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Business Ethics MGT610

LESSON 23

OLIGOPOLISTIC COMPETITION

Oligopolistic Competition

Oligopolies can set high prices through explicit agreements to restrain competition. The more

highly concentrated the oligopoly, the easier it is to collude against the interests of society,

economic freedom, and justice. The following list identifies practices that are clearly unethical:

1. Price Fixing - when companies agree to set prices artificially high.

2. Manipulation of Supply - when a company agrees to limit production.

3. Exclusive Dealing Arrangements - when a company sells to a retailer only on

condition that the retailer will not purchase products from other companies and/or will

not sell outside a certain geographical area.

4. Tying Arrangements - when a company sells a buyer certain goods only on condition

that the buyer also purchases other goods from the firm.

5. Retail Price Maintenance Agreements - when a company sells to a retailer only on

condition that they agree to charge the same set retail prices.

6. Price Discrimination - when a company charges different prices to different buyers for

the same goods or services.

Several industrial and organizational factors lead companies to engage in these practices:

1. Crowded and Mature Market - When large numbers of new entrants or declining

demand create overcapacity in a market, the resulting decline in revenues and profits

creates pressures on middle-level managers. They may respond by allowing,

encouraging, and even ordering their sales teams to engage in price fixing.

2. Job-Order Nature of Business - If orders are priced individually so that pricing

decisions are made frequently and at low levels of the organization, collusion among

low-level salespeople is more likely.

3. Undifferentiated Products - When the product offered by each company in an industry

is so similar to those of other companies that they must compete on price alone by

continually reducing prices, salespeople come to feel that the only way to keep prices

from collapsing is by getting together and fixing prices.

4. Culture of the Business - When an organization's salespeople feel that price fixing is a

common practice and is desired, condoned, accepted, rationalized, and even encouraged

by the organization, price fixing is more likely.

5. Personnel Practices - When managers are evaluated and rewarded solely or primarily

on the basis of profits and volume so that bonuses, commissions, advancement, and

other rewards are dependent on these objectives, they will come to believe that the

company wants them to achieve these objectives regardless of the means.

6. Pricing Decisions - When organizations are decentralized so that pricing decisions are

pushed down into the hands of a lower part of the organization, price fixing is more

likely to happen. Price decisions should be made at higher organizational levels.

7. Trade Associations - Allowing salespeople to meet with competitors in trade

association meetings will encourage them to talk about pricing and to begin to engage in

price-setting arrangements with their counterparts in competing firms.

8. Corporate Legal Staff - When legal departments fail to provide guidance to sales staff

until after a problem has occurred, price-fixing problems are more likely.

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Business Ethics MGT610

It is difficult to legislate against many common oligopolistic price-setting practices, however,

because they are accomplished by tacit agreement. Firms may, without ever discussing it

explicitly, realize that competition is not in their collective best interests. Therefore, they may

recognize one firm as the "price leader," raising their prices in reaction when the leader decides

to do so. No matter how prices are set, however, clearly social utility declines when prices are

artificially raised.

Firms also occasionally resort to bribery, which also results in a decline in market competition.

Bribes serve as a barrier to others entering the market; the briber becomes, in effect, a

monopoly seller. To determine whether a payment is ethical, there are three relevant points to

consider: