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Business Ethics MGT610

LESSON 22

MONOPOLY COMPETITION

Of course, the three values of capitalist justice are only produced if the market embodies the

seven conditions that define perfect competition. If even one of the conditions is not present,

then the market cannot claim to promote those values. This, in fact, is the most important

limitation of free market morality: because free markets are not perfectly competitive, they do

not achieve the moral values.

Monopoly Competition

In a monopoly, two of the seven conditions are absent: there is only one seller, and other sellers

cannot enter the market. As the case of Alcoa exemplifies, such markets are far from the

perfectly competitive model. Although Alcoa's patents on the manufacturing of aluminum ran

out in 1909, it remained the sole producer of virgin aluminum for another thirty years. No

competitor could enter the market because their startup costs would have been too great, and

they lacked Alcoa's experience. Alcoa and other monopolies like Western Electric, Standard

Oil, and the American Tobacco Company were thus able to fix output at a quantity less than

equilibrium, making demand so high that they reaped excess profits. (Had entry into these

markets been open, the excess profits would have drawn others into producing these goods

until prices dropped, but this does not happen in a monopoly.)

Monopolistic markets and their high prices and profits violate capitalist justice because the

seller charges more than the goods are worth. Thus, the prices the buyer must pay are unjust. In

addition, the monopoly market results in a decline in the efficiency of the system. First, the

monopoly market allows resources to be used in ways that will produce shortages of those

things buyers want and cause them to be sold at higher prices than necessary. Second,

monopoly markets do not encourage suppliers to use resources in ways that will minimize the

resources consumed to produce a certain amount of a commodity. A monopoly firm is not

encouraged to reduce its costs and is therefore not motivated to find less costly methods of

production. Third, a monopoly market allows the seller to introduce price differentials that

block consumers from putting together the most satisfying bundle of commodities they can

purchase given the commodities available and the money they can spend. Because everyone

must buy from the monopoly firm, the firm can set its prices so that some buyers are forced to

pay a higher price for the same goods than others.

In effect, those who have a greater desire for an item will buy less, and those who desire an

item less will buy more, which is a great inefficiency, and means that consumers are no longer

able to purchase the most satisfying bundle of goods they can.

Oligopolistic Competition

Most industries are not entirely monopolistic; in fact, most are dominated by a few large firms.

These markets lie somewhere in between the monopoly and the perfectly competitive free

market; the most important type of these imperfectly competitive markets is the oligopoly.

In an oligopoly, two of the seven conditions are not present. Instead of many sellers, there are

only a few significant ones. The share each firm holds may be somewhere between 25 percent

and 90 percent of the market, and the firms controlling this share may range from 2 to 50

depending on the industry. Second, as with the monopoly, other sellers are not free to enter the

market. Markets like this, which are dominated by four to eight firms, are highly concentrated

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Business Ethics MGT610

markets. A list of firms in oligopoly markets in the most highly concentrated American

industries reads like a who's who of American corporate power.

The most common cause of oligopolistic market structure is the horizontal merger or

unification of two companies that formerly competed in the same line of business. Because

such markets are comprised of a small number of firms, it is easy for their managers to join

forces to set prices and restrict their output, acting, in effect, like one large monopolistic firm.

Therefore, like monopolies, they can fail to set just profits, respect basic economic freedoms,

and protect social utility.