Question

Demand and supply are Key elements of the U.S. economic system. So, too, is competition. This exercise will challenge you to better understand the ethical dimensions of a system that relies on demand, supply, and competition.

The Situation

You are a businessperson in a small town, where you run one of two local pharmacies. The population and economics base are fairly stable. Each pharmacy controls about 50 percent of the market. Each is reasonably profitable, generating solid if unspectacular revenues.

The Dilemma

You have just been approached by the owner of the other pharmacy. He has indicated an interest either in buying your pharmacy or in selling his to you. He argues that neither of you can substantially increase your profits and complains that if one pharmacy raises its prices, customers will simply go to the other one. He tells you outright that if you sell to him, he plans to raise prices by 10 percent. He believes that the local market will have to accept the increase for two reasons: (1) The town is too small to attract national competitors, such as Walgreens, and (2) locals customers can’t go elsewhere to shop because the nearest town with a pharmacy is 40 miles away.

Questions for Discussion -

1. What are the roles of supply, demand, and competition in this scenario?

2. What are the underlying ethical issues?

3. What would you do if you were actually faced with this situation?

Answer 1

1.) The roles of supply-demand and competition are as follows:

Demand: The demand here is from the customers who need medicines in the small town at a given price.

Supply: The concept of supply in this situation is the medicines supplied by the two pharmacies to the consumers at a given price.

Competition: Since is the market is free of outside competition as mentioned above. The market under consideration is a duopoly, which means only two suppliers dominate the market with each taking 50% of the market share. The two pharmacies are the only competition that each others face. In such a market structure, the suppliers are in a stronger position to manipulate prices, and they are not price takers, as it would have been in a perfect competition environment. However, the manipulation of prices is constrained by the issue of losing market share to the other pharmacy if the prices aren't manipulated in union.

2.) The underlying ethical issues here is the elimination of the prevailing competition by acquiring one of the two pharmacies. If the acquisition is carried out the market then becomes a monopoly where the existing solo pharmacy would have the power to set prices as they please in order to increase their profitability. Unlike before, where if one pharmacy increases the prices it risks losing its market share to the other pharmacy. An important factor here is the nature of the good, medicines, the demand for these goods is highly inelastic, and price hikes will only lead to less than proportionate change in the quantity demanded. If the competition is eroded the existing pharmacy could exploit the customers, which is unethical.

3.)

If actually faced with the situation my actions would depend on what my motives are, if I wish to concentrate on increasing my profitability substantially I would aquire the other pharmacy and increase my prices to gain higher profits, consequently completely blindsiding the unethical aspects of forming a monopoly and exploiting the customers. This same applies if making a large income throught the sale of my pharmacy, where my compeition does the same, and I could move into another market of goods with the funds generated by the sale of the pharmacy. Either way, a monopoly is formed and the customers are exploited.

If I wish to be ethical and increase my profits I would acquire my competition and keep the prices the same or increase them only a little, by say 2% (to cover extra costs of running two pharmacies), and rely on the increased profits that are generated from increased volume of sale, or try and capitalise on economies of scale to mitigate my costs.

But personally, I would go with the option of acquiring my competition and maintaining the prices the same, as exploiting customers over life sensitive medicines is highly unethical, and profits can be made without doing so.