Chapter Four

Ethics in the Marketplace

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 people’s 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 3.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 average are just both from buyer’s and seller’s 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 buyer’s and seller’s 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 participants’s budget. However, this does not mean that
society’s 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.
-No2. Monopoly Competition
-The opposite extreme of a perfectly competitive market is the
free(unregulated/pure) monopoly market..
2 perfect market conditions not present:
a.In a monopoly, instead of having numerous sellers and none have substantial
share, the monopoly has only one seller and 100% share.
b.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.
-the market imposes unjustly high prices on the buyer and generates monopoly
profits. There’s no motivation to maximise efficiency as no need to reduce
cost and sellers can set high price.
 Ethical Weaknesses of Monopolies
• Violates capitalist justice.
– charging more for products than producer knows they are worth
• Violates utilitarianism.
– keeping resources out of monopoly market and diverting them to
markets without such shortages
– removing incentives to use resources efficiently
• Violates negative rights.
– forcing other companies to stay out of the market
– letting monopolist force buyers to purchase goods they do not want
– letting monopolist make price and quantity decisions that consumer is
forced to accept
 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.

How does oligopoly industries affect the market?

a.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.

b.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.

c.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.
d.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.
e.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.
Oligopolies and Public Policies
-Oligopolies are not a modern phenomenon. Toward the end of 19 th 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
-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 Chicago School of antitrust has argued that markets are
economically efficient even when there are as few as 3 significant rivals in a
market . Gov should do something with outright price fixing and merger that
can cause monopoly but don’t 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
collusion/cooperation, 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.
-