CG & BE Mod 4 ,Session 3

8/14/2019 CG & BE Mod 4 ,Session 3

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Befo re studyi ng t he et hic s ofefo re studyi ng t he et hic s ofanti com peti tive pract ices ,i t isnti com peti tive pract ices ,i t isess en tial to have clearss en tial to have clearunde rst anding of m arketnde rst anding of m arketcompe tit ion". It is a riva lry be twee nompe tit ion". It is a riva lry be twee ntwo or more par ties trying to obta inwo or more par ties trying to obta insomething that only one of themomething that only one of themcan pos sess.T hre are dif feren tan pos sess.T hre are dif feren tmode ls of com pe titi on wit h ethi calode ls of com pe titi on wit h ethi calissues rai sed by each typ e of suc hssues rai sed by each typ e of suc h


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Perfect C omp et iti onerfect C omp et iti on In a per fectly co mp et itiv e mar ket , the price t hen a per fectly co mp et itiv e mar ket , the price t hebu ye rs ar e w il li ng to pay for goods rise s wh enu ye rs ar e w il li ng to pay for goods rise s wh enfewe r go ods are av ai la bl e and these risi ngewe r go ods are av ai la bl e and these risi ngprices induce sellers to provide greater qty. ofrices induce sellers to provide greater qty. ofgo ods. thus as mo re go ods ar e ma de ava il ab le ,o ods. thus as mo re go ods ar e ma de ava il ab le ,pr ices ten d to fal l a nd these fall in g pr ices lea dr ices ten d to fal l a nd these fall in g pr ices lea dsel ler s to decre ase the qty . of go ods th eyel ler s to decre ase the qty . of go ods th eypr ovid e. These flu ct uat io ns p roduce a st riki ngr ovid e. These flu ct uat io ns p roduce a st riki ngoutco me-pr ices and qty. alw ays mo ve to wardsutco me-pr ices and qty. alw ays mo ve to wards

wh at is ca ll ed " equ ili bri um po int". At theh at is ca ll ed " equ ili bri um po int". At theeq ui lib riu m point , eve ry se ll er finds a wil lin gq ui lib riu m point , eve ry se ll er finds a wil lin gbu ye r an d e ve ry bu yer find s a wil li ng s el le r. Itu ye r an d e ve ry bu yer find s a wil li ng s el le r. Itsat isf ies three of the mo ral cr it er ia: just ice,at isf ies three of the mo ral cr it er ia: just ice,ut ili ty and righ ts .T he pr inciple of dimi nish ingt ili ty and righ ts .T he pr inciple of dimi nish ingmar gi nal util it y" is man if est ed (the mo re wear gi nal util it y" is man if est ed (the mo re weconsu me, t he les s uti lit y or sat is fact ion we getonsu me, t he les s uti lit y or sat is fact ion we getfrom co nsu min mo re


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Eth ic s & p erfectly c omp eti ti veth ic s & p erfectly c omp eti ti vemar ketsar kets Perfec tly competi ti ve ma rk ets ful fi ll thr eeerfec tly competi ti ve ma rk ets ful fi ll thr eemor al goal s na mely (i ) just ice by l ead in gor al goal s na mely (i ) just ice by l ead in g

buye rs and sel lers to excha ng e the iruye rs and sel lers to excha ng e the irgood s in a w ay tha t i s jus t (cap ita li stood s in a w ay tha t i s jus t (cap ita li stjus ti ce ) ( ii ) effi cienc y b y ma ximizing t heus ti ce ) ( ii ) effi cienc y b y ma ximizing t heut ili ty of buy ers a nd sell ers b y l ead in gt ili ty of buy ers a nd sell ers b y l ead in gthem t o a lloca te, u se a nd di str ib ute theirhem t o a lloca te, u se a nd di str ib ute theirgood s wi th p erfec t eff iciency (i ii )ood s wi th p erfec t eff iciency (i ii )respec ts bu yers and sel lers ri ght s ofespec ts bu yers and sel lers ri ght s offree co ns entree co ns ent


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Mon opoly comp et iti onon opoly comp et iti on This happen s whe n fre e mar ke this happen s whe n fre e mar ke tceas es to be perfec tly comp etit ive.eas es to be perfec tly comp etit ive.

