Syllabus | LH's
Virtual Office | Chapter 4 Outline
Understand the case for the morality of free markets as the best guarantors
of capitalist distributive justice, economic utility, and liberty rights:
appreciate the limitations of this justification.
Understand how the case for the morality of free markets depends on the
assumption of perfect competition.
Know the defining features and essential presuppositions of perfectly competitive
Understand how perfect competition is a useful idealization, and how the
principle of diminishing marginal utility and of increasing marginal
costs interact to determine the equilibrium price.
Understand the nature of monopoly markets and their negative impacts on
Understand the nature of oligopoly markets, their negative impacts on perfect
competition, and the several different ways in which oligopolistic influence
may be exercised.
Understand the do-nothing view, the anti-trust view and the
view as competing schools of thought about appropriate public policy
with regard to oligopoly markets.
If free markets are moral it's because they allocate resources and distribute
commodities in ways that are just, that maximize utility, and that respect
the liberty of buyers and sellers. Since markets having these benefits
depend crucially on their competitiveness, anticompetitive conditions and
practices are morally dubious. Monopoly practices and markets and
oligopoly practices and markets are two principle types of anticompetitive
practices and conditions that free market economies spawn. Under
monopoly conditions a market segment is controlled by a single seller.
Under oligopoly conditions a market segment is controlled by just a few
Though real markets are all imperfect, perfect competition serves
as a useful idealization not only for economic purposes of explaining and
predicting the behavior of actual markets but also for ethical purposes,
i.e., for understanding and assessing the moral case for keeping markets
as perfectly competitive as possible. Under this idealization a perfectly
competitive market is defined in terms of seven conditions:
distribution: numerous buyers and sellers, none of whom has a substantial
openness: buyers and sellers are free to enter or leave the market
full and perfect knowledge: each buyer & seller has full and
perfect knowledge of each others' doings
equivalent goods: goods being sold are similar enough that buyers
don't care whose they buy.
nonsubsidization: costs of producing or using goods are borne entirely
by the buyers & sellers.
rational economic agency: all buyers and sellers act as egoistic
nonregulation: no external parties such as governments regulate
the price, quantity, or quality of goods.
Freely competitive markets, in addition, presuppose
try to buy (or produce) as low as possible
sell as high as possible
Perfect competition gets its ethical import from that fact that it's the
self-regulative abilities of free markets -- in response to supply and
demand -- that provides the principle arguments for the moral superiority
for free markets. Where supply exceeds demand, prices, profits, and
production decrease; where demand exceeds supply, prices, profits, and
production increase: thus under conditions of perfect competition production
naturally tends toward the equillibrium point (where supply equals demand)
and goods find their "natural price" (= ordinary costs of production +
normal rates of profit). Normal profit is "the average profit that
producers could make in other markes that carry similar risks" (p. 213).
The principle of diminishing marginal utility affects demand and
states that each additional item consumed is less valuable than each earlier
item: the principle of increasing marginal costs affects supply
and states that each additional item produced beyond a certain point costs
more to produce than each earlier item.
an underlying system of production: so there's goods to exchange
an enforcable private property system: so buyers and sellers have
ownership rights to transfer
a system of contracts: to administer such transfers.
The principle moral benefits alleged for free markets are three:
Even so, this would-be moral justification of them is limited by
additional considerations of positive rights, of care and
of character; and it is challenged by competing egalitarian,
and socialist-contribution-based conceptions of distributive justice.
Finally, to the extent that actual "free-market" policies fail to be perfectly
competitive, their claim to actually having the alleged benefits
(and with it their claim to morality) is diminished. Monopoly and
oligopoly conditions are morally problematic due to their violation, especially,
of the two "basic conditions" for the existence of perfect competetion,
distribution, and openness.
serving demands of capitalist (contribution-based) justice
maximizing economic utility
safeguarding negative rights of economic liberty
Monopoly markets, being -- "markets in which a single firm is the only
seller . . . and which new sellers are barred from entering" (p. 221) are
by definition not distributed (rather, concentrated) and
not open (rather, closed). Under monopoly conditions,
the nonexistence of competition and the inability of competitors to enter
(to increase supply and bid prices down) results in artificially high prices;
prices above the equillibrium point or natural price. This equillibrium
point, being the point at which investors make a fair return (equal to
the going-rate across comparable markets), is the point at which capitalist
justice is served. Consequently, under monopoly conditions such justice
is ill-served: the seller charges more and the buyer is forced to pay more
than the goods are worth (i.e., their natural price). Furthermore,
monopolies foster distributive inefficiency, since demand is less well
served; and monopoly conditions remove competitive pressures ordinarily
making for increased productive efficiency. Discretionary preferences
of consumers also suffer under monopoly conditions: consumers are forced
to cut back more on other items than they would have had to (under "normal
conditions") to afford the monopolized goods. Finally, monopoly conditions
do no so well safeguard economic liberty as open competition does: sellers
are not free to enter the market; and buyers buy overpriced products under
duress in the absence of alternative vendors.
True monopolies are rare but oligopoly conditions -- where a few firms
control most of the market -- are common and have similar anticompetitive
dynamics and effects. Horizontal mergers -- between former competitors
-- are the chief cause of oligopolistic conditions. Oligopoly markets,
not unlike monopolies, are not well distributed, but largely concentrated:
the fewer firms control the market the more "highly concentrated" the market
is said to be. And they are not open, but relatively closed due to
various factors, including anticompetitive strategems on the part of the
oligopoly firms. The anticompetitive effects of oligopolies are aggravated
by the ease with which the few firms controlling the market can join forces
and create virtual monopoly conditions by their collusion. The anticompetitive
effects of such collusion are similar to those of actual monopolies, with
the same detrimental effects: capitalist justice is ill-served; utility
in the form of productive and distributive efficiency is undermined; and
rights of economic liberty are infringed. Explicit agreements, tacit
agreements, and even bribery are anticompetitive practices frequently used
to maintain oligopolistic control of markets.
Oligopolies pose a special public policy challenge since the long-term
trend in our economy is towards diminishing competition. There are
three principle schools of thought regarding what to do in light of this
fact. The Do-Nothing view maintains this trend is no problem,
claiming competition between industries with substitutable products takes
the place of competition with industries; that the countervailing forces
of other large orgainization (especially governments and labor unions)
blunts the effects of economic concentration; that markets can be economically
efficient with as few as three competitors (as the "Chicago School" claims);
and that economies of scale more than offset any ill-effects due to diminished
competition. The Anti-trust View advocates breaking up larger
firms into smaller units each controlling not more than 3-5% of the market
in order to restore competition with all its beneficial effects.
Regulation View advocates the middle course of allowing concentration
preserve economies of scale while using regulation to prevent collusion
and ensure that oligopoly firms maintain competitive relations among themselves.
Syllabus | LH's
Virtual Office | Chapter 4 Outline