CHAPTER 4. ETHICS IN THE MARKETPLACE (from Syllabus)

A. Topics

1. Price fixing

2. Manipulation of supply

3. Tying arrangements

4. Retail price maintenance agreements

5. Price discrimination

6. Bribery

7. Antitrust view

B. Example for the above 7 related to Philippine Laws

C. Case should cover implications to: profit, environment, work-life balance,

and individual responsibility

Below are the Learning Objectives and Chapter Outline found online:

Learning Objectives & Overview | Course Syllabus | LH's Virtual Office

Business Ethics: Concepts & Cases: Chapter 4 Objectives and Overview

Ethics in the Marketplace

Learning Objectives

1. Understand the case for the morality of free markets as the best guarantors of

capitalist distributive justice, economic utility, and liberty rights: appreciate the

limitations of this justification.

2. Understand how the case for the morality of free markets depends on the

assumption of perfect competition.

3. Know the defining features and essential presuppositions of perfectly

competitive markets.

4. Understand how perfect competition is a useful idealization, and how the

principle of diminishing marginal utility and of increasing marginal

costs interact to determine the equilibrium price.

5. Understand the nature of monopoly markets and their negative impacts on

perfect competition.

6. Understand the nature of oligopoly markets, their negative impacts on perfect

competition, and the several different ways in which oligopolistic influence

may be exercised.

7. Understand the do-nothing view, the anti-trust view and the regulative view as

competing schools of thought about appropriate public policy with regard to

oligopoly markets.

Overview

If free markets are moral it's because they allocate resources and distribute

commodities in ways that are just, that maximize utility, and that respect the liberty of

buyers and sellers. Since markets having these benefits depend crucially on their

competitiveness, anticompetitive conditions and practices are morally

dubious. Monopoly practices and markets and oligopoly practices and markets are

two principle types of anticompetitive practices and conditions that free market

economies spawn. Under monopoly conditions a market segment is controlled by a

single seller. Under oligopoly conditions a market segment is controlled by just a few

sellers.

Though real markets are all imperfect, perfect competition serves as a useful

idealization not only for economic purposes of explaining and predicting the behavior

of actual markets but also for ethical purposes, i.e., for understanding and assessing

the moral case for keeping markets as perfectly competitive as possible. Under this

idealization a perfectly competitive market is defined in terms of seven conditions:

1. distribution: numerous buyers and sellers, none of whom has a substantial

market share.

2. openness: buyers and sellers are free to enter or leave the market

3. full and perfect knowledge: each buyer & seller has full and perfect

knowledge of each others' doings

4. equivalent goods: goods being sold are similar enough that buyers don't care

whose they buy.

5. nonsubsidization: costs of producing or using goods are borne entirely by the

buyers & sellers.

6. rational economic agency: all buyers and sellers act as egoistic utility

maximizers

o try to buy (or produce) as low as possible

o sell as high as possible

7. nonregulation: no external parties such as governments regulate the price,

quantity, or quality of goods.

Freely competitive markets, in addition, presuppose

1. an underlying system of production: so there's goods to exchange

2. an enforcable private property system: so buyers and sellers have ownership

rights to transfer

3. a system of contracts: to administer such transfers.

Perfect competition gets its ethical import from that fact that it's the self-regulative

abilities of free markets -- in response to supply and demand -- that provides the

principle arguments for the moral superiority for free markets. Where supply exceeds

demand, prices, profits, and production decrease; where demand exceeds supply,

prices, profits, and production increase: thus under conditions of perfect competition

production naturally tends toward the equillibrium point (where supply equals

demand) and goods find their "natural price" (= ordinary costs of production + normal

rates of profit). Normal profit is "the average profit that producers could make in

other markes that carry similar risks" (p. 213). The principle of diminishing marginal

utility affects demand and states that each additional item consumed is less valuable

than each earlier item: the principle of increasing marginal costs affects supply and

states that each additional item produced beyond a certain point costs more to produce

than each earlier item.

