Ethics in the Marketplace

Market
Any forum in which people come together for the purpose of exchanging ownership of goods/services

Types of Market Competition

Market Structures

Monopoly

Duopoly

Oligopoly

Monopolistic Competition

Perfect

No of Firms
product

one
Unique No substitute

two
Homogeneous differentiated

few
Identical Differentiated

many
differentiated Identical/homog eneous

Perfect Competition

Numerous buyers and sellers None have substantial market share Freedom to enter/exit market Full product knowledge of every good being sold Homogeneous product No external parties (e.g. govt.) to regulate price, quantity and quality of goods/services

Companies are price takers, because buyer and seller dont have significant power to affect prices at which goods are being sold In perfect competition, the prices, the amounts supplied and amounts demanded all tend to move toward point of equilibrium
Point of Equilibrium

Prices buyers are willing to pay for certain amount of goods exactly matches the price sellers must take to cover costs

Free (unregulated) Monopoly Market

Single seller has substantial (100%) share of the market

Barriers to entry (e.g. patent laws, customer loyalty, high costs) make it difficult for other sellers to enter the market
Monopoly profit

Seller can control the prices Quantity below equilibrium Prices above equilibrium Extracts monopoly profit

Oligopoly

Oligopoly means few sellers.

Each

has market share from 25-90% and the number of firms may be between 2-50 depending on industry size

Because of high start-up costs and other barriers to entry, the number of firms entering it is low.

Since relatively small number of firms so it becomes easier for firms to join forces and act as a unit Can set prices at same level and restrict output Fails to exhibit just profit levels, declines social utility and negates respect for economic freedom The more highly concentrated the market, the higher the profits extracted from the market

Unethical Practices in Oligopoly

Price fixing Agreement between firms to set prices at artificially high

level

Manipulation of supply which results in market shortages and

causes prices to rise at levels higher than those in free market competition

Exclusive dealing arrangements when firms sell to retailers on the

condition that they will not purchase product from other companies or/and wont sell out of a particular geographical area

Tying arrangement: When a firm sells a buyer a certain good only on

the condition that buyer agrees to purchase other products

Price Discrimination: to charge different prices to different buyers for

identical goods or services

Differences are only legitimate when based on volume differences, or other differences related to true costs of manufacturing, packaging, marketing, transporting or servicing goods.

Reasons for Price Fixing

Crowded and Mature markets

Overcapacity

created due to large no of new entrants or declining demand results in decline in revenue and profits decisions made at lower levels, considered a common practice of the company, evaluation and rewards solely on basis of profits

Nature of Business
Pricing

Undifferentiated Products
When

products are so similar that competition is only on the basis of price, so to avoid prices from collapsing salespeople come together and fix prices