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Business Ethics: Concepts & Cases (6th edition) : Chapter 4

Ethics in the Marketplace

Introduction

If free markets are moral it's because they allocate resources & distribute commodities 1. in ways that are just 2. that maximize economic utility 3. that respect the liberty of both buyers and sellers These three benefits depend crucially on competition .Consequently, anticompetitive practices are morally dubious Two kinds of anticompetitive conditions and practices o monopoly conditions: a market segment controlled by one seller o oligopoly conditions: a market segment controlled by a few sellers

4.1 Perfect Competition

Under perfect competition, "no buyer or seller has the power to significantly affect the prices at which goods are exchanged." Seven features of perfectly competitive markets: 1. distributed: numerous buyers & sellers, none of whom has a substantial market share 2. open: buyers and sellers are free to enter or leave the market 3. full and perfect knowledge: each buyer & seller has full and perfect knowledge of each others' doings 4. equivalent goods: goods being sold are similar enough that buyers don't care whose they buy. 5. unsubsidized: costs of producing or using goods is borne entirely by the buyers & sellers 6. rational economic agency: all buyers and sellers act as egoistic utility maximizers try to buy (or produce) as low as possible sell as high as possible 7. unregulated: no external parties such as governments regulate the price, quantity, or quality of goods Breakdown of the seven features o 1-2 -- openness and distribution -- the "basic conditions"

o 3-6 are "idealizing conditions" o 7 -- nonregulation -- a measure of how free the market all real economies are mixed, mixing free market elements command elements regulative admixtures justified by appeal to social utility distributive justice rights -- especially positive or welfare rights Essential presuppositions o an enforceable private property system so buyers and sellers have ownership rights to exchange o a system of contracts to facilitate & control transfers of ownership o an underlying system of production so there's goods to be exchanged Self-regulation: the basis for the alleged moral benefits of competitive markets o supply > demand sellers bid prices down: assumes distribution among sellers falling profits lead to decreased production: assumes openness profits in one market sector falling below those in others causes sellers to move into the other, more profitable, sector o demand > supply buyers bid prices up: assumes distribution among buyers rising profits lead to increased production: assumes openness profits in one market sector rising above those in others causes sellers to move out of the others and into the more profitable sector

Equilibrium in Perfectly Competitive Markets

Principle of Diminishing Marginal Utility o affecting demand o states that each additional item consumed is less useful or satisfying than each of the earlier items consequently is less valuable than each of the earlier items

consequence: "the price consumers are willing to pay for goods diminishes as the quantity of goods they buy increases" Principle of Increasing Marginal Costs o affecting supply o states that each additional item produced after a certain point costs more to produce than earlier items point determined by countervailing economies of scale & scarcity or plenitude of resources costs breakdown = ordinary costs + normal profits "ordinary" costs of production & distribution costs of labor materials marketing distribution etc. "normal" profit: "the average profit the producers could make in other markets that carry similar risks" (p. 213) Equilibrium price: the price at which supply = demand, i.e., o the amount buyers will pay for a quantity of goods o the production costs (including normal profits) of that quantity for the sellers Discussion: Perfect Competition as useful idealization o only a few markets -- mainly agricultural commodities markets -- come close to the ideal o perfect competition and explanatory construct or idealization enables economists to make predictions as with other useful idealizations use of equations governing "frictionless planes" to estimate behavior of real inclined planes use of equations governing "free fall in a vacuum" to estimate the behavior of bodies falling in the atmosphere etc. ethically illuminating provides us with a clear understanding of the advantages of competition and understanding of why it may be desirable to keep markets as competitive as possible
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Ethics and Perfectly Competitive Markets (PCMs)

Capitalist distributive justice is well served by perfectly competitive markets o contributive justice: to each according to their contribution

counting capital or ownership of the means of production as a contribution counting the value of workers contribution as = the price their services command on the job market accords with the practice of counting "normal" profit as a cost of production Economic utility or efficiency is best served o demand is served: sellers sell and producers produce what consumers want o efficiency is forced on producers & distributors by competition o consumers individual preferences are served each gets what they in particular most want from among the goods available Negative rights are well respected, especially rights of economic liberty o to buy and sell whatever you choose o whenever you choose o to and from whomever you choose Limitations on Perfectly Competitive Markets' Claims to Moral Superiority o Justice under competing conceptions not so well served egalitarian justice violated by income & wealth disparities arising under PCMs distribution according to ability to pay vs. need is contrary to needs-based conceptions counting the value of labor as the price it commands on the job market contrary to Marxian contribution-based justice value of labor = fair-market value of product minus the ordinary costs of production "normal" profit not counted as a cost of production o Justice and benefits alleged accrue only to market participants or those with money to buy it's only their demand that are served it's only their individual preferences that are served o Positive rights of the poor may be violated: e.g., rights to food & shelter education health-care o Conditions for perfect competition may conflict with care rational egoistic utility maximization neglects caring -it's selfish

