Tacit Agreements



3.4 Oligopolistic Competition

3.4.2 Tacit Agreements

Although most of the forms of explicit market agreements enumerated are illegal, the more common types of price-setting in oligopolies are accomplished through some unspoken form of cooperation against which it is difficult to legislate. How does this take place? The managers of the major firms in an oligopoly can learn by hard experience that competition is not in their personal financial interests. Price-cutting competition, they find, will only lead to minimal profits. The firms in an oligopoly, therefore, may each come to the conclusion that cooperation is in the best interests of all. Each firm may then reach the independent conclusion that they will all benefit if, when one major firm raises its prices, all other firms set their prices at the same high levels.

111 Through this process of “price-setting,” all the major firms will retain their share of the market and they will all gain by the higher price. Since the 1930s, for example, the major tobacco companies have charged identical list prices for cigarettes. When one company decides it has a reason to raise or lower its cigarette prices, the other companies will always follow suit within a short period of time. The officials of these companies, however, have made no explicit agreement to act in concert.

Without ever having talked the matter over among themselves, each realises that all will benefit, so long as they continue to act in a unified fashion. In 1945, incidentally, the U.S. Supreme Court found the dominant cigarette companies guilty of tacit collusion but the companies; reverted to identical pricing after the case was settled. In Nigeria, anytime Coca-Cola increases its unit price per bottle, Pepsi will also increase theirs.

To co-ordinate their prices, some oligopoly industries will recognise one firm as the industry's “price leader.” Each firm will tacitly agree to set its prices at the levels announced by the price leader, knowing that all other firms will also follow its price leadership. Because each oligopolist knows it will not have to compete with another firm's lower prices, it is not forced to reduce its margin of profit to the levels to which open competition would reduce them. There need be no overt collusion involved in this form of price-setting, only an unspoken understanding that all firms will follow the price leadership of the dominant firm and will not engage in the price-lowering tactics of competition.

Whether prices in an oligopoly market are set by explicit agreements or implicit understandings, it is clear that social utility declines to the extent that prices are artificially raised above the levels that would be set by a perfectly competitive market. Consumers must pay the unjust prices of the oligopolists, resources are no longer efficiently allocated and used, and the freedom of both consumers and potential competitors diminishes.

3.4.3 Bribery

When used to secure the sale of a product, political bribery can also introduce diseconomies into the operations of markets. This is a form of market defect that received a great deal of public attention during the late 1970s, when it was discovered that a sizable group of companies had attempted to land contracts with overseas governments by paying bribes to various government officials. Lockheed Aircraft Corporation, for example, paid several million dollars to government officials in Saudi Arabia, Japan, Italy, and Holland to influence aircraft sales in those countries.

112 When bribes are used to secure the purchase of a commodity, the net effect is a decline in market competition. The product of the briber no longer competes equally with the product of other sellers on the basis of its price or merits. Instead, the bribe serves as a barrier to prevent other sellers from entering the briber's government market. Because of the bribe, the government involved buys only from the firm who supplies the bribe and the briber becomes in effect a monopoly seller.

If a briber succeeds in preventing other sellers from receiving equal entry into a government market, it becomes possible for the briber to engage in the inefficiencies characteristic of monopolies. The bribing firm can impose higher prices, engage in waste, and neglect quality and cost controls because the monopoly secured by the bribe will secure a sizeable profit without the need to make the price or quality of its products competitive with those of other sellers.

Bribes used to secure the sale of products by shutting out other sellers differ, of course, from bribes used for other purposes. An official may insist on being paid to perform legal duties on behalf of a petitioner, as when, for example, a customs officer asks for a "tip" to expedite the processing of an import permit. A government official may offer to lower a costly tariff in return for an under-the-table payment. The previous analysis would not apply to bribes of this sort, which are being used for a purpose other than to erect market barriers.

In determining the ethical nature of payments used for purposes other than to shut out other competitors from a market, the following considerations are relevant.

• Is the offer of a payment initiated by the payer (the one who pays the money), or does the payee (the one who receives the money) demand the payment by threatening injury to the payer’s interests? In the latter case, the payment is not a bribe but a form of extortion. If the threatened injury is large enough, the payer may not be morally responsible for the act, or the moral responsibility may at least be diminished.

• Is the payment made to induce the payee to act in a manner that violates the official sworn duty to act in the best interests of the public? Or is the payment made to induce the payee to perform what is already an official duty? If the payee is being induced to violate official duty, then the payer is cooperating in an immoral act because the payee has entered an agreement to fulfill these duties.


• Are the nature and purpose of the payment considered ethically unobjectionable in the local culture? If a form of payment is a locally accepted public custom and there is a proportionately serious reason for making the payment (it is not intended to erect a market barrier nor to induce an official to violate public duties), then it would appear to be ethically permissible on utilitarian grounds. (It might, however, constitute a legal violation of the Foreign Corrupt Practices Act of 1977.).