The mono pol y market has only onehe mono pol y market has only oneseller with 10 0% sha re of theeller with 10 0% sha re of themarke t in which o the r s ell ers canarke t in which o the r s ell ers canno t ent er ( t here are ent ry ba rri ers)o t ent er ( t here are ent ry ba rri ers)Eg.A lc oa he ld mono pol y pat ent forg.A lc oa he ld mono pol y pat ent forvi rgi n alum inum in USA unti l 19 09i rgi n alum inum in USA unti l 19 09


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Monopolyonopolyco mpeti tion:ju stice, util ityo mpeti tion:ju stice, util ity andndrightight

Th is vio lat es capi tal just ice ena bl in g theh is vio lat es capi tal just ice ena bl in g themo nopoli st to ch ar ge a hig h pri ce an d reap higho nopoli st to ch ar ge a hig h pri ce an d reap highprofits.rofits. Th is resu lts in decl in e in ef fici en cy in all ocat ionh is resu lts in decl in e in ef fici en cy in all ocat ion& dist ribu tion of goodsdist ribu tion of goods Inflated price for the consumern flat ed pr ice for the co nsu mer No mo tiva ti on to red uce cost s or newo mo tiva ti on to red uce cost s or newtech no logyech no logy Pu ts rest rict ions on the neg at ive r igh ts unli keu ts rest rict ions on the neg at ive r igh ts unli kethe pe rfect ly free ma rkethe pe rfect ly free ma rketA monopoly market thus deviates from the idealsmonopoly market thus deviates from the idealsof cap it ali st ic ju st ice, eco nomic uti lit y andf cap it ali st ic ju st ice, eco nomic uti lit y andnegative rightsegative rights


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Oli gop olis tic comp etit ionli gop olis tic comp etit ion Such mar ke ts li e bet we en the tw o ext reme s ofuch mar ke ts li e bet we en the tw o ext reme s ofpe rf ect ly co mpe ti tiv e and mo nopolist ic onese rf ect ly co mpe ti tiv e and mo nopolist ic ones(imp er fect ly co mp et iti ve mar ke ts )imp er fect ly co mp et iti ve mar ke ts ) Do mi nat ed by a few lar ge f irms an d sai d to beo mi nat ed by a few lar ge firms an d sai d to behi ghly co ncen trat edi ghly co ncen trat ed Al th oug h can form in a var iet y of way s, th el th oug h can form in a var iet y of way s, th emo st co mmo n cau ses of su ch a mar keto st co mmo n cau ses of su ch a mar ketst ru ct ure ar e ho rizo ntal mer ger st ru ct ure ar e ho rizo ntal mer ger s Like m ono po li es, can fai l to exh ibi t just profitike m ono po li es, can fai l to exh ibi t just profitle ve ls, can gen er at e a decli ne in so cia l util itye ve ls, can gen er at e a decli ne in so cia l util ityan d ca n fai l to res pe ct bas ic eco nomi c freed omsn d ca n fai l to res pe ct bas ic eco nomi c freed oms


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Olig op oly -wh at it lead s tolig op oly -wh at it lead s to Expl ici t ag reeme nts : The man age rs of a f ewxpl ici t ag reeme nts : The man age rs of a f ewfirms can meet an d join tly ag ree to fix p rices atirms can meet an d join tly ag ree t o fix p rices ata lev el m uch hig her tha n wha t may r esu lt in alev el m uch hig her tha n wha t may r esu lt in ape rf ect ly co mpe ti tiv e ma rket .e rf ect ly co mpe ti tiv e ma rket . Pr ice fix in g: The ma na ger s can mee t s ecr et lyr ice fix in g: The ma na ger s can mee t s ecr et lyan d agr ee to se t th ei r pr ices at ar ti ficia ll y highn d agr ee to se t th ei r pr ices at ar ti ficia ll y highlevelsevels Man ipu lat ion of su pp ly: Fir ms m ig ht agr ee toan ipu lat ion of su pp ly: Fir ms m ig ht agr ee toli mit thei r pr oduction so that prices ar e ma dei mit thei r pr oduction so that prices ar e ma deto riseo ri se Exclu si ve deal in g agr eeme nt s: A fir m ins ti tute sxclu si ve deal in g agr eeme nt s: A fir m ins ti tute san ex clusiv e dea li ng agr ee men t wh en it se ll s ton ex clusiv e dea li ng agr ee men t wh en it se ll s toa ret ai ler on co ndi tio n that the ret ai ler wi ll no tret ai ler on co ndi tio n that the ret ai ler wi ll no tpu rcha se an y produ ct from other co mp an ie su rcha se an y produ ct from other co mp an ie s

