DP13172 The I.O. of ethics and cheating when consumers do not have rational expectations

Author(s): John Thanassoulis
Publication Date: September 2018
Keyword(s): Competition, Ethics, Malpractice, Moral Dilemma
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13172

I study the incentive of firms to be unethical in competitive markets, by conducting practices which illicitly harm stakeholders (consumers, workers, the environment) so as to raise profits. I offer a theoretical analysis which embeds consistent philosophical concerns (utilitarian, Kantian, and in some settings, Rawlsian) to evaluate the moral dilemma managers face of cheating stakeholders for profit in a model of competition with regulatory oversight. I characterise sufficiency conditions which apply broadly and which yield the result that more competition raises the equilibrium level of malpractice in Nash Equilibria of the competition game. If agents reason more deontologically, professing a duty-ethic, then oligopoly is linked to malpractice. I explore how firm level changes impact equilibrium malpractice drawing predictions for some aspects of FDI and for behavioural changes as firms approach the technological frontier.