ethic4.pptx

8/14/2019 ethic4.pptx

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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 amarket 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 7features.

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


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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 onecares 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 aspossible 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 anenforceable private property system, an underlying system of contract and

an underlying system of production.


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In such a market, the price rises when fewer goods are available and theserising prices induce sellers to provide greater quantities. so with moregoods, the prices tend to fall and this will lead to sellers to decreasequantities. 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 amountof goods sellers want to sell, at a price the highest a buyers willing to payequals the lowest price sellers are willing to take.. Every seller finds awilling buyer and every buyer finds a willing seller. Here, this marketsatisfies three of the moral criteria:justice utility and rights.

-The supply and demand curves can be used to explain how the 3 moralcriteria are achieved.

Equilibrium in Perfectly Competitive Markets.

-A demand curve is a line on a graph indicating the most thatconsumers/buyers would be willing to pay for a unit of some product when

they buy different quantities of those products. The fewer they buy , themore they are willing to pay. The curve slopes down to right. EX. They buy600 m t of potates, they are willing to pay $1.


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-Why consumer willing to pay less as they buy more potatoes?The principle ofdiminishing marginal utility states that each additional item a personconsumes is less satisfying than each of the earlier items the personconsumed.. Durian.

-Consequently , if the price of a product were to rise above their demandcurve, average buyers will see themselves as losers-that is paying out morefor 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 othermarket.

-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 themarket because they would perceive a chance to buy the product for lessthan what is worth to them.

-A supply curve is a line on a graph indicating the prices producers mustcharge to cover the average costs(including normal profit)of supplying a

given amount of a commodity.Beyond a certain point,, the more unitsproducers 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 grow100 m t of potatoes.


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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 naturallyproductive 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.


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So why does the amounts supplied and the amounts demanded all tend tomove toward the point of equilibrium in a perfectly competitive market?

If the price of potatoes rise above equilibrium point to $4., producers willsupply more goods 500 mt than at equilibrium level 300mt. But at high

price, consumers will purchase fewer goods 100mt than at equilibrium . Toget 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 producerswill 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 willrise and the rising prices will attract more producers into the market therebyraising supply. Eventually equili is achieved

-Supposed if amount supplied is 100mt,which is less than equil amount. Thesupplying costs is $1 and below ,consumer willing to pay $4.sellers willraise their price to $4 and make abnormally high profit of 43..This

abnormal profit will attract outsiders into the market, increasing quantityand decreasing price consumers wiling to pay . Amount supplied willincrease to equil point and price will drop to equil price.


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-The opposite happens if amount being supplied is 500 mt. here sellers willlower their prices.producers will leave market, lower supply,raise priceand establish equil.

-Although the model of perfect competition does not describe any realmarket, it does provide use with a clear understanding of competition andunderstanding 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 isjust(justice based on contribution only); According to the capitalistcriterion of justice, benefits and burden are distributed justly when

individuals receive in return at least the value of the contribution thatthey made to an enterprise.thus the equili point is the one and only pointat which prices on avaeage are just both from buyers and sellers pointof view.


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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 eachparticipantssbudget. 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 freecompetitive 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.


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-Competitive pressures that forces manufacturers to reduce costs, employeesto seek only employers with high salaries will diminish the virtues ofloyalty , kindness and caring and encourage greed, self mindedness andcalculative 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 ishigh ands that it can get high profit.monoploy profit. It is assumed thatwithout external regulatory agencies(such as government), companies willmaximise their profits.


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-A monopoly market is one that deviates from the ideals of capitalist justice,economic utility and negative rights.. Instead of continually establishing a justequli, the market imposes unjustly high prices on the buyer and generatesmonopoly profits. Theres no motivation to maximise efficiency as no need toreduce 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 todictate terms to the consumer.. Can force consumers to buy things that theydont 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 perfectlycompetitive 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 togetherand influence price. Each firm hold between 25%-90% share. No of firms mayrange from 2-25 in an industry.

