Business Ethics and Corporate Governance, Second Edition

COMPETITION BOOSTS CORPORATE GOVERNANCE

In a competitive environment, firms generally cannot expect to earn excess profits. An industry that generates above-average profits tends to attract new competitors, which bring forth additional supply and drive down profitability. Where natural barriers to entry are high, excess profits may persist and interim regulation may be needed to protect consumers. Over time, however, technological advances and entrepreneurial innovations tend to chip away the natural barriers, unless they are prevented by regulations.

To withstand competition, firms need to rely on operational efficiency. Unless their production and administrative costs are kept below prevailing market prices, which may be determined by efficient ...