Business Ethics

Concepts & Cases

Manuel G. Velasquez

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 Chapter Four

Ethics in the Marketplace

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 https://www.businessinsider.com/bill-gates-
microsoft-antitrust-case-history-outcome-2020-
7#on-march-3-1998-then-microsoft-ceo-bill-gates-
came-to-capitol-hill-to-testify-before-the-senate-
judiciary-committee-1

The case is not unlike what Google is now facing: a lawsuit form the DOJ alleging
Google's business deals hurt smaller competitors. Back in 1998, Gates was called
before the Senate Judiciary Committee to be questioned about Microsoft's
dominance in the software market. Microsoft's business practices ultimately led the
Department of Justice to file suit against the company.

A court initially ruled that Microsoft should be broken up into two separate
companies, which Microsoft appealed. In the end, Microsoft settled with the US
government, agreeing to change its ways. But the court case had long-lasting
impacts on Gates and Microsoft. It directly contributed to Gates' early retirement,
and Gates has said it's the reason Microsoft's smartphone ambitions failed.

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Copyright © 2012 Pearson Education, Inc. All rights reserved.
 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.

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 Definition of Market
• A forum in which people come together to
exchange ownership of goods; a place where
goods or services are bought and sold.

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 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.

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 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.

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In addition , free competitive markets require and enforceable private
property system and a system of contacts and production

In such a market, prices rise when supply falls, inducing greater

production.

Thus prices and quantities move towards the equilibrium point,

where the amount produced exactly equals the amount buyers want
to purchase.

In this manner, free markets satisfy three of the moral criteria:

justice, utility and rights.

That is, perfectly competitive free markets achieve a kind of

justice, they satisfy a certain version of utilitarianism, and they
respect certain kinds of moral rights.

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 Supply Curve

Demand Curve

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 Demand Curves
• Demand Curve: A line on a graph indicating
the quantity of a product buyers would
purchase at each price at which it might be
selling; the supply curve also can be
understood as showing the highest price
buyers on average would be willing to pay for
a given amount of a product.

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 Supply Curves
• Supply curve: A line on a graph indicating the
quantity of a product sellers would provide for
each price at which it might be selling; the
supply curve also can be understood as
showing the price sellers must charge to cover
the average costs of supplying a given amount
of a product.

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 Equilibrium in Perfectly
Competitive Markets
• Equilibrium point: In a market, the point at which the quantity
buyers want to buy equals the quantity sellers want to sell,
and at which the highest price buyers are willing to pay equals
the lowest price sellers are willing to take.
• Principle of diminishing marginal utility: generally each
additional unit of a good a person consumes is less satisfying
than each of the earlier units the person consumed.
• Principle of increasing marginal costs: after a certain point,
each additional unit a seller produces costs more to produce
than earlier units.

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 Equilibrium in Perfectly Competitive
Market
• Price and quantity move to equilibrium in
perfectly competitive market because:
– If price rises above equilibrium, surplus appears and
drives price down to equilibrium.
– If price falls below equilibrium, shortage appears and
drives price up to equilibrium.
– If quantity is less than equilibrium, profits rise,
attracting sellers who increase quantity to
equilibrium.
– If quantity is more than equilibrium, prices fall, driving
sellers out which lowers quantity to equilibrium.

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 Ethics and Perfectly
Competitive Market
1. Buyers and sellers to exchange their goods in a
way that is just.

2. Maximize the utility of buyers and sellers

3. Respect buyers and sellers right of free consent

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 Justice in Perfectly Competitive
Markets
• In the capitalist sense of the word, justice is when the
benefits and burdens of society are distributed such
that a person receives the value of the contribution he
or she makes to an enterprise.
• Perfectly competitive free market embody this sense of
justice since the equilibrium point is the only point
which both the buyers and sellers receive the JUST
price for a product.
• Such markets also maximize the utility of buyers and
sellers by leading them to use and distribute goods
with maximum efficiency. This is done in a way that
respects the buyers and sellers’ right of free consent.

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 Efficiency comes about in the perfectly
competitive free market in three main ways:
• They motivate firms to invest resources in
industries with a high consumer demand and
move away from industries where demand is low.
• They encourage firms to minimize the resources
they consume to produce a commodity and to
use the most efficient technologies.
• They distribute bundles of commodities among
buyers so that they receive the most satisfying
commodities they can purchase, given what is
available to them and the amount they have to
spend.