an d/o r wi ll not sel l o utsi de a certa inn d/o r wi ll not sel l o utsi de a certa ineo ra h i cal ar ea Contd. ------e ogra ph ical ar ea Co ntd. ------


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Con td. F rom s lid e No. 8on td. F rom s lid e No. 8 Ty in g ar ran gemen ts :A fir m en ter s into a tyi ngy in g ar ran gemen ts :A fir m en ter s into a tyi ngag re eme nt wh en it sel ls a buyer a ce rta in goodg re eme nt wh en it sel ls a buyer a ce rta in goodonly on co nd iti on that the bu yer ag ree s tonly on co nd iti on that the bu yer ag ree s topu rcha se cert ain other goods from the sa meu rcha se cert ain other goods from the sa mefirm.irm. Ret ai l pr ice ag reeme nts : If a ma nuf actu reret ai l pr ice ag reeme nts : If a ma nuf actu rersel ls to re tai le rs only on co nd iti on that the yel ls to re tai le rs only on co nd iti on that the yag re e to ch ar ge the sa me se t re tai l pr ices forg re e to ch ar ge the sa me se t re tai l pr ices forits goodsts goods Pr ice di scr imi nat ion :T o ch ar ge di ffer en t pr icesr ice di scr imi nat ion :T o ch ar ge di ffer en t pr icesto di ffere nt buye rs for id ent ical g oods oro di ffere nt buye rs for id ent ical g oods orser vi ceser vi ces Ta cit agr ee men ts :A cc ompl is hed th ro so mea cit agr ee men ts :A cc ompl is hed th ro so meun spo ken form of coope rat io n aga in st wh ich itn spo ken form of coope rat io n aga in st wh ich it

is d iff icul t to le gi sl at e, pri ce se tti ng; ( the y ma ys di fficul t to le gi sl at e, pri ce se tti ng; ( the y ma yid en t if a r ice le ad er to fol lo wd en tif y a p rice le ad er to follo w)


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Con td. F rom s lid e No. 9on td. F rom s lid e No. 9 Ol igopol ies and pub li c p oli cy :Somel igopol ies and pub li c p oli cy :Someec onomi st s hold t ha t not hi ng sh ould bec onomi st s hold t ha t not hi ng sh ould bedone about t he eco nomi c pow er he ld byone about t he eco nomi c pow er he ld by

ol ig opoly co rpora tions . T his is the poli cyl ig opoly co rpora tions . T his is the poli cyof , the d o-noth in g ne w.f , the d o-noth in g ne w. The anti trust view : The a rg ument is th athe anti trust view : The a rg ument is th atpri ces and pr ofits i n conce nt ra tedri ces and pr ofits i n conce nt ra tedind ust ri es a re hi gher tha n t hey sho uldnd ust ri es a re hi gher tha n t hey sho uldbe. The s olut ion, i t is a rgued ,is t oe. The s olut ion, i t is a rgued ,is t oreins ta te compet it iv e pr essures b yeins ta te compet it iv e pr essures b yforcing t he l arg e comp ani es to di ve storcing t he l arg e comp ani es to di ve stint o s mall f ir ms.nt o s mall f ir ms.


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Thank Youhank You

CG & BE Mod 4 ,Session 3

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