ETHICS IN OLIGOPOLY & PUBLIC POLICIESBY- NEHAVARSHA PANDEY

OLIGOPOLYCharacteristics of an Oligopoly Market-Few sellers offering similar or identical productsInterdependent firmsBest off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal costLarge barriers to entry Development costs Importance of reputationHighly differentiated, complex productsStrategic interactions between firmsEx: Mobile networks like airtel, Vodafone, Docomo etc.Ex: Cement companies like: Jaypee, ultra tech cement, ambuja cement etc are the identical product manufactured by producers. All the producers come together to take a decision about price of the product, and about the subsidiaries from govt.

Markets with Only a Few SellersDuopolyOligopoly with only two membersDecide quantity to sellIt is the simplest type of oligopoly.Price determined on the marketBy demand

Competition, Monopolies, and CartelsThe duopolists may agree on a monopoly outcome.

CollusionAn agreement among firms in a market about quantities to produce or prices to charge.

CartelA group of firms acting in unison.

Competition, Monopolies, and CartelsAlthough oligopolists would like to form cartels and earn monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists.

Oligopolies can set high prices through explicit agreements to restrain competition. The more highly concentrated the oligopoly, the easier it is to collude against the interests of society, economic freedom, and justice. The following list identifies practices that are clearly unethical:

Price Fixing- when companies agree to set prices artificially high.

Manipulation of Supply when companies agree to limit production.

Exclusive Dealing Arrangements-when a company sells to a retailer only on condition that the retailer will not purchase products from other companies and/or will not sell outside a certain geographical area.

Tying Arrangements-when a company sells to a retailer only on condition that they agree to charge the same set retail prices.

Price Discrimination-when a company charges different prices to different buyers for the same goods or services.

Boycott - agreement among competitors not to deal with a supplier or a customer.

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, it is engaging in retail price maintenance. A manufacturer may publish suggested retail prices and may even refuse to sell to retailers who regularly sell their goods at lower prices. It is illegal, however, for retailers to enter an agreement to abide by the manufacturers prices and illegal for manufacturers to force retailers to enter such an agreement.

Bribery

Bribes used to secure the sale of products by shutting out other sellers results in a decline in market competition, and therefore are unethical. Bribes used for other purposes, e.g. a tip to accelerate the process, a tip to lower a costly tariff, will not have the same effects. Bribes of this sort are unethical if The offer of a payment is initiated by the payer; andThe payment made to induce the payee to not act in the best interests of the pubic; andThe nature and purpose of the payment are considered ethically objectionable in the local culture

PUBLIC POLICY TOWARD OLIGOPOLIESCooperation among oligopolists is undesirable from the standpoint of society as a whole because it leads to production that is too low and prices that are too high.

Restraint of Trade and the Antitrust LawsAntitrust laws make it illegal to restrain trade or attempt to monopolize a market.

Sherman Antitrust Act of 1890 Elevated agreements among oligopolists from an unenforceable contract to a criminal conspiracy.Clayton Act of 1914 Further strengthened the antitrust laws.Used to prevent mergersUsed to prevent oligopolists from colluding

*

Antitrust: Sherman Antitrust ActSection 1:

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations, is hereby declared illegal.

**

Section 2:

Every person who shall monopolize, or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be guilty of a misdemeanor.

**

Controversies over Antitrust PolicyAntitrust policies sometimes may not allow business practices that have potentially positive effects:Resale price maintenance Predatory pricingTying

*

Controversies over Antitrust Policy Resale Price Maintenance (or fair trade) occurs when suppliers (like wholesalers) require retailers to charge a specific amount ,Might seem anticompetitive.Predatory Pricingoccurs when a large firm begins to cut the price of its product(s) with the intent of driving its competitor(s) out of the marketTyingwhen a firm offers two (or more) of its products together at a single price, rather than separately, Form of price discrimination.

What should society do in the face of the high degree of market concentration in oligopolistic industries? There are three main points of view.

MAIN VIEWS OF OLIGOPOLY POWER:

There are three main points of view-Do-Nothing ViewAnti trust ViewRegulation View

First, the Do Nothing view, claims that the power of oligopolies is not as large as it appears.

Though competition within industries has declined, they maintain that competition between industries with substitutable products has replaced it.

Finally, they argue that bigger is better, especially in the current age of global competition. Economies of scale, produced by high concentration, actually lower prices for consumers.

Second, the Antitrust view argues that prices and profits in highly concentrated industries are higher than they should be.

By breaking up large corporation into smaller units, they claim, higher levels of competition will emerge in those industries.

The result will be a decrease in collusion, greater innovation, and lower prices.

The third view is the Regulation view, which can be seen as a middle ground between the other two. Those who advocate regulation do not wish to lose the economies of scale offered by large corporations, but they also wish to ensure that consumers are not harmed by large firms.

They argue that subdivision of Big industries is not favourable. They as a giant company may produce other good benefits for the masses.

But they also encourage regulated market and even suggest nationalization in case of non-compliance of market regulations.

But they also suggest the ill effects of nationalization at the same time.

Therefore, they suggest setting up regulatory agencies and legislation to control the activities of large corporations. Some even suggest that the government should take over the operation of firms where only public ownership can guarantee that they operate in the public interest.

ConclusionWhichever view we take, clearly the social benefits of free markets cannot be guaranteed, and the markets themselves cannot be morally justified, unless firms remain competitive.

Example-Destroyer/Predatory PricingDeliberate price cutting or offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrants

Anti-competitive and illegal if it can be proved

Typical of oligopoly with collusion

Microsoft have been accused of predatory pricing strategies in offering free software as part of their operating system Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market

THANKYOU

***

**

*