ETHICS IN OLIGOPOLY &

PUBLIC POLICIES

BYNEHA
VARSHA PANDEY

OLIGOPOLY
Characteristics of an Oligopoly Market Few sellers offering similar or identical products
Interdependent firms
Best off cooperating and acting like a monopolist by producing
a small quantity of output and charging a price above
marginal cost
Large barriers to entry
Development costs
Importance of reputation
Highly differentiated, complex products
Strategic interactions between firms
Ex: Mobile networks like airtel, Vodafone, Docomo etc.
Ex: Cement companies like: Jaypee, ultra tech cement, ambuja cement
etc are the identical product manufactured by producers. All the
producers come together to take a decision about price of the product,
and about the subsidiaries from govt.

Markets with Only a Few

Sellers

Duopoly

Oligopoly with only two members

Decide quantity to sell
It is the simplest type of oligopoly.
Price determined on the market
By demand

Competition, Monopolies, and

Cartels
The duopolists may agree on a
monopoly outcome.
Collusion
An agreement among firms in a market
about quantities to produce or prices to
charge.

Cartel
A group of firms acting in unison.

Competition, Monopolies, and

Cartels
Although oligopolists would like to
form cartels and earn monopoly
profits, often that is not possible.
Antitrust laws prohibit explicit
agreements among oligopolists.

 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:

 Price Fixing- when companies agree to set prices

artificially high.

Manipulation of Supply when companies agree

to limit production.

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.

Tying Arrangements-when a company sells to a

retailer only on condition that they agree to charge the

same set retail prices.

Price Discrimination-when a company charges

different prices to different buyers for the same goods or

services.

 Retail Price Maintenance Agreements:

If a
manufacturer sells to retailers only on condition that they agree to
charge the same set retail prices for its goods, it is engaging in
retail price maintenance. A manufacturer may publish
suggested retail prices and may even refuse to sell to retailers who
regularly sell their goods at lower prices. It is illegal, however, for
retailers to enter an agreement to abide by the manufacturers
prices and illegal for manufacturers to force retailers to enter such
an agreement.

Bribery
Bribes used to secure the sale of products by shutting out other
sellers results in a decline in market competition, and therefore are
unethical. Bribes used for other purposes, e.g. a tip to accelerate
the process, a tip to lower a costly tariff, will not have the same
effects. Bribes of this sort are unethical if
The offer of a payment is initiated by the payer; and
The payment made to induce the payee to not act in the best interests of the
pubic; and
The nature and purpose of the payment are considered ethically objectionable
in the local culture

PUBLIC POLICY TOWARD

OLIGOPOLIES
Cooperation among oligopolists is
undesirable from the standpoint of
society as a whole because it leads
to
production that is too low and
prices that are too high.

Restraint of Trade and the

Antitrust Laws
Antitrust laws make it illegal to restrain
trade or attempt to monopolize a market.
Sherman Antitrust Act of 1890
Elevated agreements among oligopolists
from an unenforceable contract to a criminal
conspiracy.
Clayton Act of 1914
Further strengthened the antitrust laws.
Used to prevent mergers
Used to prevent oligopolists from colluding

Antitrust: Sherman
Antitrust Act
Section 1:
Every contract, combination in the
form of trust or otherwise, or
conspiracy, in restraint of trade or
commerce among the several states
or with foreign nations, is hereby
declared illegal.

 Section 2:
Every person who shall
monopolize, or conspire with any
other person or persons to
monopolize any part of the trade
or commerce among the several
states, or with foreign nations,
shall be guilty of a misdemeanor.

Controversies over Antitrust

Policy
Antitrust policies sometimes may not
allow business practices that have
potentially positive effects:
Resale price maintenance
Predatory pricing
Tying

Controversies over Antitrust

Policy
Resale Price Maintenance (or fair trade)
occurs when suppliers (like wholesalers) require
retailers to charge a specific amount ,Might seem
anticompetitive.
Predatory Pricing
occurs when a large firm begins to cut the price of
its product(s) with the intent of driving its
competitor(s) out of the market
Tying
when a firm offers two (or more) of its products
together at a single price, rather than separately,
Form of price discrimination.

 What should society do in the face of the

high degree of market concentration in
oligopolistic industries? There are three
main points of view.
MAIN VIEWS OF OLIGOPOLY POWER:
There are three main points of
viewDo-Nothing View
Anti trust View
Regulation View

 First, the Do Nothing view, claims that

the power of oligopolies is not as large as
it appears.
Though competition within industries has
declined, they maintain that competition
between industries with substitutable
products has replaced it.
Finally, they argue that bigger is better,
especially in the current age of global
competition. Economies of scale,
produced by high concentration, actually
lower prices for consumers.

 Second, the Antitrust view argues

that prices and profits in highly
concentrated industries are higher
than they should be.
By breaking up large corporation into
smaller units, they claim, higher
levels of competition will emerge in
those industries.
The result will be a decrease in
collusion, greater innovation, and
lower prices.

 The third view is the Regulation view, which can be seen

as a middle ground between the other two. Those who
advocate regulation do not wish to lose the economies of
scale offered by large corporations, but they also wish to
ensure that consumers are not harmed by large firms.
They argue that subdivision of Big industries is not
favourable. They as a giant company may produce other
good benefits for the masses.
But they also encourage regulated market and even suggest
nationalization in case of non-compliance of market
regulations.
But they also suggest the ill effects of nationalization at the
same time.

 Therefore, they suggest setting up

regulatory agencies and legislation to
control the activities of large
corporations. Some even suggest
that the government should take
over the operation of firms where
only public ownership can guarantee
that they operate in the public
interest.

Conclusion
Whichever view we take, clearly the
social benefits of free markets cannot be
guaranteed, and the markets themselves
cannot be morally justified, unless firms
remain competitive.

ExampleDestroyer/Predatory
Pricing
Deliberate price cutting
or offer of free
gifts/products to force
rivals (normally smaller
and weaker) out of
business or prevent new
entrants
Microsoft have been accused
of predatory pricing strategies
in offering free software as
part of their operating system
Internet Explorer and
Windows Media Player - forcing
competitors like Netscape and
Real Player out of the market

Anti-competitive and
illegal if it can be proved
Typical of oligopoly with
collusion

THANKYOU