Chapter 4 Ethics in the Marketplace PDF

CHAPTER 4 ETHICS IN THE MARKETPLACE Source: Velasquez M.G. (7th Edition). (2012) Business Ethics Concepts and Cases. Prentice Hall 13/01/25 Ms. O.N KANGANDJO 1  I...

CHAPTER 4 ETHICS IN THE MARKETPLACE Source: Velasquez M.G. (7th Edition). (2012) Business Ethics Concepts and Cases. Prentice Hall 13/01/25 Ms. O.N KANGANDJO 1  INTRODUCTION This chapter moves the consideration of business ethics from the morality of the economic system in general to the morality of specific practices within our system. If free markets are justified, it is because they allocate resources and distribute commodities in ways that are just or fair, that maximise the economic utility of society’s members, and that respect the freedom of choice of both buyers and sellers. These moral aspects of a market system depend crucially on the competitive nature of the system. 13/01/25 Ms. O.N KANGANDJO 2  If firms join together and use their combined power to fix prices, drive out competitors with unfair practices, or earn monopolistic profits at the expense of consumers, the market ceases to be competitive and the results are injustice, a decline in social utility, and a restriction of people’s freedom of choice. This chapter examines the ethics of anticompetitive practices, the underlying rationales for prohibiting them, and the moral values that market competition is meant to achieve. 13/01/25 Ms. O.N KANGANDJO 3 Anticompetitive practices Anticompetitive practices refer to a wide range of business practices in which a firm or group of firms may engage in order to restrict inter-firm competition to maintain or increase their relative market position and profits without necessarily providing goods and services at a lower cost or of higher quality. Price fixing Businesses may engage in a type of crime known as "price fixing," or conspiring with competitors to charge a minimum price for their products. This practice forces consumers to pay more for a particular product than would be charged in a "non-price fixing" competitive environment. Businesses are rewarded with higher profit margins because this practice does not force them to conform to market forces. When a business and its officers are prosecuted for price fixing, the business often faces large fines while individual officers usually go to prison. 13/01/25 Ms. O.N KANGANDJO 4  To understand the nature of market competition and the ethics of anticompetitive practices, we will examine models describing three degrees of competition in a market. They are: -Perfect competition -Pure monopoly and -Oligopoly 13/01/25 Ms. O.N KANGANDJO 5  Three Models of Market Competition Perfect competition – A free market in which no buyer or seller has the power to significantly affect the prices at which goods are being exchanged. Pure monopoly – A market in which a single firm is the only seller in the market and which new sellers are barred from entering. Oligopoly – A market shared by a relatively small number of large firms that together can exercise some influence on prices.  Perfect Competition A perfectly competitive free market is one in which no buyer or seller has the power to significantly affect the prices at which goods are being exchanged. Perfectly competitive free markets are characterized by seven defining features: (1) numerous buyers and sellers and has a substantial share of the market. (2) All buyers and sellers can freely and immediately enter or leave the market. (3) Every buyer and seller has full and perfect knowledge of what every other buyer and seller is doing.  Perfect Competition (Cont.) (4) The goods being sold in the market are so similar to each other that no one cares from whom each buys or sells. (5) The costs 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. (6) All buyers and sellers are utility maximizers. (7) No external parties (such as the government) regulate the price, quantity, or quality of any of the goods being bought and sold in the market.  In addition to these seven characteristics, free competitive markets also need the following: – an enforceable private property system – a system of contracts – an underlying system of production 13/01/25 Ms. O.N KANGANDJO 9  Ethics and Perfectly Competitive Markets Achieve capitalist justice, but not other kinds of justice like justice based on need. Satisfies a certain version of utilitarianism (by maximizing utility of market participants but not of all society) Respects some moral rights (negative rights but often not positive rights) Equilibrium in Perfectly Competitive Markets The movement towards the equilibrium point can be explained in terms of two principles: -the principle of diminishing marginal utility and -The principle of increasing marginal costs NOTE: Since sellers and buyers meet in the same market, their respective supply and demand curves will meet and cross at the equilibrium point. 13/01/25 Ms. O.N KANGANDJO 11  Characteristics of Monopoly Market One seller High entry barriers Quantity below equilibrium Prices above equilibrium and supply curve Can extract monopoly profit 13/01/25 Ms. O.N KANGANDJO 12  Ethical Weaknesses of Monopolies Can lead to ignoring the demands of caring and value of human relationships Can encourage vices of greed and self- seeking and discourage virtues of kindness and caring Can be said to embody justice, utility, and rights only if seven defining features are present.  Oligopolistic Markets Unethical Practices in Definitions Oligopolistic Markets Major industrial markets – Price-fixing are dominated by only a – Manipulation of supply few firms. – Market allocation Oligopolistic markets are – Bid rigging – Exclusive dealing “imperfectly competitive” arrangements because they lie between – Tying arrangements the two extremes of the – Retail price maintenance perfectly competitive and agreements monopolistic markets. – Predatory price discrimination.  Main Views on Oligopoly Power Do-nothing view. – Do nothing since power of oligopolies is limited by competition between industries and by countervailing power of large groups – Oligopolies are competitive and big U.S. companies are good international competitors. Antitrust view. – Large monopoly and oligopoly firms are anticompetitive and should be broken up into small companies Regulation view. – Big companies are beneficial but need to be restrained by government regulation.