We investigate how market competition influences the way leaders discipline employees' ethical transgressions. A cross-sectional study among organizational leaders (Study 1) revealed that strong market competition is related to an instrumental decision frame (business practices are more focused on serving the organization's interest). This decision frame explains why strong market competition is related to leaders' perceptions of the evaluation of wrongdoing in terms of instrumental rather than moral concerns. Two experiments (Studies 2 and 3) show that increased market competition makes leaders' disciplining of ethical transgressions more contingent upon the transgression's instrumentality to the organization: the same ethical transgression is punished less when it resulted in profit than when it resulted in loss. This research is among the first to identify conditions that determine disciplinary responses of organization leaders to ethical transgressions, and it feeds the debate on whether market competition promotes the display of unethical behavior within organizations.