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 Utility in Perfectly Competitive
Markets
• Prices in the system of perfectly competitive
markets attract resources when demand is high
and drives them away when demand is low, so
resources are allocated efficiently.
• Perfectly competitive markets encourage firms to
use resources efficiently to keep costs low and
profits high.
• Perfectly competitive markets let consumers buy
the most satisfying bundle of goods, so they
distribute goods in way that maximizes utility.

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 Negative Rights in Perfectly
Competitive Markets
• Perfectly competitive markets respect the
right to freely choose the business one enters.
• In perfectly competitive markets, exchanges
are voluntary and respects the right of free
choice.
• In perfectly competitive markets, no seller
exerts coercion by dictating prices, quantities,
or kinds of goods consumers must buy.

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• Perfectly Competitive Free Markets embody
the negative right or freedom from coercion.
Thus they are perfectly Moral in three
important ways but some cautions:
1. Achieve capitalist justice, but not other kinds of
justice like justice based on needs.
2. Satisfies a certain version of utilitarianism (by
maximizing utility of market participants but not of
all society)
3. Respects some moral rights (negative rights but
often not positive rights)

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 Characteristics of Perfectly
Competitive Markets (Cautions)
4. Can lead to ignoring the demands of caring
and value of human relationships
5. Can encourage vices of greed and self-seeking
and discourage virtues of kindness and caring
6. Can be said to embody justice, utility, and
rights only if seven defining features are
present.

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 Monopoly Competition
• One dominant seller controls all or most of the
market’s product, and there are barriers to entry that
keep other companies out.
• Seller has the power to set quantity and price of its
products on the market.
• Seller can extract monopoly profit by producing less
than equilibrium quantity and setting price below
demand curve but high above supply curve.
• High entry barriers keep other competitors from
bringing more product to the market (high cost and
risk, economies of scale, and network effect)

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 Monopoly Competition: Justice, Utility
and Rights
• Violates capitalist justice.
– charging more for products than producer knows they are worth
• Violates utilitarianism.
– keeping resources out of monopoly market and diverting them
to markets without such shortages
– removing incentives to use resources efficiently
• Violates negative rights.
– forcing other companies to stay out of the market
– letting monopolist force buyers to purchase goods they do not
want
– letting monopolist make price and quantity decisions that
consumer is forced to accept

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 Oligopolistic Markets
Definitions

• Major industrial markets are dominated by only a few firms.

• Oligopolistic markets are “imperfectly competitive” because

they lie between the two extremes of the perfectly
competitive and monopolistic markets.

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 Unethical Practices in
Oligopolistic Markets
– Price-fixing
– Manipulation of supply
– Market allocation
– Bid rigging
– Exclusive dealing arrangements
– Tying arrangements
– Retail price maintenance agreements
– Predatory price discrimination.
– Bribery
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 BREAD PRICE-FIXING
Loblaw admits to bread price-fixing scheme spanning more than 14 years

Various brands of
bread sit on
shelves in a
grocery store in
Toronto on Nov. 1,
2017.

https://www.theglobeandmail.com/report-on-business/loblaw-parent-company-alerted-competition-watchdog-to-bread-price-
fixing/article37387816/#:~:text=Loblaw%20admits%20to%20bread%20price%2Dfixing%20scheme%20spanning%20more%20than%2014%20year
s,-Open%20this%20photo&text=Grocery%20giant%20Loblaw%20Cos.,Bureau%20investigation%20into%20the%20industry.

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Several industrial and organizational factors lead
companies to engage in price fixing

Incentives and Pressures

1. Crowded and Mature Market
2. Undifferentiated Products
3. Personnel Practices

Opportunities
1. The Job-order Nature of Business
2. Decentralized Pricing Decisions
3. Industry of Trade Associations

Rationalizations
1. In active Corporate Legal or HR staff
2. Organizational Culture of the Business
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 The Fraud Triangle
• The pressures or strong incentives to do
wrong, such as organizational pressure, peer
pressure, company needs, personal incentives
• The opportunity to do wrong, which includes
the ability to carry out the wrongdoing, being
presented with circumstances that allow it,
low risk of detection
• The ability to rationalize one’s action by
framing it as morally justified.

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 Oligopolies and Public Policy
• 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.

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Malaysian Law that protect consumers from buying goods
and services that are priced higher than they should be.

Competition Act 2010

• Encourage healthy competition between companies in the
same industry
• Prevent companies from collaborating illegally

Malaysian Competition Commission (MyCC) acts as a

regulatory body to protect consumers from being abused by a
monopoly. It gets its powers under Section 40 of the
Competitive Act. Has the power to instruct a monopoly to
stop business.

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 Questions?

Thank You

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