ECONOMICS, ETHICS AND UNFAIR COMPETITION

Centre for Business Research, University of Cambridge

Working Paper No. 22

by

Ian. W. Jones Michael G. Pollitt

Centre for Business Research Centre for Business Research
Email: i.jones@cbr.cam.ac.uk Email: m.pollitt@jims.cam.ac.uk

December 1995
Abstract
This paper seeks to explore the economics and ethics of competition in the context of
two important economic relationships: vertical (buyer-supplier) relations between
firms and horizontal (rivalrous) relations between firms. We start by developing
concepts of fairness within each of the three types of relationship with reference to the
Bible. We go on to illustrate and analyse these concepts with 4 case studies of best
practice and poor competitive relationships. The case studies involve Hewlett Packard,
the UK clothing industry, United Biscuits and the British Airways Dirty Tricks
campaign.

JEL Classification: M1

Further information about the Centre for Business Research can be found at the
following address: www.cbr.cam.ac.uk.
Economics, Ethics and Unfair Competition

fair
10a. Of conduct, actions, arguments, methods: Free from bias, fraud, or injustice;
equitable, legitimate. Hence of persons: equitable; not taking undue advantage;
disposed to concede every reasonable claim. Of objects: That may be legitimately
aimed at; often in fair game, fig.; fair wage(s)

unfair
2. Not fair or equitable; unjust: of actions, conduct etc.; spec. of (business)
competition
(Oxford English Dictionary)

1. Introduction

Fair Competition is an important legal and ethical concept. The term refers to what
constitutes legally and ethically acceptable behaviour by firms in their internal and
external business relationships. Business behaviour can be ethically categorised along
a line which runs from the illegal, through the ethically mandatory (as required by
social norms and trade associations) to good or exemplary - we might refer to this line
as the ethical continuum, along which the ethical value of given actions, groups of
actions or firms might be located. Thinking about what constitutes fair competition in
this way immediately suggests that competition law is focused at one end of the
ethical continuum, on behaviour which only the most unscrupulous or least well
informed firms will continue to engage in. Amoral, but rational firms, may still engage
in illegal behaviour if competition law is subject to weak enforcement such that the net
benefits from illegal behaviour are positive. Such a situation may exist in some former
communist countries, where low salaries of public servants and inefficient procedures
may render competition law ineffective, and in advanced countries where
shortcomings in legislation and new developments may give rise for opportunities for
frustrating the intent of the law.

Competition law1, such as the 1973 Fair Trading Act in the UK or the 1914 Clayton
Act in the US, the 1947 Anti-monopoly Law in Japan and Articles 85 and 86 of the
Treaty of Rome, traditionally covers several major areas of firm behaviour - the
behaviour of large firms with market power (eg.predatory pricing), collusion between
firms (eg. price fixing cartels), mergers (eg.between competitors) and agreements
between firms and their suppliers (eg.resale price maintenance). Competition law
establishes and empowers government institutions, such at the Federal Trade
Commission and Department of Justice in the US and the Office of Fair Trading
(OFT) and Monopolies and Mergers Commission (MMC) in the UK, to undertake
investigations and to impose penalties. Competition law is an evolving process which
involves the law being continually updated eg. revisions to US merger guidelines, the
introduction of the EC Unfair Contract Terms Directive 19932 and the new draft UK

1
Competition Bill3. Such evolution occurs in the light of new and usually higher ethical
standards - including more types of business behaviour along the ethical continuum
within the legally required rather than ethically mandatory category discussed above -
and reflects improved enforcement techniques and discoveries in the methodologies
for identifying abuses4.

However an advanced and advancing competition policy law clearly does not exhaust
what may be considered ethical behaviour, it does not mean that firms obeying the
letter of the law are adhering to best practice business ethics. Competition policy law,
like most law within democratic societies, is ethically minimalist in the sense that
there is always likely to be good competitive behaviour that goes beyond what is
legally required. Furthermore the law cannot regulate effectively the latest
management practices unanticipated at its passing. In addition it suffers from
shortcomings as law : weak enforceability, political intervention, conflicting
objectives, lack of information and the need to maintain incentives to engage in risky
productive activity etc5. These shortcomings have led to a generally permissive
legislative approach to the regulation of business behaviour for fear of errors (eg.
towards mergers in the EC), a low success rate in competition authority proceedings
(as evidenced by the varied outcomes of MMC investigations in UK) and low ex post
penalties following proven abuses (for fear of bankrupting productive firms).

Clearly, many companies join trade associations and commit themselves to standards
of fairness which go beyond the straightforward requirements of competition law6.
Whole industries, such as banking, engage in detailed self-regulation. Such
commitments to external standards which involve behaviour further up the ethical
continuum. Many individual companies further commit themselves to their own
ethical standards as embodied in a code of ethics which lays down standards for
employees and for the company as a whole in business dealings. Still other companies
have built up reputations for ethical behaviour without recourse to published codes of
good practice (eg.Marks and Spencer)7.

Among those firms which do more than the law requires some may be described as
ethically best practice firms. The reasons for firms seeking to go beyond the law at all
may be mixed: some do so because of a concern for ethics per se, while others would
appeal primarily to enlightened self-interest ie. that adhering to higher standards pays
off financially in the long run either positively, by gaining profits from reputation, or
negatively, by avoiding legal penalties or stiffer government regulation because of the
anti-social nature of the firm or industry behaviour. There would seem to be a strong
overlap, at least initially, between enlightened self-interest and what might be
considered ethically mandatory as we move along the ethical continuum from the
legally required. However it is clearly the case that as companies seek to pursue higher
and higher ethical standards eventually ethics proves less financially rewarding. The
best standards of business behaviour are likely to be costly relative to those suggested
purely by enlightened self-interest.

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The starting point for this paper is that those of us who would seek to advocate higher
ethical standards in business relationships for ethics sake should provide apologetics
for such a position where they exist. Such apologetics will involve seeking where
possible to argue from reason and enlightened self-interest the case for best practice
business ethics. We focus on the analysis of two important external business
relationships: vertical relationships between firms and their suppliers and horizontal
relationships between firms and their competitors.

