Competition and the market

This moves the thought of business ethics from the morality of the economic system in general to the morality of specific practices within our system. Given that our system generally follows the free market model, which is based on rivalry; it may be surprising to note that there are so many illustrations of anticompetitive practices in the U.S. today. A report on New York Stock Exchange companies showed that 10 percent of the companies had been involved in antitrust suits during the previous five years.  A  survey  of  major  business executives indicated that 60 percent of those sampled believed that many businesses slot in in price fixing.6 One study found that in a era of two years alone over sixty major firms were prosecuted  by  federal  agencies  for  anticompetitive  practices.  Actually, it is more than astonishing. The morality of the free market system itself is based on the idea of competition creating a just allotment of resources and maximizing the utility of society's members. To the extent that the market is not competitive, it loses its moral validation for existing.

To understand the nature of market competition and the ethics of anticompetitive practices, it is helpful to study three abstract models of the different degrees of competition in a market: perfect competition, pure monopoly, and oligopoly.

Perfect Competition

In a perfectly free competitive market, no buyer or seller has the power to extensively affect the price of a good. Seven features characterize such markets:

1.   The goods being sold in the market are so similar to each other that no one cares from whom each buys or sells.

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, including knowledge of the prices, quantities, and quality of all goods being bought and sold.

4.   There are numerous buyers and sellers, none of whom has a substantial share of the market.

5.   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.

6.   All buyers and sellers are utility maximizers: Each tries to get as much as possible for as little as possible.

7.   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.

In addition, free competitive markets require an enforceable personal property system and a system of contracts and production.

In such markets, prices rise when supply falls, inducing greater production. Thus, prices and quantities move towards the stability point, where the amount produced exactly equals the amount buyers want to purchase. Thus, perfectly free markets convince three of the moral criteria:  utility, justice and rights. That is, perfectly competitive free markets achieve a certain kind of justice, they satisfy a certain version of utilitarianism, and they respect certain kinds of moral rights.

The movement towards the stability point can be explained in terms of two principles: the principle of diminishing marginal utility and the principle of increasing marginal costs. When a buyer purchases a good, each extra item of a certain type is less satisfying than the earlier ones. Therefore, the extra goods a consumer purchases, the less he will be willing to pay for them. The more one buys, the less one is willing to pay. On the supply side, the more units of a good, a producer makes, the higher the regular costs of making each unit. This is because a producer will use the most productive resources to make his or her first few goods. After this point, the producer must turn to less productive resources, which means that his costs will rise. Since sellers and buyers meet in the same market, their personal supply and demand curves will meet and cross at the equilibrium point.