efficiency demands of competition may conflict with caring if I'm too caring pay my help substantially more than my competitors if I spend substantially more on pollution controls than my competitors if I spend spend substantially more on safe working conditions than my competitors then I may lose out in the competition my production costs will be higher my competitors will undersell me putting me out of business Certain bad character traits may be encouraged and certain good traits discouraged by competitive markets discouraged good traits kindness caring generosity negative traits encourages greed & self-seeking materialism Imperfections of real markets insofar as they fall short of perfect competitiveness they may fail to deliver even the promised benefits of serving capitalistic justice maximizing utility securing negative rights of economic liberty

4.2 Monopoly Competition

In monopoly conditions the first two of the seven conditions defining perfect competition are violated o not distributed but concentrated instead of "numerous sellers, none of whom has a substantial share of the market" one seller has a 100% share of the market o not open but closed instead of other sellers being able to "freely and immediately enter" other sellers are prevented from entering due to various factors patent laws high capitalization costs

anticompetitive machinations of the monopoly holder etc. Monopoly markets Definition: "markets . . . in which a single firm is the only seller in the market and which new sellers are barred from entering." (p. 221) Principal Market-Distorting Effect inability of other competitors to enter the market thereby increasing supplies thereby bidding prices down results in artificially high prices above the "natural price" or equilibrium point natural price = cost of production + goingrate-of-profit (CP + GRP)

Monopoly Competition: Justice, Utility, and Rights

Monopoly Markets & Capitalist Justice o Capitalist justice says: "to each according to their contribution of labor or investment. o Equilibrium point is where Capitalist justice is served. o Under monopoly conditions prices kept above equilibrium so the seller charges more than the goods are worth (i.e., their natural price) so the prices the buyer is forced to pay are unjust (i.e. > CP +GRP) Monopoly Markets & Economic Utility
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Monopolies foster distributive inefficiency: demand is not served monopolies create (virtual?) shortages (indicated by high profits) other firms unable to enter the market to make up these shortages excess profits absorbed by the seller are resources not needed to supply the amounts of goods the consumers are getting: if others were free to enter the market the same goods would be supplied for less. Monopolies remove competitive pressures making for productive efficiency Discretionary preferences of consumers not as well-served:

consumers forced cut back more than they would have had to (under "normal" conditions) to buy the monopolized goods Monopoly Markets and Negative Rights of Economic Freedom
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Sellers not free to enter. Buyers buy under duress: monopoly sellers can dictate terms to buyers goods they may not want: "You have to buy the Service Agreement with that." Example: Microsoft marketing of Explorer quantities they may not desire: "sorry it only comes by the dozen." GM's reply to Bill Gates (humor)

4.3 Oligopolistic Competition

True monopolies are rare: but a second type of "imperfectly competitive market" is common. Oligopoly conditions: a few firms control most of the market o relatively common ("business as usual") o have similar dynamics and anticompetitive effects In oligopoly conditions the first two of the seven conditions defining perfect competition are violated o not distributed but concentrated instead of "numerous sellers, none of whom has a substantial share of the market" a few sellers have a near 100% share of the market o not open but closed instead of others sellers being able to "freely and immediately enter" other sellers are prevented from entering due to high start-up costs anticompetitive machinations of the oligopoly firms long-term contracts with buyers etc. Concentration o the fewer the firms controlling the market the more "highly concentrated" the market o the more firms controlling the market the less "highly concentrated" Horizontal mergers: the chief cause of oligopolistic conditions

horizontal merger = "unification of two or more companies that were formerly competing in the same line of business" e.g., Daimler, Disney-Times-Warner anticompetitive Dynamic: Creation of Virtual Monopoly Conditions via Collusion o with only a few firms in the market it is relatively easy for them to join forces and act as a unit "much like a single giant firm" by agreeing to set prices at the same (excessively high) level tacitly: a "gentlemen's agreement" explicitly: price fixing by agreeing to restrict output & control supply (OPEC) o with similar anti-competitive & consequently dubious ethical consequences violations of capitalist justice negative impacts on economic utility distributive inefficiencies productive inefficiencies diminished discretionary preference satisfaction o with similar negative (economic freedom) rights violations others are prevented from entering the market sellers dictate terms buyers have no recourse since the "competition" has agreed to dictate the same terms
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Explicit Agreements

Price fixing: managers meet (secretly) & agree to set prices at a artificially high levels. Manipulation of Supply: firms agree to limit their production o result in artificially induced shortages o hence in artificially high prices Exclusive Dealing Arrangements: firms sell to retailers on condition o that retailers will not buy from certain other companies (contra openness) o or will not sell outside of a certain geographical area (contra distribution) Tying Arrangements: the seller agrees to sell to buyer only on condition that the buyer agrees to buy other products from the firm. Retail Price Maintenance Agreements: manufacturer sells to retailer only on the condition o that they agree to charge the same set retail price for the goods.

