Business & Social Responsibilities. Ethics In Marketplace

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1 Business & Social Responsibilities Ethics In Marketplace 1

2 Issues Today 3 degrees of competition in a market Perfect competition Pure monopoly Oligopoly Ethics of anticompetitive practices 2

3 Perfect Competition Features: Numerous buyers and sellers, none has substantial market share No barriers to entry or to leave Perfect information Perfect substitutable goods Buyers and sellers are utility maximizers No external intervention on quantity, price, costs, and benefits in the market The first two characterize competitive feature, the last characterizes free feature. 3

4 Perfect Competition (cont.) Free competitive markets also need (1) private property system, (2) an underlying system of contracts, and (3) an underlying system of production. In perfectly competitive markets, prices and quantities always move toward the equilibrium point. The point at which the amount of goods buyers want to buy exactly equals the amount of goods sellers want to sell, and at which the highest price buyers are willing to pay exactly equal the lowest price sellers are willing to take. 4

5 Demand Curve in PC Markets A demand curve is a line on a graph indicating the most that consumers would be willing to pay for a unit of some product when they buy different quantities of those products. It is downward sloping because of the principle of diminishing marginal utility; each additional item a person consumes is less satisfying than each of the earlier items the person consumed. 5

6 Demand Curve in PC Markets (cont.) If the price of a product is above the demand curve, then Consumers see themselves as losers, and would leave the market and spend elsewhere. The opposite is true if the price were to fall below the demand curve 6

7 Supply Curve in PC Markets A supply curve is a line on a graph indicating the prices producers must charge to cover the average costs of supplying a given amount of a commodity. It is upward sloping because of the principle of increasing marginal costs; after a certain point, each additional item a seller produces costs more to produce than earlier items. The principle of increasing marginal costs prevails because productive resources in the world are limited. 7

8 Supply Curve in PC Markets (cont.) The costs of producing a commodity also include the normal profits, apart from the ordinary costs of labor, materials, distribution, etc. If the price is below the supply curve, then Producers see themselves as losers, and would leave the market and invest elsewhere. The opposite is true if the price were to rise above the supply curve. 8

9 Equilibrium in PC Markets Point of equilibrium is the point at which the supply and demand curves meet. When the price is above the equilibrium surplus of goods will appear. It is eventually eliminated because sellers will be forced to lower their prices and decrease production to get rid of unsold goods; and the abnormally high profits will attract outside producers into the market, and bring about a decrease in the price consumers are willing to pay for larger quantities. 9

10 Equilibrium in PC Markets (cont.) When the price is above the equilibrium shortage will appear. It is eventually eliminated because buyers will bid up the price, which will attract more producers into the market; and producers will leave the market because of the loss, thereby lowering the supply, raising the price. 10

11 Ethics and PC Markets PC markets incorporate forces that drive buyers and sellers toward the point of equilibrium, in doing so, they achieve: Capitalist justice Maximum utility of buyers and sellers The aforementioned moral principles are established in a way that respects of buyers and sellers negative rights 11

12 Justice from PC Markets Capitalist Justice: fairness is getting paid fully in return for what one can contributes is established because of the fact that participants in PC markets tend to trade at equilibrium. From the sellers (buyers ) point of view, the price is fair only if it falls somewhere on the sellers supply (buyers demand) curve. 12

13 Efficiency from PC Markets Efficiency from the allocation of resources Resources are allocated efficiently in accordance with consumer demands and needs. Efficiency from the use of resources Firms are motivated to lower their costs to increase profits. Firms are motivated to reduce their profits to the lowest levels to not lose buyers to other firms. Efficiency from the distribution of commodities Consumers are as happy as possible possible given their budget and the range of available goods 13

14 Rights from PC Markets Negative right of freedom of opportunity Participants are free to entry or leave as they choose. Negative right of consent All exchanges are voluntarily. No external parties force price and quantity. Negative right from coercion No single seller or buyer dominate the market that other are forced to accept the terms or go without. 14

15 Criticisms on PC Markets Other forms of justice are not established, e.g. justice based on needs and egalitarian justice. Utility of others, e.g. the poor, the old, the sick, the disabled, the young, may not be maximized. Positive rights of those outside the market are diminished, i.e. rights to consume goods outsiders need are diminished. 15

16 Criticisms on PC Markets (cont.) Pressures toward economic efficiency can conflict with the demands of caring. The virtues of loyalty, kindness, and caring all diminish, whereas the vices of being greedy, self-seeking, avaricious, and calculating are encouraged. Real markets are not of the PC type. 16

17 Monopoly Competition Features that differ from PC markets: One seller with 100% market share Barriers to entry, e.g. patent laws, licenses, tariffs, brand loyalty, low manufacturing costs, high entry costs. Monopolies can also be created through mergers. A monopoly seller can fix its output at a quantity that is less than equilibrium and at which demand is so high that It allows the firm to reap an excess monopoly profit by charging prices that are far above the supply curve and above the equilibrium price. 17

