COMPETITION AND THE MARKET:Perfect Competition

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Business Ethics MGT610

LESSON 20

COMPETITION AND THE MARKET

Introduction

This chapter moves the consideration 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 competition; it may be surprising to

note that there are so many examples 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 corporate

executives indicated that 60 percent of those sampled believed that many businesses engage in

price fixing.6 One study found that in a period of two years alone over sixty major firms were

prosecuted by federal agencies for anticompetitive practices. Actually, it is more than

surprising. The morality of the free market system itself is based on the idea of competition

creating a just allocation of resources and maximizing the utility of society's members. To the

extent that the market is not competitive, it loses its moral justification for existing.

To understand the nature of market competition and the ethics of anticompetitive practices, it is

helpful to examine 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 significantly affect

the price of a good. Seven features characterize such markets:

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

market.

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. The goods being sold in the market are so similar to each other that no one cares from

whom each buys or sells.

5. 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.

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

little as possible.

7. 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.

In addition, free competitive markets require an enforceable private 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 equilibrium point, where the amount produced exactly equals the

amount buyers want to purchase. Thus, perfectly free markets satisfy three of the moral criteria:

justice, utility, 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.

Business Ethics MGT610

The movement towards the equilibrium 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 additional item of a certain type is less satisfying than the

earlier ones. Therefore, the more 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 average 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 respective supply and demand curves

will meet and cross at the equilibrium point.

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