitetet i Agder Norway.
Velasquez, Manuel G., 2011, Business Ethics:
Concepts and Cases, 7th edition, NJ: Pearson
Prentice Hall.
www.transparency.org