In what follows we explore the practical question of what constitutes best practice
business behaviour within these relationships beginning in section 2 by considering an
ethically ideal position which illuminates the whole length of the ethical continuum.
We look for this ideal by examining concepts of fairness in the Bible. This seems a
reasonable approach as Judaeo-Christian concepts of fairness, derived from the Bible,
have played a major role in the evolution of both legal and moral values in many
advanced market economies. In sections 3 and 4 we attempt to give practical focus to
the range of ethical behaviour which firms engage in by looking at two examples for
each of the business relationships: one example exhibiting ethical best practice, the
other the problems of failing to do even the ethically mandatory. In each section we
present the examples and then offer some economic analysis in order to provide some
economic apologetics for ethical behaviour. Section 5 offers a brief conclusion.

2. Biblical insights into the nature of unfair competition.

In this section we discuss the ethical issues raised by vertical and horizontal business
relationships in the light of economic theory. The aim is to use an understanding of the
economic nature of the relationship in order to sharpen the focus on the essence of the
ethical issue in each case.

In an earlier paper (1996) we discussed the nature of integrity (honesty) in business

from a biblical perspective. This topic was much easier to define and apply in an
economic context than the concept of unfair competition - there are two main
reasons for this. Firstly, economic fairness is traditionally a topic for political debate
and may be thought to lie at the heart of welfare judgements in economics and party
political preferences. This may explain the shortcomings of legislation on competition
and the unwillingness of politicians to relinquish discretionary powers over
competition policy law enforcement in the UK8. Secondly, honesty is a personal virtue
which is much discussed in both theoretical (socio-legal) and applied (case study
examples) terms in the Bible. However unfairness in a business environment is much
less widely discussed.

In spite of technical progress and economic growth, much of modern business has
zero-sum elements to it (especially as growth rates in advanced countries fall) - one
firm's gain in market share is another's loss, growth leads to some firms falling behind
others etc. Modern capitalism is characterised by a process of 'creative destruction9.
This insight reveals the paradoxical nature of the competitive process - creativity and

3
economic death go together. Drawing biblical insights is complicated by the twin fact
that both the principles of competition and the case study evidence on competition are
seldom discussed. There are examples of a vertical relationships in the Bible (the King
of Lebanon supplied cedars to King Solomon of Israel for the building of the
Temple10) and of competitive rivalry (Jacob and his uncle Laban for Labans sheep
flock11)12. However the ethical aspects of these relationships are not discussed
explicitly. Unfairness is discussed at a more personal level and unfairness as it relates
to justice is actually a large topic in biblical ethics.

We can suggest that there are relationships in the Bible which have similar
characteristics to those of the economic relationships that we discuss - making such
connections between economic analysis and wider social concerns has been
legitimised by public/rational choice theory13. It is at this fundamental level that we
can perhaps make progress in drawing out the modern implications of biblical
attitudes of fairness in a competitive environment. Biblical principles can provide a
radical end to the ethical continuum as well as commenting on its whole length. The
Bible argues for obedience to the law and keeping ones promises, it appeals to the
ethically mandatory on the grounds of self-interest and reason and encourages
behaviour which is good and exemplary beyond the law14. We note the problem of
'ethical blindspots': firms that are ethically best practice in some areas may not be in
others. By definition surviving firms must do something well and it is difficult to find
firms which would score ethically badly in all their economic relationships.

2.1: The ethics of vertical relationships.

Vertical relationships almost always have a power aspect. From the point of view of
economic theory we need to be clear that vertical relationships can be motivated by a
mixture of market power and efficiency considerations and that vertical separation
(eg.contracting out) may or may not involve vertical control without ownership15.
Although there can be strong efficiency motives for vertical relationships, any vertical
relationship poses interesting ethical dilemmas because it involves a power
relationship in which one firm has market power over a downstream or upstream
company with whom it trades by virtue of its market share at a particular vertical stage
of production. If one of the firms has a relatively large market share the weaker firm
may be denied inputs (if the small firm is a purchaser) or access to output markets (if
the small firm is a supplier). In addition to this each firm may be more or less
dependent on the specific investments made in order to satisfy the contractual
relationship (the asset specificity problem)16. This power imbalance implies the
possibility of discretion on the part of the stronger firm in the allocation of the joint
profits of the vertically related businesses. If there was no inequality in the power
relationship between the two firms - there would be no cause for dissatisfaction
(except in the case of deceit or misinformation) on the part of one or other party to the
trade. Their bargaining power would be equal either as a result of mutual
interdependence or of the presence of alternative sources of supply or outlets for
production. It is inequality which can lead to unfairness.

4
The Bible talks extensively about how the strong should act towards the weak17: the
principle of the Jubilee (where traditional family land must not be appropriated for
prolonged periods); paying fair wages; and not exploiting legal rights up to the point
of not leaving the poor or the weak with opportunity to earn a dignified living, albeit
above that which they would receive in a free market. Vertical relationships based on
power thus should allow the weaker firm to earn a fair rate of return on its assets i.e.
the risk-free interest rate plus a fair premium which should be low if the vertical
relationship is low risk (eg.producers of Y-fronts should fairly expect a lower return
than producers of designer clothes). Contracts should allow the weaker firm to pay fair
wages to its workers. It is interesting to think about the ethics of contracting out: 'do
onto others as you would do onto yourselves'18 is important in the context of the
difference between vertical integration (joint ownership of adjacent stages of the
supply chain) and vertical contracts (between separate buyer and supplier in the supply
chain). Exemplary behaviour would therefore, for firms with vertical market power,
involve a self-limitation of the exercise of that economic power.

2.2 The ethics of rivalry

This is the most difficult economic relationship we consider in this paper. The
question is one of the limits of rivalry between firms and the process of creative
destruction. This can so easily degenerate into a discussion of the relative merits of
capitalism and socialism. Libertarians argue that ends of wealth creation and economic
progress justify means, if they are within the law, Marxists argue against the
exploitation and wasteful competition that characterises advanced capitalism19. We
once again need to draw back from issues that are a long way from the issues of
personal principle and motivation that dominate biblical discussions and hence are
most important from the point of view of the individual firm.

We accept the reality of the capitalist competitive system and thus the destruction
which accompanies it. However we should point out that justifications of it do exist
and that capitalism is not any more inconsistent with the biblical ideal than any other
system. In particular we recognise that destruction and creation often go together in
the Bible20. This is not to say that in each of the biblical examples destruction was
good in and of itself. However the consequences and indeed the necessity of it were
desirable - but that does not change the fact that the destruction involved real suffering
and would not have been necessary in an ideal world21.

