The Ethical Economics
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FREEDOM OF ENTRY - ETHICS OF COMPETITION

The standard neoclassical model of perfect competition that is used to demonstrate how self-interested behavior can lead to economically efficient outcomes assumes that monopoly power in markets is non-existent. Implicitly this means that individuals and firms are free to enter and exit any market they wish without any impediment. It also assumes that information about production techniques and costs is shared among all market participants. This implies that there are no trade secrets, no intellectual property rights, no non-compete clauses in contracts, no exclusivity deals, no horizontal mergers and acquisitions, no labor unions restricting freedom of entry in labor markets, and no occupational licensing requirements restricting access, and so on. The fact that these actions and behaviors are pervasive in real world markets is a clear indication that the model of perfect competition does not perfectly mimic the functioning of real economies. Nevertheless, the model remains useful because it clearly displays the ideal conditions needed to achieve that highly efficient state of economic nirvana. Economic nirvana requires complete freedom for firms and consumers to participate in any market they wish and it requires the sharing of production information widely and completely among all market participants.

In terms of ethical principles, free and open competition would require that businesses refrain from activities that would prevent competitors from participating in the market and also to refrain from collusive arrangements that serve to enhance monopoly power in the market.

Some would argue that the allowance of some limited degree of monopoly power is needed in a real market setting. If markets were truly competitive, small shocks to a market, such as a sudden drop in demand, could cause many firms to quickly shut down leading to unemployment for many workers. A modest profit cushion created via some modest monopoly power might be necessary to enable businesses to survive occasional shocks and to reduce market anxiety both for the owners and their workers. This can be used to justify some behaviors, including product differentiation, some intellectual property protections, some mergers, and perhaps exclusivity deals. These types of firm protections could provide that profit cushion to enable more efficient markets to prevail in the long run, especially when an economy is dynamic and rapidly changing.

Steven Suranovic, December 1, 2019

Ethical Principles
Promoting Economic Efficiency

  • Market freedom
    • No monopolizatiom
    • No restraint of trade
    • No discrimination

 

Why?

  • Competition is generally more economically efficient than monopolization (some exceptions may apply - eg. intellectual property)
  • Competition reduces income and wealth inequality by lowering monopoly rents

 

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