Chapter 4 Ethics in the Marketplace

Chapter 4Ethics in the MarketplaceClass: MAN3509 Business EthicsInstructor: Sudiyanti, S.E., M.Sc.

Department of ManagementFaculty of Economics and BusinessGadjah Mada UniversityChapter Outline2MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.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 Concepts3MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Perfect CompetitionA free market in which no buyer or seller has the power significantly affect the prices at which goods are being exchangedPure MonopolyA market in which a single firm is the only seller in the market and which new sellers are bared from enteringOligopolyA market shared by a relatively small number of large firms that together can exercise some influence on pricesPerfect Competition4MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.MarketAny forum in which people come together for the purpose of exchanging ownership of goods or moneyCharacteristics of Perfectly Competitive Free Markets:Numerous buyers and sellers with no substantial share of the marketAll buyers and sellers are easy to enter or leave the marketPerfect Competition (cont.)5MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Characteristics of Perfectly Competitive Free Markets:Every buyer and seller has perfect knowledge of the prices, quantities, and quality of all goods being bought and soldThe goods being sold are so similar to each otherThe costs and benefits of producing or using the goods are borne entirely not by other external partiesAll buyers and sellers are utility maximizersNo external parties regulate the price, quantity or qualityEquilibrium in Perfectly Competitive Market6MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Demand CurveA 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 CurveA line on a graph indicating the prices producers must charge to cover the average costs of supplying a given amount of a commodityEquilibrium in Perfectly Competitive Market (cont.)7MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Principle of Diminishing Marginal UtilityEach additional item a person consumes is less satisfying than each of the earlier items the person consumed.Principle of Increasing Marginal CostsAfter a certain point, each additional item a seller produces costs more to produce than earlier items.Point of EquilibriumThe 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 Markets8MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Moral Outcomes of Perfectly Competitive Markets Achieve a certain kind of justice Satisfy a certain version of utilitarianism Respect certain kinds of moral rightsEquilibrium in Perfectly Competitive Market9MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Price and Quantity move to equilibrium in perfectly competitive market because:If P > E, surplus appears and drives P down to EIf P < E, shortage appears and drives P up to EIf Q < E, profits rise, attracting sellers who increase Q to EIf Q > E, prices fall, driving sellers to which lowers Q to EMonopoly Competition10MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Monopoly Market Characteristics One seller High entry barriers Quantity below equilibrium Price above equilibrium and supply curve Can extract monopoly profitMonopoly Competition: Justice, Utility, and Rights11MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Ethical Weaknesses of Monopolies Violation of capitalist justice Economic inefficiency Lack of respect for negative rightsOligopolistic Competition12MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Imperfectly Competitive MarketsMarkets 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 MarketsOligopoly markets that are dominated by a few large firms (e.g. 3 to 8).Oligopolistic Competition (cont.)13MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Horizontal MergerThe unification of two or more companies that were formerly competing in the same line of business.Explicit Agreements14MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Price FixingAn agreement between firms to set their prices at artificially high levels.Manipulation of SupplyWhen 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.)15MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Exclusive Dealing ArrangementsWhen 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 ArrangementsWhen 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.)16MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Retail Price Maintenance ArrangementsA manufacturer sells to retailers only on condition that they agree to charge the same set retail prices for its goods.Price DiscriminationTo charge different prices to different buyers for identical goods or services.Explicit Agreements (cont.)17MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Unethical Practices in Oligopoly Industries Price-fixing Manipulation of supply Exclusive dealing arrangements Tying arrangements Retail price maintenance agreements Price discriminationTacit Agreements18MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Price LeaderThe firm recognized as the industry leader in oligopoly industries for the purpose of setting prices based on levels announced by that firm.Bribery19MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.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.)20MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.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 dutiesBribery (cont.)21MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.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.22MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.

Bribery (cont.)Main Views on Oligopoly23MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc. Antitrust view Do-nothing view Regulation viewOligopolies and Public Policy24MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.TrustAn alliance of previously competitive oligopolists formed to take advantage of monopoly powers.The Anti-trust View25MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Assumptions:If an industry is not atomistic with many small competitors, there is likely to be administrative discretion over pricesConcentration results in recognized interdependence among companies with no price competition in concentrated industriesConcentration 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.)26MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Assumptions: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. Concentration is aggravated by product differentiation and advertising. Advertising is correlated with higher profits.There is oligopolistic coordination by signaling through press releases of other means.The Do-Nothing View27MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.Although competition within industries has declined, it has been replaced by competition between industries with substitutable products.The economic power of any large corporation may balanced and restrained by the countervailing power of other large corporate groups in society.Markets are economically efficient even when there are as few as three significant rivals in the market (Chicago School of Anti-trust).Big is good particularly in light of the globalization of business that has taken place during recent decades.The Regulation View28MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc. 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 Discussion29MAN3509 - Business Ethics | Sudiyanti, S.E., M.Sc.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 enoughBig 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?Sources30MAN3509 - Business Ethics | Sudiyanti, S.E., 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