The Biblical record suggests that destruction should not be the motive or focus of
individuals - far from it - it should be avoided by the pursuit of right action22.
Applying all this to the competitive environment leads to the suggestion that good
competitive rivalry should be motivated by a desire to create and to improve
independently of the competition23. Competition may be useful in this process in that it
provides a yardstick by which performance may be judged. A consequence of this
process is almost of necessity that some firms are less successful than others and that

5
hence some firms may go bust. Here we verge back into the capitalist - socialist
debate. However in biblical terms it is the means and motive that seem to be ethically
important in the competitive process. Means should be honest and within the law,
whatever the agreed rules are. The motive for competition should not be arise from a
desire to kill or to dominate24 but from a desire to create something better25. The
conduct of competition should thus involve competing according to the rules and
avoiding untruthful or unfair references to competitors products and admitting defeat
when beaten by legitimate means26. It might be argued that cut-throat competition is
less of a problem than collusion (explicit or tacit). However collusion can be criticised
for the same underlying reason as excessive rivalry - it arises from wrong motives i.e.
the desire to exploit consumers rather than to serve them.

3. Relationships with suppliers.

(a) A best practice vertical relationship: Hewlett Packards relationship with its
suppliers.

The computer industry provides many well known examples of companies with best
practice ethical standards. Companies such as IBM and Hewlett Packard have built
their reputations for quality products on the back of well-worked out corporate
business ethics. The best companies have detailed codes of ethics which inform
employees how the company expects them to act in relation to their major
stakeholders27. In this sub-section we focus on the example of Hewlett Packard28.

Hewlett Packard designs, manufactures and services electronic products and systems
for measurement, computation and communications (Hewlett Packard Annual Report,
1996). Net revenue in 1996 was $38,420m and net earnings was $2586m. The
company is incorporated in the US but generates the majority of its income outside the
US and is the producer of HP printers and UNIX computer systems. The company is
highly successful and increased its net earnings by 293% in the five years to 1996.

HPs values are a set of deeply held beliefs that govern and guide our behaviour in
meeting our objectives and in dealing with each other, our customers, shareholders
and others.

(The HP Way, 1994)

The company was founded in 1939 by William Hewlett and David Packard in a garage
which is credited as the birthplace of Silicon Valley. In 1957 Hewlett and Packard
formulated a set of corporate objectives known as the HP Way which lays down the
guiding philosophy of the company. The HP Way sets seven corporate objectives
concerning profit, customers, fields of interest, growth, our people, management and
citizenship.

The citizenship objective is restated in the 1994 Annual Report (p.3):

6
Our corporate objective on citizenship challenges the company to honour our
obligations to society by being an economic, intellectual and social asset to each
nation and each community in which we operate.

Since 1957 the HP Way has been updated and the company has produced a detailed
set of standards of business conduct. This document details ethical behaviour on
conduct involving HP, such as acceptance of gratuities, conduct involving
competitors, conduct involving customers and conduct involving suppliers, and is
introduced by the company president. All employees are annually reviewed about their
compliance to the companys business ethics. The company feels that the corporate
presidents endorsement enhances the companys reputation and that employees feel
comfortable with ethical behaviour. Employees are encouraged to take ethically tough
business decisions, violation of the companys standards is disciplinary offence as
compliance is a contractual obligation.

The company bought in $3,486m of services in 1996 as well as having numerous

subsidiary companies29. The company is thus involved in many different types of
relationships with suppliers of materials, components, business services etc. Given its
size it has the potential to be a major buyer of many smaller companies products and
thus has the potential to exercise considerable monopsony buying power over its
suppliers. HPs standards of business conduct however have a two page section on
conduct involving suppliers. The general policy is summed up as:

HPs relationships are of strategic importance. You must use common sense, good
judgement and the highest standards of integrity when you deal with suppliers.

(Standards of Business Conduct, p.19)

The standards then go on to discuss: choosing an HP supplier; handling of formal bid

processes; guidelines on the exchange of confidential information; the treatment of
supplier price information; the limiting of supplier prices; and the endorsement of
supplier products.

The company reports that the nature of the supplier relationship has been changing in
recent years with the movement to just-in-time management but also the development
of the idea of making partners of suppliers and the ability to influence cost and quality
to the mutual benefit of both parties. Supplier relationships tend to be long term with
regular reviews around every 3 years. The company recognises the need to keep
suppliers financially viable and generally does not want to make suppliers dependent
and thus become responsible for their survival.

(b) A poor vertical relationship: manufacturer-retailer relations in the UK clothing

industry.

7
In order to meet the challenges of the 90s, UK manufacturers must form stronger
bonds with retailers to eliminate cost and risk by integrating the process of design,
manufacture and supply.
(Apparel and Textile Challenge Initiative, Press Release, 1995)

By way of a sharp contrast with the preceding example we now consider the poor
manufacturer-supplier relationships in the clothing industry in the UK30. The rag
trade has long been a favourite example of an industry characterised by poor working
conditions, import penetration, small and undynamic manufacturing companies31. The
UK trade balance in clothing has declined markedly since 1979 and the UK fashion
industry has been unfavourably compared to clothing industries in other European
countries, such as Italy, who seem to have managed the challenge of cheap imports
and changing consumer tastes much more successfully.

However the UK clothing industry is characterised by very unequal power

relationships between manufacturers and suppliers. 14 multiple retailers (eg.Marks
and Spencer, Debenhams etc.) control 80% of all sales of clothing in the UK32. In Italy
80% of sales are through independent retailers. UK retailers are extremely large while
the typical UK manufacturer is much smaller33. The majority of sales in the major
stores are of own-brand clothes which further reduces the relative power of the
manufacturer as the consumer in this case is not buying a particular manufacturers
product and is totally unaware of the source. If manufacturers do not comply with
retailers terms the retailer can source their clothes elsewhere.

The government has recognised that poor retailer supplier relationships are harming
the international competitiveness of the manufacturers by sponsoring an Apparel and
Textile Challenge Director to foster links between the retailers and the manufacturers.
This appointment is part of the Department of Trade and Industrys (DTI) Challenge
Initiative34 and also involves the retailers trade association - British Retail
Consortium - and the manufacturers trade association - The British Apparel and
Textile Confederation.

The UK fashion industry is one of the most price sensitive in Europe with consumers
interested in low price goods35. Price competition is such that overseas suppliers often
receive less for the same goods from UK retailers than from retailers in other
European countries such as Germany. However in recent years demand has become
more sensitive to quality and service and the major retailers have pressured suppliers
to improve in these areas. Technology changes have acted to shorten the supply chain
and reduce costs. Electronic Point of Sale (EPOS) data received by the retailer can be
used to vary demands on manufacturers much more quickly and precisely36. Own
brand products with retailer labels have become increasingly important. The large
national chains are able to market their brands and hence exploit economies of multi-
shop ownership but this increases the demand for standard lines and restricts
opportunities available to small innovative manufacturers.

