Course Syllabus | LH's Virtual Office | Chapter 4 Outline

Business Ethics: Concepts & Cases: Chapter 4 Objectives and Overview
Ethics in the Marketplace

Learning Objectives

  1. 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.
  2. Understand how the case for the morality of free markets depends on the assumption of perfect competition.
  3. Know the defining features and essential presuppositions of perfectly competitive markets.
  4. 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.
  5. Understand the nature of monopoly markets and their negative impacts on perfect competition.
  6. Understand the nature of oligopoly markets, their negative impacts on perfect competition, and the several different ways in which oligopolistic influence may be exercised.
  7. Understand the do-nothing view, the anti-trust view and the regulative view as competing schools of thought about appropriate public policy with regard to oligopoly markets.

Overview

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 sellers.

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:

  1. distribution: numerous buyers and sellers, none of whom has a substantial market share.
  2. openness: 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. nonsubsidization: costs of producing or using goods are borne entirely by the buyers & sellers.
  6. rational economic agency: all buyers and sellers act as egoistic utility maximizers
  7. nonregulation: no external parties such as governments regulate the price, quantity, or quality of goods.
Freely competitive markets, in addition, presuppose
  1. an underlying system of production: so there's goods to exchange
  2. an enforcable private property system: so buyers and sellers have ownership rights to transfer
  3. a system of contracts: to administer such transfers.
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.

The principle moral benefits alleged for free markets are three:

  1. serving demands of capitalist (contribution-based) justice
  2. maximizing economic utility
  3. safeguarding negative rights of economic liberty
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, needs-based 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.

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. The Regulation View advocates the middle course of allowing concentration to preserve economies of scale while using regulation to prevent collusion and ensure that oligopoly firms maintain competitive relations among themselves.


 Course Syllabus | LH's Virtual Office | Chapter 4 Outline