18 Monopoly Competition (cont.) Do the monopoly profits always exist? Not necessarily, if its managers are motivated by altruism, or if it is regulated, or if it is pressurized by an angry public, or if it has to pay high wages, high salaries, and high bonuses. However there is an overwhelming evidence which shows that monopoly companies often seek monopoly profits. 18

19 Justice and MC Capitalist justice cannot be achieved because the system does not operate at equilibrium. The average consumer would be contributing more for those goods than what the goods are worth. 19

20 Efficiency and MC Inefficiency from the allocation of resources Shortage will appear and cannot be eliminated. Resources are therefore deflected into other nonmonopoly markets that already have an adequate supply of goods. Inefficiency from the use of resources A monopoly firm is not encouraged to reduce its costs and is therefore not motivated to find less costly methods of production. 20

21 Efficiency and MC (cont.) Inefficiency from the distribution of goods Price differentials are allowed that can prevent consumers to be as happy as possible given their budget and range of available goods. 21

22 Rights and MC MC markets incorporate restrictions on the negative rights that PC markets respect Rights to entry and leave Rights to buy goods buyers want in quantities they desire Rights to choose without coercion 22

23 Oligopolistic Competition Imperfectly competitive markets are markets that lie somewhere on the spectrum between the two extremes of the PC market and the pure monopoly. In an oligopoly, 2 features of PC markets are not presented: A few significant sellers, each with substantial market share (maybe between 25% - 90%) New sellers find it difficult to entry due to e.g. high start-up costs, brand-loyalty, etc. 23

24 Oligopolistic Competition (cont.) Oligopoly markets that are dominated by a few, e.g. 3-8, large firms are said to be highly concentrated markets. Oligopolies are usually caused by horizontal mergers: the unification of two or more companies with similar line of business. By explicitly or tacitly agreeing to fix prices and outputs, together with barriers to entry, oligopoly can function much like the monopoly, and therefore can fail to achieve justice, social utility, some economic freedoms 24

25 Explicit Agreements The greater the degree of market concentration, the fewer the managers, the easier it is for them to come to an explicit meeting to agree on price fixing. 25

26 Tacit Agreements When one company decides it has a reason to raise or lowers its product prices, other companies will always follow suit within a short period of time. No official meeting, each realizes that all will benefit so long as they cooperate. Price leader is the firm recognized as the industry leader in oligopoly industries for the purpose of setting prices based on levels announced by that firm. 26

27 Unethical Practices In OC Markets Price-fixing: an agreement between firms to set their prices at artificially high levels Unethical practices from explicit agreements (cont.) Manipulation of supply: an agreement between firms to limit their production so that prices rise to levels higher than those that would result from free competition 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 27

28 Unethical Practices In OC Markets Tying arrangements: when a firm sells a buyer a certain good only on condition that the buyer agrees to purchase certain other goods from the firm Retail price maintenance agreement: a manufacturer sells to retailers only on condition that they agree to charge the same set retail prices for its goods Price discrimination: to charge different prices to different buyers for identical goods or services 28

29 Factors Which Lead to Price Fixing A crowed and mature market Job-order nature of business Undifferentiated products Culture of the business Personnel practices Pricing decisions Trade associations Corporate legal staff 29

30 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; and The payment made to induce the payee to not act in the best interests of the pubic; and The nature and purpose of the payment are considered ethically objectionable in the local culture 30

31 Antitrust Laws Sherman Antitrust Act 1890 Prohibits competing companies from making agreements to fix prices, to divide up territories or customers, or to restrict the quantity of goods they bring to market Prohibits a company that already holds a monopoly from using its monopoly power to maintain its monopoly or to extend its monopoly into other markets Does not prohibit a company from acquiring a monopoly through legitimate business dealings, e.g. having a better product, a shrewd strategy, or sheer luck. 31

32 The Do-Nothing View on OC Oligopoly should be left alone because: high level of competition is still maintained by its relation to other competing industries; and the economic power of any large corporation may be balanced and restrained by the countervailing power of other large corporate groups in society; and some oligopolies are providing consumers with products they freely choose to buy and therefore are efficiently using economic resources to improve consumer welfare; and big is good (economies of scale). 32

33 The Antitrust View on OC assumptions: discretion over prices is likely in OC markets concentration leads to a decline in price competition; and high degree of concentration is unnecessary, each should not earn more than 3%-5% of market share monopoly profits always appear in highly concentrated market concentration is aggravated by product differentiation and advertising, and advertising leads to high profits press release or other means signal oligopolistic coordination 33

34 The Antitrust View on OC Prices and profits of concentrated industries are higher than they should be and that monopolists and oligopolists use unfair tactics against their competitors and suppliers. By breaking up large corporations into smaller units, higher levels of competition will emerge. 34

35 The Regulation View on OC Oligopoly corporations should not be broken up because their large size has beneficial consequences: Mass production and distribution are possible Economies of scale Oligopoly corporations should be regulated to prevent unethical practices Nationalization? 35

36 36

37 CONTACT Nattawoot Krongkajonsook Homepage : Mobile: Office: Department of Finance, 4 th Floor of Faculty of Business Administration, Kasetsart University Tel: Ext. 356 Office Hours: Monday and Wednesday, 10 am 2 pm. 37

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