8
It is noticeable that the ethics of the supply chain are rarely highlighted. Consumer
monitoring organisations do not discuss retailers records with suppliers and the
manufacturers are reluctant to bring attention to the well-known problems in the
supply chain for fear of retaliation on the part of the major retailers who exercise such
power over them37. The primary motive is to increase retailer profit while increasing
market share, eliminating risk and reducing inventory. Ethical standards vary from
retailer to retailer but the culture of the buying office is closer to that of the jungle
than that of the sports field.
The situation in the UK is largely a function of history, foreign competition and the
uniquely relative power of garment retailers. Intense competition has led to low rates
of return on capital and hence low incentives to invest. Such competition over a
prolonged period has encouraged firms to act individually and has discouraged co-
operation which has benefited overseas firms operating in successful industrial
districts38. Thus firms fail to co-operate in the collective provision of training, research
and development and business services. However it would be wrong to suggest that
the ethical position in the UK is materially worse than in the rest of Europe, the Far
East or even the US. In varying degrees the rest of Europe suffers from similar
problems to the UK while the workplace standards of the Far East are far below those
in the UK39. The relative size of the UK retailers has tended to lead to manufacturers
not developing as many new products unlike in Italy where the relative power of the
manufacturer-retailer relationship is reversed and large manufacturing companies have
gone on to be very successful overseas eg.Benetton, Fara and Gabichi.

The DTIs Challenge Initiative is seeking to improve the relationship between retailers
and buyers by sharing information and risk. EPOS information requires the
manufacturer to be extremely flexible. Retailers may book production space for
10,000 units and change the required product (shirts to skirts) as sales change. All this
reduces the retailers risk. Currently time from the start of production to shelf can be as
short as 2 weeks for some lines (and as long as 1 year on other lines) in the largest
chains with further reductions in average production to shelf times envisaged.
Bringing manufacturers and suppliers closer together in order to reduce overall supply
chain costs and increase flexibility is one of the objectives of the Challenge Initiative.

Tactics used by the retailers to exert pressure on suppliers include:

Retrospective discounts: changing the price paid to the manufacturers after production
and contracting. A major retailer40 recently sent a letter to all their suppliers
unilaterally imposing a 2% discount of all payments from 1 October 1995 stating that
continued fulfilment of orders was taken as acceptance of the new contract.

Defect clauses: penalties are often imposed if any defects (>0 percent) are found.
Contractual terms may specify that if this is repeated within three months the penalty
is doubled and tripled if again in the next three months and so on. These are imposed
tactically from time to time. As clothing manufacture is as much an art as a science it
is always possible to find a fault or defect in a piece of clothing if the retailer wants to.

9
Disproportionate penalties: the penalties imposed for contractual violations are often
much greater than the cost of the offence. A small error in the bar-coding for example
can lead to a major penalty being imposed. Retailers however argue that true cost of
defective manufacturing to them is high in terms of repackaging and lost reputation.

Advertising appropriations: deductions are regularly imposed on suppliers due to new

stores being opened and justified on the grounds that they will increase manufacturers
sales. However this is seldom, if ever, the case as new orders go elsewhere.

Mark-downs: if items are moving slowly and the retailer decides to have a sale (say
20% off) the manufacturers are pressured to absorb half of the costs (i.e. 10% of the
discount is passed on to manufacturers).

Intellectual Property: if manufacturers undertake the development of a range of

clothing (in terms of design and development) the retailers can sometimes appropriate
the design and source at least 80% of it from the Far East. In addition the residual 20%
received is generally confined to fast moving items with their associated problems.

Unfair treatment of UK suppliers relative to foreign suppliers: The above practices are
inevitably discriminatory as they cannot be applied to overseas purchases, particularly
where these orders are manufactured under an irrevocable letter of credit which means
that once they arrive at the airport or on the ship they are effectively paid for. If they
are defective when they arrive then no charges can be levied. Defective products from
overseas have to be repaired in the UK and an industry has grown up repairing the
defects in imported clothing.

(c) Analysis of vertical case studies

The above cases suggest two very different types of vertical relationship at opposite
ends of the ethical continuum. In this sub-section we discuss the underlying economic
rationale for the different competitive relationships and the economic case for a more
ethical approach.

The underlying technology and tastes and preferences in the computing and garment
industries are very different. The vertical relationships are different as well. HPs
vertical relationships are supplier - manufacturer relationships whereas in clothing we
discuss clothing manufacturer - retailer relationships. These are clearly different stages
of the supply chain. Computer equipment is a rapidly expanding market while clothing
is a mature market subject to intense price competition in most segments of the market
due to the pressure of cheap imports. It is a feature of economic development that
newly industrialising countries rely on industries such as clothing to provide
economic takeoff. The presence of cheap manufacturers in the third world will
necessitate some scaling down of the UK clothing industry in high volume, low value
added market segments. In the short run however manufacturers may try to compete
by improving productivity, reducing profit margins and cutting wages (relative to

10
other sectors). In the short run there is some scope to do this - in the long run however
it will lead to underinvestment and deskilling and a fall in the quantity and quality of
the workforce. As a long run strategy the clothing industry cannot compete with the
cheap imports in the market for standardised, cheap clothing, particularly as the Multi-
Fibre Agreement (MFA) quota controls are incrementally dismantled by 2005 under
the GATT Uruguay Rounds Textile Agreement.

However the UK clothing industry does have some advantages, especially in the high-
value added segments of the market, in design, quality control, customer services and
closeness to the UK market. As new technology shortens the supply chain and rising
incomes accompany changing tastes - UK manufacturers will increasingly have the
opportunity to sell high fashion items rather than simple clothing. As incomes rise
price will become less important while quality and responsiveness to demand will
become relatively more important. In this context there is a place for a substantial UK
clothing industry where manufacturers and retailers have close competitive
relationships. The practices outlined in the case study have a number of different
economic aspects: some exist to shift risk, some exist to expropriate surplus.