effects

diminishes competition between retailers removes competitive pressure on the manufacturer to lower prices decrease production costs Price Discrimination: charging different prices to different buyers for identical goods. o Examples Continental Pie Co. underselling Utah Pie Co. in Salt Lake City Most famous case: Standard Oil cornering of the oil market at the end of the 19th century used regional price discrimination region by region to undersell the locally based oil companies & drive them out of business. The airlines? o Price differences are legitimate only when based on volume differences other differences related to true costs of manufacturing transporting packaging marketing servicing

Tacit Agreements

Explicit agreements to undertake many of the anti-competitive practices just named are illegal Most collusion between oligopolies, consequently is based on unspoken or "tacit" forms of cooperation Genesis of unspoken cooperation o firms each come to recognize that competition is not in their best interest o that cooperation would be in the best interests of all o so without any explicit agreement to cooperate they undertake to act as if there were such an agreement you might say there is such an agreement de facto or in practice Price-setting: when one major player raises prices, all the would-be competitors follow suit o each realizes all will benefit as long as they continue to act in this concerted fashion o "price leader" version

the oligopolies recognize one (dominant) player as the industry's price leader and tacitly agree to follow suit in setting prices at whatever level this firm sets

Bribery

Bribes can be used to secure the sale of products o serve to shut out other sellers o hence, are anticompetitive Not all bribes are of this sort: e.g. "tips" customarily given to customs agents in some countries to "expedite the process" Ethical rules for bribery: potentially excusatory & mitigating questions o Is the offer of payment initiated by the payer? if so, this is a morally culpable act of bribery if not -- if the payee initiates the transaction by demanding payment (usually accompanied by an explicit or implicit threat: e.g., the processing won't be "expedited") it's more like extortion by the payee than bribery by the payer the payer is absolved of moral responsibility or their responsibility is at least diminished o Is the payment made to induce the payee to act in a manner contrary to the duties or responsibilities of their office if so: it's a morally culpable bribe: the payer is inducing the payee to act immorally if not -- as in the case of the customs official -- it may not be. o Are the nature and purpose of the payment considered ethically unobjectionable by the local culture if so (again as in the case of the customs agent) then it may be morally excusable if not done for anticompetitive purposes if not done for the purpose of inducing the payee to do something immoral may be ethically permissible on utilitarian grounds: otherwise the process won't be "expedited" might, however, still be a legal violation of the Foreign Corrupt Practices Act of 1977 agreement with local practices won't be a mitigating or excusing factor if it is done for anticompetitive purposes

or if it is done for the purpose of inducing the payee to do something immoral

Oligopolies and Public Policy

The problem o Competition within industries has declined & is declining. o What to do in light of this fact?

The Do-Nothing View

No Problem: Competition between industries with substitutable products takes the place of competition within o example: steel industry, though highly concentrated, faces competition from plastics, aluminum, etc. o question: what to do when Alcoa & U. S. Steel & 3M merge? "Countervailing power" of other large corporate groups blunts the effects of concentration o unions & government o large corporate buyers not so easy to dictate terms to Chicago School: markets are economically efficient with as few as three significant rivals Big is good o economies of scale reductions in unit costs of production using the same fixed resources o offsets drawbacks: excessive profits offset by incredible cost savings o necessary to meet foreign competition from subsidized industries o Velasquez is dubious: "research suggests that in most industries expansion beyond a certain point will not lower costs but will instead increase them."

The Antitrust View

Reinstitution of competitive pressures o is necessary in order to rein in excessive oligopoly profits o requires breaking up large firms into smaller units (each controlling not more than 3-5% of the market) Expected results o higher levels of competition will emerge o along with a decrease in explicit and tacit collusion

bringing about the beneficial consequences lower prices for consumers greater innovation increased development of cost cutting technologies

The Regulation View

Oligopoly corporations should not be broken up o economies of scale would be lost if they were forced to decentralize mass production mass distribution etc. o these economies should be passed on to consumers in the form of cheaper products more plentiful products To pass savings due to economies of scale along to consumers requires proper regulation of large corporations o nationalization -- government take-over of operations the regulative extreme controversial sometimes necessary & beneficial, some argue never necessary or beneficial others argue leads to unresponsive bureaucracy removes competitive pressure from these firms or industries which negatively effects productivity efficiency innovation o proponent of regulation usually have in mind measures less extreme than regulation to ensure that markets continue to be structured competitively: to ensure that firms maintain competitive market relations between themselves i.e., to prevent collusion may be voluntarily followed or legally enforced justified insofar as competition is necessary to best secure utilitarian benefits distributive justice rights to negative freedom