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Business Ethics MGT610

LESSON 21

PERFECT COMPETITION

Though some agricultural markets approximate the model of the perfectly competitive free

market, in actuality there is no real example of such a market. Markets that do not have all

seven features of the perfectly free market are, therefore, correspondingly less moral.

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 markets embody this sense of justice, since the

equilibrium point is the only point at which both the buyer and seller 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.

Efficiency comes about in perfectly competitive free markets in three main ways:

1. They motivate firms to invest resources in industries with a high consumer demand and

move away from industries where demand is low.

2. They encourage firms to minimize the resources they consume to produce a commodity

and to use the most efficient technologies.

3. They distribute 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.

First, in a perfectly competitive market, buyers and sellers are free (by definition) to enter or

leave the market as they choose. That is, individuals are neither forced into nor prevented from

engaging in a certain business, provided they have the expertise and the financial resources

required.

Second, in the perfectly competitive free market, all exchanges are fully voluntary. That is,

participants are not forced to buy or sell anything other than what they freely and knowingly

consent to buy or sell. Third, no single seller or buyer will so dominate the market that he is

able to force the others to accept his terms or go without. In this market, industrial power is

decentralized among numerous firms so that prices and quantities are not dependent on the

whim of one or a few businesses. In short, perfectly competitive free markets embody the

negative right of freedom from coercion. Thus, they are perfectly moral in three important

respects: (a) Each continuously establishes a capitalist form of justice; (b) together they

maximize utility in the form of market efficiency; and (c) each respects certain important

negative rights of buyers and sellers. No single seller or buyer can dominate the market and

force others to accept his terms. Thus, freedom of opportunity, consent, and freedom from

coercion are all preserved under this system.

Several cautions are in order, however, when interpreting these moral features of perfectly

competitive free markets. First, perfectly competitive free markets do not establish other forms

of justice. Because they do not respond to the needs of those outside the market or those who

have little to exchange, for example, they cannot establish a justice based on needs. Second,

competitive markets maximize the utility of those who can participate in the market given the

constraints of each participant's budget. However, this does not mean that society's total utility

is necessarily maximized. Third, although free competitive markets establish certain negative

rights for those within the market, they may actually diminish the positive rights of those

outside those whose participation is minimal. Fourth, free competitive markets ignore and even

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Business Ethics MGT610

conflict with the demands of caring. As we have seen, an ethic of care implies that people exist

in a web of interdependent relationships and should care for those who are closely related to

them. A free market system, however, operates as if individuals are completely independent of

each other and takes no account of the human relationships that may exist among them. Fifth,

free competitive markets may have a pernicious effect on people's moral character. The

competitive pressures that are present in perfectly competitive markets can lead people to

attend constantly to economic efficiency. Producers are constantly pressured to reduce their

costs and increase their profit margins. Finally, and most important, we should note that the

three values of capitalist justice, utility, and negative rights are produced by free markets only

if they embody the seven conditions that define perfect competition. If one or more of these

conditions are not present in a given real market, then the claim can no longer be made that

these three values are present.