Risk shifting is interesting in the context of the clothing industry because the risk
appears to be being shifted from the party most able to bear it on to the party least able
to bear it. Retailers have a diversified portfolio of lines, while manufacturers rely
heavily on a few lines and a few retail outlets. A deliberate shifting of risk from
retailer to manufacturer is sub-optimal relative to the socially desirable distribution of
risk. Manufacturers compensate by being more conservative in their R+D and by
focusing excessively on quality control rather than design - the manufacturing sector
loses flexibility in responding to changing tastes.

The devices which the retailers use to appropriate surplus are examples of simple
opportunism as discussed by Oliver Williamson (1975). Opportunistic behaviour -
such as retrospective discounts - is a feature of vertical relationships where the seller
has a relatively low market share and relatively high asset specificity compared to the
buyer. In such circumstances the bargaining power of the seller is relatively weak and
he can be forced to accept unfair terms which do not provide a fair long term return
to risky capital. In the long run less capital will be invested and innovation will
decline. It is interesting to note that, in the UK clothing industry, very short term
opportunism towards imports is prevented by the use of irrevocable letters of credit
which prevent purchasers from changing the price once the contract is shipped.
Opportunistic practices are widespread and repeated - thus the manufacturers know
that they can expect them and hence they will respond rationally by reducing quality
and misrepresenting costs and prices.

It is easy to see that opportunistic risk shifting and surplus appropriation may be
profitable in the short run. Consumers may also enjoy lower prices in the short run.
However in the long run such short run benefits may be outweighed - if unfair
relationships lead to lower investment (and hence lower productivity growth and

11
product innovation) they will be bad for the retailers (and customers) as well as the
manufacturers. Unfair relationships may establish a pattern of cumulative decline in
the industry or engineer a shift to a low quality - low price equilibrium in the industry
rather than a high quality - high price equilibrium. A low-low equilibrium is even
more undesirable if it also involves a relative decline in the diversity of outputs
manufactured and sold in the UK market. If, as the theory of industrial districts
suggests41, regional specialisation and concentration is important in sustaining a
successful industry, then there is a danger that the size of various parts of the clothing
industry may eventually fall below their critical mass and decline precipitately.

A high quality - high price product is what companies like HP seek to achieve together
with their suppliers. Innovation and responsiveness to the market is crucial for HP, in
1996 less than 50% of sales were generated by products introduced more than 2 years
previously. Competitive relationships which reward suppliers for their risk taking are
essential if this sort of innovation is to be encouraged - capital will not be invested
unless it commands an appropriate return.

HPs approach involves obedience to law and implicit recognition of enlightened self-
interest. It self-limits its economic power and encourages long term relationships
which support innovation and social efficiency. Thus from the standpoint of biblical
ethics HPs standards for its supplier relationships fair very well. The UK clothing
industry is the scene of economic exploitation by economically powerful retailers of
weaker manufacturers. Clearly, imposing excessive penalties and not abiding by
contract terms is unethical because it is possibly illegal and because it involves
breaking ones word. This is not only unfair but also against the long run interests of
both parties: it has already resulted in government investigation of supplier
relationships in the industry. The contrasting case studies seem to illustrate that a
fairer division of the gains from the vertical relationship ensures behaviour by both
sides which achieves a more socially optimal level of production in an industry. A
fairer relationship is also likely to lead to higher long run profitability for purchasing
(and supplier) firms. Given the current nature of the power relationship, the lack of
hard information, the general weakness of competition policy law in the area of
vertical relationships (see DTI, 1996) it is difficult to see how a fairer division of the
gains from trade can be achieved except by mutual agreement and retailer restraint,
perhaps underpinned by a voluntary code of ethics.

5. Relationships with rivals

(a) A best practice relationship: United Biscuits relationship with its competitors.

While many companies seek to develop reputations for honesty and fair dealing
towards their suppliers rather fewer have actively sought to develop an ethical policy
towards their competitors42. That situation may be changing as many companies
(including HP) do have sections in their codes of ethics directed at company behaviour
towards their competitors. Such companies have sought to discourage employees from

12
behaviour which might be unethical or even unlawful. United Biscuits (UB) provides
our example of a company which has developed such a policy.

United Biscuits is a major international food company producing biscuits, savoury

snacks and frozen and chilled foods...43. The company was created 1948 by the
merger of two Scottish family businesses McVitie&Price and Macfarlane Lang is
currently a market leader in several European and Far Eastern biscuit and savoury
snack markets across the world including the UK where it has more than one third of
the biscuit market. In the last 5 years however the companys fortunes have suffered a
series of setbacks and profits have fallen44. Sales were 1890m in 1996 and operating
profit was 129m. After unsuccessful overseas expansion the company has now
refocused business on the UK market but 30% of revenue comes from overseas.

For many years until 1990 Lord (Hector) Laing, a leading advocate of business ethics
and socially responsible business, was chairman of the company. The company has an
established reputation as a leader in corporate governance issues45. In 1987 Lord Laing
introduced UBs Ethics and Operating Principles which is endorsed verbatim by the
current chairman having been reviewed in 1993. The code outlines the companys
objective:

United biscuits wants to have solid lasting relationships with its shareholders,
employees and franchisees, with customers and suppliers, with the communities where
we live and work and with governments and the public at large.

(Ethics and Operating Principles, p.2)

The code contains the following section on competitors:

We compete vigorously, energetically, untiringly but we also compete ethically and

honestly. Our competitive success is founded on excellence - of product and service.
We have no need to disparage our competitors either directly or by implication or
innuendo.

In any contacts with competitors, employees will avoid discussing proprietary or

confidential information.

No-one may attempt improperly to acquire a competitors trade secrets or other

proprietary or confidential information. Improper means are activities such as
industrial espionage, hiring competitors employees to get confidential information,
urging competitive personnel or customers to disclose confidential information, or any
other approach which is not completely open and above board.

(Ethics and Operating Principles, p.6)

13
This statement is a very explicit statement of principle with regard to relationships
with competitors46.The companys major competitors are Jacobs, Burtons, Northern
Foods, Nestle and PepsiCo. Northern Foods and Jacobs are similar companies and UB
considers the market to be very competitive. The company does not mention other
companies in its advertising and attempts to compete on quality and service with value
for money. Recently there have been cases where UB has sought to defend the
companys packaging and trademarks from alleged copying by competitors. UBs
ethics are firmly based on those of its founder Lord Laing - a caring and approachable
person. Managers have read and sign UBs Ethics and Business Practices which
contains the Ethics and Operating Principles as part of their conditions of
employment. The managers are responsible for communicating ethics down the
organisation. The companys recent problems are not thought to be a result of its
ethics, on the contrary it is felt that the companys philosophy helps it to attract good
employees47.