-Other sellers not able to freely enter the market.-high costs, sellers agreement withbuyers,good brand recognition.

Highly concentrated markets are oligopoly markets that are dominated by a fewlarge firms (3 to 8)


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-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 areimportant 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.


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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. 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 organisationalfactors 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


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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 organisationssalespeople 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.


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g.Trade associations:Allowing sales people to meet with competitors in tradeassociations meeting will encourage them to talk about pricing and to begin toengage in price setting arrangements with their counterparts in competingfirms.

h.Corporate legal staff:When legal departments fail to provide guidance to salesstaff until after a problem has occurred, price fixing problems are more likely.

-Tacit Agreements.:The more common types of price setting in oligopolies areaccomplished through some unspoken form of cooperation/undersstandingagainst which it is difficult to legislate. To coordinate their prices, some

oligopoly industries will recognise one firm as the industry leader. Each firmwill tacitly agree to set its prices at the levels announced by the leader, knowingthat all other firms will also follow. Cigarretes price list.

-Bribery:when used to secure the sale of a product, political bribery can alsointroduce 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 fromentering market. Government only buys from seller who bribes, it becomesmonopoly seller. MNC bribing foreign gov.


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-Bribes used to secure sale of products by shutting out other sellers differ, ofcourse from bribes used for other purpose like a custom officer asks for tips toshorten processing time.

-In determining the ethical nature of payments used for purposes other than to shutout other competitors from the market, the following considerations arerelevant:

a.Is the offer of payment initiated by the payer(bribe), or does the payee demandthe payment by threatening injury to the payers interest?(this is extortion).Here ,the payer may not be morally responsible for the act or moralresponsibility 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 paymentmade 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 inan immoral act because the payee has entered an agreement to fulfill theseduties.

c.Are the nature and purpose of the payment considered ethically unobjectionablein the local culture? If a form of the payment is a locally accepted publiccustom and there is a proportionately serious reason for making the payment(itis 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 utilitariangrounds.( but it might violate the Foreign corrupt practices act of 1977)


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Oligopolies and Public Policies

-Oligopolies are not a modern phenomenon. Toward the end of 19thcentury,

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 forsuppliers 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 maintainits 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.


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-Although the US has a long history of antitrust legislation, there is still a greatdeal of debate concerning what gov should do about the power of oligopolyand monopoly.The views are:

a.The do nothing view:

-Do nothing because the power of large oligopoly corporations is actually notas large as it may first appear. Although competitions within industrydeclines, it has been replaced by competition between industries withsubstitute products. Aluminum and cement industries. Apart fromthat,Galbraith once argued that the economic power of any large

corporations may be balanced and restrained by countervailing power ofother large corporate groups in society. Gov and unions and consumersgroups.

-The so called ChicagoSchool of antitrust has argued that markets areeconomically efficient even when there are as few as 3 significan rivals in amarket.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 withforeign companies.


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b.The Antitrust view

-Like trust busters in the 19thcentury, many contemporary economists and antitrustlawyers are suspicious of economic power exerted by oligopoly.

They argue that prices and profits in concentrated industries are higher than theyshould be and that monopolists and oligopolists use unfair tactics against theircompetitors and suppliers. So, better to break them into smaller companies. Bydoing so , you get a decrease in exsplicit and tacit collusion, lower prices forconsumers, greater innovation and the increased development of cost cuttingtechnologies 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 todecentralised.

-To ensure that consumers are not harmed by large firms, regulatory agencies andlegislation should be set up to restrain and control activities of largeorganisation.

-However, where some large firms cannot be effectively controlled by the usual

forms of regulation, then there should be nationalisation.(government takeover)

-Critics say , nationalisation will lead to unresponsive and inefficient bureaucraciesPublic owned companies are not subject to competitive market pressures andthis results in higher prices and costs.

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