(b) A poor competitor relationship: British Airways and Virgin - The Dirty Tricks
Campaign.

Fair competition: Ensure comparisons drawn with competitors and working partners
are based on fact and avoid innuendo. Competition should be based on the quality
value and integrity of British Airways service and products.

(British Airways, Code of Business Conduct, 1993)48

In the early 80's British Airways (BA) was in public ownership and had the reputation
of being overmanned and giving poor service to it customers. New top management -
Lord King and Colin Marshall - was brought in. Under their management the company
was transformed into a top class service company and the finances were vastly
improved. The company was privatised in January 1987. As a result in the harsh years
of 1991 and 1992, BA was one of the only two international airlines to make a profit
and many competitors lost large sums of money, supported by their governments. As
part of its growth, BA absorbed troubled UK airlines, British Caledonian and Dan Air,
and took stakes in USAir, Quantas, TAT, and formed Deutsche BA. This is part of an
ambition to become a truly global airline which will permit it to operate a strategy of
having hub airports throughout the world via through which the passenger can pass
and fly with BA or one of its partner airlines.

Small airlines were threatening but vulnerable competitors. Their threat was to cream-
off business on some of the most profitable routes in particular those across the North
Atlantic. The vulnerability of these airlines was that if business turned down they
could go bankrupt. Airline bankruptcy was a threat to the passenger as well, who
could end up stranded without a return flight or with a valueless ticket. The emergency
arrangements for such passengers could not recompense them for the anxiety and
inconvenience even if financial compensation was made. One such airline was Laker
Airways which went out of business in 1984 (when it was overborrowed on new

14
aircraft purchases) complaining loudly of unfair competition by the major airlines,
including BA.

Virgin is run by an entrepreneur, Richard Branson. He established his reputation and

wealth through the Virgin music business which has now been sold. The airline started
in 1984 with a solitary Boeing 747 on the New York to London route and by 1993 had
expanded its fleet to 8, and had won landing slots at London Heathrow and extra slots
into Tokyo.

BA was unhelpful to Virgin49 denying it access to the Heathrow night flight simulator
which it made readily available to a domestic competitor, British Midland. Following
the take-over of British Caledonian, BA stopped their contract to service Virgin
aircraft.

Treat others as you would like to be treated yourself.

(British Airways, Code of Business Conduct, 1993)50

BA staff in New York phoned Virgin passengers, often in their hotels at inconvenient
hours, offering first class seats or Concorde seats instead of their flights with Virgin.
Sometimes, they suggested that Virgin had difficulties and the passengers had to
transfer. To do this BA staff posed as Virgin staff. In order to contact the passengers
BA staff obtained illegal access to Virgin's passenger and loading information. Virgin
also subsequently alleged that relevant internal BA documents had been shredded
(Betts and Cassell, 1993a).

BA produced internal competitive reports which were anti-Virgin: one was considered
so dubious that some employees shredded it rather than let it come to light. Soon after
these reports were written, rumours started spreading in the press that Virgin was
facing financial difficulties and was losing 50m a month (Betts and Cassell, 1993b).

Virgin made allegations of BA misconduct in 1991 - which were denied - and a

television programme featured the case in early 1992. Virgin sued BA for libel when
BA attacked the good faith and integrity of Virgin in its staff newspaper in the Spring
of 1992.

Your Board accepts responsibility for, and regrets, the Virgin saga, which cast a
shadow over our company. However, the relatively small number of unconnected
incidents involving a very small number of employees must be kept in perspective.

(British Airways Plc Annual Report and Accounts, 1992-93, p.2)

In early 1993, BA issued a public apology and paid Richard Branson and Virgin a
record 610,000 in damages as well as costs. Eventually BA's solicitors produced a
report which confirmed luring of passengers and computer tapping (see Betts and

15
Cassell, 1993c). It was established that a few staff were involved and that senior
directors were not aware of the deceit. Virgin are still proceeding with their case in the
US courts51.

In the year that followed, British Airways lost much of the goodwill which it had
painstakingly built up, amongst its employees (there was a strike threat), its
shareholders (the share price fell) and presumably amongst the decision makers who
were crucial to getting official approval for acquiring shares in other national airlines
or maintaining its landing slots in overbusy airports such as Heathrow (Betts, 1993).
More recently, its reputation and its profits have recovered52.

A code of ethics was produced within three weeks of the courtroom apology.

(c) Analysis of the rivalry case studies.

The airline industry is usually cited as the example of a contestable market (Baumol,
1982). A perfectly contestable market is one in which entry and exit costs are zero and
in which incumbent firms are disciplined not by actual competitors but by the threat of
hit and run entry should they attempt to raise prices above the perfectly competitive
level. Thus even though only one airline operator may be observed on a given route it
is prevented from raising prices above average cost by the threat of costless entry by
another airline which can simply allocate a pre-existing plane to that route at short
notice. Baumol suggested that the deregulated airline industry in which it was much
easier to get takeoff and landing slots had resulted in concentration and lower prices
and profits. A more domestic example is the deregulated bus industry in the UK53.

Contestability and actual competition is a feature of the market in transatlantic flights

which Virgin and BA are engaged in. In fact the allocation of slots to Virgin was a
major victory for the airline and BA reportedly stopped its political donation to the
Conservative Party in protest. Contestable markets are characterised by price
competition and the potential for cream-skimming as large incumbent firms find their
most profitable business areas being cherry-picked by the competition. This is a
feature of competition between Virgin and BA - BA with its national carrier status and
extensive route network has much higher fixed costs than Virgin and depends on high
margin business to support high volume low margin business elsewhere by paying
fixed costs. Virgin carries lower fixed costs as a small international airline.

The nature of entry into the airline industry differs markedly from the businesses that
UB is engaged in. UB produces heavily branded products into which entry is
expensive. New entrants must invest extremely large sums in order to launch new
brands and cannot enjoy external economies of brand reputation which accrue to new
product launch by UB under an existing trademark such as KP or McVities. Clearly
new entrants could attempt to replicate UB but this involves an extremely large
amount of investment and hence of sunk cost - hit and run entry is not possible. The
nature of competition is thus very different in the snack food market.

16
The economics of the Dirty Tricks campaign itself are simple and are a rather
extreme example of predatory pricing in which a large competitor undercuts its
smaller actual or potential competitor54. Such undercutting involves charging below
short run marginal cost. BA employees offered much better flights for the same money
than Virgin - one can only assume that this involved losses on individual passengers.
BA could afford to lose this money because it could cross-subsidise losses in the
premium transatlantic market from profitable routes elsewhere in the network. Virgin
could not and made a loss of 16m in 1992. If Virgin had been driven out of business
then BA could have profited subsequently from higher fares. Game theory also
predicts a benefit to companies who deliberately pursuing aggressive marketing
strategies in that this deters potential entrants from actually entering and may be
highly profitable55. This is so even though a continually aggressive stance results in
lower profits relative to acquiescing to new entry.

Predatory pricing is a difficult to detect strategy since it requires company and product
specific information. Current UK competition law is unsatisfactory in that the
penalties for predatory pricing do not involve fines or compensate for retrospective
losses. Thus smaller victims of predatory pricing may no longer exist when cases are
actually proved - this has been a problem in the deregulated bus industry where
incumbent firms have been shown to have pursued extremely aggressive pricing
strategies against smaller rivals.

The economic costs of aggressive pricing strategies and unethical behaviour are
potentially vary large56. BA now faces a legal claim by Virgin for $1bn (under the
triple damages rule) in the US. Company reputation and internal staff morale have
both suffered though the consequences are hard to measure consequences. Service
orientated companies rely on their staff - the delivery of quality service is what will
differentiate products and raise profit margins in the airline industry of the future
especially in business class. Staff need to believe in their company - bad press
adversely effects this belief. The allocation of slots for takeoff and landing is a
political as much as an economic decision. Airlines such as BA need to be mindful of
their public reputation in case they lose the political goodwill necessary to secure the
best possible allocation of slots in their favour.

The actions of the Dirty Tricks campaign rate extremely badly in the light of biblical
principles: a perceived corporate desire to destroy Virgin led to actions by BA
employees which have resulted in successful court action in the UK. The structure of
the market may explain the competitive pressure on BA but it does not excuse the
actions of the Dirty Tricks campaign. There was in them a desire to destroy the rival
rather than to compete fairly and creatively against them. Rivalry led to deceit and a
departure from the accepted rules of the game. UBs positive example of drafting and
communicating a code of ethics and developing a corporate ethic of fairness was
ignored. This seems to have been recognised by BA by the rapid drafting of a code of
ethics after the scandal of Dirty Tricks was admitted in Court.

17
6: Conclusion

This paper has been an exploration of how far ethical competition and economic self-
interest can be reconciled in the context of two key inter-firm relationships. Our
approach was to start with ethical principles, derived from Biblical ideas on fairness,
and then move on to examples of how these principles are demonstrated in practice.

The two principles we identified were the need to exercise self-limitation of economic
power within vertical relationships and the need to compete from a desire to create
rather than to destroy within horizontal competitive relationships. These principles are
helpful in illuminating ethical behaviour that goes beyond the minimal requirements
of the law, industry codes and pure enlightened self-interest.

The case studies drew out specific examples of how best practice ethics works in the
context of the two competitive relationships considered and of how failure to adhere to
even to ethical standards consistent with enlightened self-interest has led to economic
costs.

The case studies offer some conclusions. Firstly, at a minimum failure to obey
competition law and basic ethical standards is likely to prove costly. Secondly, law
alone does not ensure best practice ethics or even enlightened self-interest behaviour.
Thirdly, best practice ethics which fully recognises enlightened self-interest and even
goes beyond it. Such best practice involves transparent decision making, truthful and
positive advertising, effective codes of ethics and ethical senior executives. Finally,
the best practice firms were committed to self-imposed restraint in use of their
economic power within their competitive relationships.

Acknowledgements

The authors acknowledge the generous financial support of the University of Cambridge
ESRC Centre for Business Research for this project. Stuart Whitten provided excellent
research assistance. We especially wish to thank Hewlett Packard, United Biscuits, the DTIs
Textile and Apparel Challenge for the provision of information and interviews over the
summer of 1995. We acknowledge the assistance of the Chartered Institute of Purchasing and
Supply, John Lewis Partnership, Confederation of British Industry, Office of Fair Trading,
The British Apparel and Textile Federation, The Knitting Industries Federation, D.C.Gibbs,
A.K. Shah, Craig Mackenzie and Francis Bee. We are also grateful for discussions with Nigel
Biggar, Simon Deakin, Brian Griffiths, Richard Higginson, Chris Pemberton, Simon Webley
and Frank Wilkinson and the very helpful comments of anonymous referee of BEQ. All the
opinions expressed in this article reflect the personal views of the authors and responsibility
for any errors rests with them.

Notes

18
1
For a more detailed discussion of these and related competition laws see for example
Martin (1994) or D.Audretsch (1989).
2
This legislation protects consumers from traders who impose harsh penalties in
contracts for purchase, see introduction to OFT (1996) for more details.
3
See DTI (1996) for text of draft bill.
4
This is the case for the UK draft competition bill which will emphasise effects based
exemptions to a general prohibtion on anti-competitive agreements rather than the
current legislation based on legal form.
5
Competition law has arisen because of the inability of tort (case) law to deal with the
unfairness which results from the competitive process. The restraint of trade doctrine
covers some aspects of the competitive process but is inadequate and usually used
with reference to individuals rather than companies. See Whish, C. (1993) pp.48-59.
6
For a discussion of the legal shortcomings of UK competition law see Freeman, P.
(1993).
7
Ryan, L.V. (1994, pp.54-64) finds no evidence that codes lead to better performance
in the The Economists 1992 survey of Britains most admired companies.
8
See the outgoing Director General of Fair Trading, Bryan Carlsberg, on the
weaknesses of current competition policy law (OFT, 1995). See also calls for less
political interference in UK competition policy law eg.Hay (1993).
9
Following Schumpeter (1943).
10
1 Kings 5.
11
Genesis 30: 25-43.
12
For a summary of economic relationships which appear in the Bible see Gordon
(1994).
13
Following Rawls (1971).
14
On enlightened self-interest see the parable of the shrewd manager, Luke 16:1-15.
On obedience to the law see Romans 13:1-7 for this attitude to legal system and
Matthew 5:37 for the commendation of keeping your word. When the Bible talks
about the keeping the law and promises it extends this from mere contractual
fulfilment to adherence to the spirit of the law. See Jesus criticism of the Pharisees on
precisely this point: Mark 7:1-13.
15
For a discussion of vertical integration, vertical control and vertical separation see,
for example, chapter 4 of Tirole (1988).
16
See Williamson (1985).
17
See Wright (1983 and 1990) for discussions of the Old Testament laws as they
relate to the exercise of economic power. The principle of the Jubilee is discussed in
Leviticus 25.
18
Mark 12:31.
19
For various views see Hay (1989). For opposing Christian views see Sider (1984)
for a socialist approach and Griffiths (1982) for a Christian right approach.
20
Notable examples are contained in: the story of Noah and the Flood (Genesis 6-9),
Moses and the Israelites journey from slavery in Egypt to freedom in Israel (Exodus),
the history of Judges and Kings in Israel and supremely the death and resurrection of
Jesus.

19
21
The Bible is unclear on what an ideal world would look like. However in the Book
of Revelation there is the picture of the new heaven and the new earth which will be
created at the end of time.
22
The Bible goes so far as to command us to love our enemies (Matthew 5:44). This is
a very profound command which seems to indicate Jesus acceptance of the existence
and perhaps even necessity of rivalrous situations. However, even in situations of
rivalry, the good rival must show a certain care for his competitors.
23
The positive creativity of economic activity is stressed in recent Roman Catholic
writing. Economic activity focused on creating things of value reflects the creativity
which the creator displays in his creation. See the Papal Encyclical (1991) and Novak
(1993, pp.6-14).
24
For biblical examples of the desire to dominate and kill in a competitive situation
see the stories of Cain and Abel where the battle was for Gods love (Genesis 4),
David and Uriah the Hittite where David desired Uriahs wife Bathsheba (2 Samuel
12) and King Ahab and Naboth where Ahab wanted Naboths vineyard (1 Kings 21).
25
In Hebrews 11 St.Paul commends the prophets for this desire. On this attitude see
also Philippians 4:8-9.
26
For a discussion of the ethics of advertising from a biblical perspective see
Higginson (1997).
27
See for example IBMs code (1993).
28
We acknowledge the help of the Richard Thompson, Head of Legal Department and
UK Company Secretary of HP who provided us with the companys documents and
also responded to questions on the companys policy towards suppliers. For a
reference to HP as an honourable customer see the comments of Tom Melohn, the
managing director of the North American Tool and Die Company, in Hampden-
Turner, C. (1994, p.210).
29
HP has entered into several large strategic alliances in recent years with suppliers,
see Financial Times (1994).
30
IBM is an example of good practice towards the supply chain: see DTI (1992, p.7)
and DTI (1994, p.5).
31
See Whysall (1995) which discusses the many ethical issues which confront
retailers. Several survey articles mention the tough conditions imposed by retailers on
manufacturers eg.Bosworth, Jacobs and Lewis (1990, p.70) and also Whitaker,
Haywood and Rush (1989) for a set of six case studies of 3 manufactures of garments,
a retailer and 2 fabric printers and dyers.
32
Figures from Wilkinson (1995, p.23), see also Adams, Carruthers and Hamil (1991)
and New Consumer (1990) for details of retailers.
33
There are two notable exceptions to this: Coats Viyella (producers of Jaegar) and
Courtaulds (producers of Lyle and Scott). A good discussion of the textile and
clothing market is contained in the MMC Report (1989).
34
See DTI (1995, p.20, 26) which details the governments industry sponsorship
program and the specific initiatives in the textile and clothing industry.
35
For surveys of the UK clothing and textile industry Walsh (1990) and West
Midlands Enterprise Board (1988).

20
36
See Gibbs (1988) which discusses the impact of recent technological and taste
changes and suggests that major retailers will increasingly have to switch from price
to quality competition and that this will encourage the development of longer term
retailer-manufacturer relationships and strengthen the position of the manufacturers.
37
See for example Bosworth Jacobs and Lewis (1990, p.70).
38
See Wilkinson (1991) for a discussion of how dissimilar the Leicester model is to
successful model of the industrial district.
39
See New Consumer (1989/90) for an article on conditions in British owned garment
production factory in the Philippines.
40
Letter to its suppliers dated 24th May, 1995. This letter unilaterally imposes a
reduction of 1% in the settlement price for orders delivered after 25 June 1995 and a
further 1% from October 1995 on the grounds that we [the company] will be raising
our capital investment this year towards 100m and substantially increasing our
revenue spend. ...This reflects our ongoing commitment to share risks and benefits of
investments and to emphasise the importance of improving product quality.
41
For information on industrial districts see Wilkinson and You (1994).
42
See Financial Times (1995) which reports study which found that 65% of codes
mention insider trading while only 23% mention relations with competitors.
43
United Biscuits (1995, p.2).
44
See Lorenz (1995) for details. For comment on recent perfomance see Financial
Times (1997).
45
See Fowe (1994, p.417).
46
New Consumer (1991) notes that this statement is amongst the most explicit
provided by any company in the New Consumer research survey.
47
Information in this paragraph was supplied via an interview with Derek Coultard,
Deputy Human Resources Manager at UB.
48
Reprinted in Financial Times (1993).
49
See Betts and Cassell (1993b). For an account of the Dirty Tricks Campaign see
Gregory (1994).
50
See section 2.1; this view is apparently supported by small firms; see Reid (1992).
51
Skapinker (1995) notes the end of the legal proceedings in the UK. Buckley (1995)
notes charges brought in US courts: BA has attempted to monopolise transatlantic
airline passenger service between US and the UK; BA has used its monopoly over
Heathrow and Gatwick (airports) to obtain unfair competitive advantage in the market
for transatlantic airline passenger service; and that BAs corporate travel programmes
constitute illegal contracts that unreasonably restrain trade.
52
See Skapinker and Tett (1993). In defence of BAs aggressive strategy see
Economist (1993) which argues for business ethics just being obedience to the law.
BA went on to report record profits for 1994-95.
53
See OFT (1992) for an account of competition in the operation of bus services on
certain routes in Bognor Regis.
54
For surveys see Myers (1994) or Ordover and Saloner (1989).
55
Myers, op.cit., highlights three models in which predation can be profitable: deep
pocket models where predator firms have access to greater financial resources than

21
rivals, signalling models where in the presence of cost uncertainty low prices may
allow a predator to misrepresent costs to rivals and deter entry/induce exit and
reputation models where aggressive response to competition deters future entry.
56
Hosmer (1994) argues that ethics should be at the heart of the firm because firms are
reliant on trust relationships of a very extensive nature with different of groups of
stakeholders.

22
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