The principle moral benefits alleged for free markets are three:

1. serving demands of capitalist (contribution-based) justice

2. maximizing economic utility

3. safeguarding negative rights of economic liberty

Even so, this would-be moral justification of them is limited by additional

considerations of positive rights, of care and of character; and it is challenged by

competing egalitarian, needs-based and socialist-contribution-based conceptions of

distributive justice. Finally, to the extent that actual "free-market" policies fail to be

perfectly competitive, their claim to actually having the alleged benefits (and with it

their claim to morality) is diminished. Monopoly and oligopoly conditions are

morally problematic due to their violation, especially, of the two "basic conditions"

for the existence of perfect competetion, distribution, and openness.

Monopoly markets, being -- "markets in which a single firm is the only seller . . . and

which new sellers are barred from entering" (p. 221) are by definition notdistributed

(rather, concentrated) and not open (rather, closed). Under monopoly conditions, the

nonexistence of competition and the inability of competitors to enter (to increase

supply and bid prices down) results in artificially high prices; prices above the

equillibrium point or natural price. This equillibrium point, being the point at which

investors make a fair return (equal to the going-rate across comparable markets), is the

point at which capitalist justice is served. Consequently, under monopoly conditions

such justice is ill-served: the seller charges more and the buyer is forced to pay more

than the goods are worth (i.e., their natural price). Furthermore, monopolies foster

distributive inefficiency, since demand is less well served; and monopoly conditions

remove competitive pressures ordinarily making for increased productive

efficiency. Discretionary preferences of consumers also suffer under monopoly

conditions: consumers are forced to cut back more on other items than they would

have had to (under "normal conditions") to afford the monopolized goods. Finally,

monopoly conditions do no so well safeguard economic liberty as open competition

does: sellers are not free to enter the market; and buyers buy overpriced products

under duress in the absence of alternative vendors.

True monopolies are rare but oligopoly conditions -- where a few firms control most

of the market -- are common and have similar anticompetitive dynamics and

effects. Horizontal mergers -- between former competitors -- are the chief cause of

oligopolistic conditions. Oligopoly markets, not unlike monopolies, are not

well distributed, but largely concentrated: the fewer firms control the market the more

"highly concentrated" the market is said to be. And they are not open, but relatively

closed due to various factors, including anticompetitive strategems on the part of the

oligopoly firms. The anticompetitive effects of oligopolies are aggravated by the ease

with which the few firms controlling the market can join forces and create virtual

monopoly conditions by their collusion. The anticompetitive effects of such collusion

are similar to those of actual monopolies, with the same detrimental effects: capitalist

justice is ill-served; utility in the form of productive and distributive efficiency is

undermined; and rights of economic liberty are infringed. Explicit agreements, tacit

agreements, and even bribery are anticompetitive practices frequently used to

maintain oligopolistic control of markets.

Oligopolies pose a special public policy challenge since the long-term trend in our

economy is towards diminishing competition. There are three principle schools of

thought regarding what to do in light of this fact. The Do-Nothing view maintains this

trend is no problem, claiming competition between industries with substitutable

products takes the place of competition with industries; that the countervailing forces

of other large orgainization (especially governments and labor unions) blunts the

effects of economic concentration; that markets can be economically efficient with as

few as three competitors (as the "Chicago School" claims); and that economies of

scale more than offset any ill-effects due to diminished competition. The Anti-trust

View advocates breaking up larger firms into smaller units each controlling not more

than 3-5% of the market in order to restore competition with all its beneficial

effects. The Regulation View advocates the middle course of allowing

concentration to preserve economies of scale while using regulation to prevent

collusion and ensure that oligopoly firms maintain competitive relations among

themselves.

Business Ethics: Concepts & Cases (6th edition) : Chapter 4

Ethics in the Marketplace

Introduction

If free markets are moral it's because they allocate resources & distribute

commodities

1. in ways that are just

2. that maximize economic utility

3. that respect the liberty of both buyers and sellers

These three benefits depend crucially on competition

.Consequently, anticompetitive practices are morally dubious

Two kinds of anticompetitive conditions and practices

o monopoly conditions: a market segment controlled by one seller

o oligopoly conditions: a market segment controlled by a few sellers

4.1 Perfect Competition

Under perfect competition, "no buyer or seller has the power to significantly

affect the prices at which goods are exchanged."

Seven features of perfectly competitive markets:

1. distributed: numerous buyers & sellers, none of whom has a substantial

market share

2. open: buyers and sellers are free to enter or leave the market

3. full and perfect knowledge: each buyer & seller has full and perfect

knowledge of each others' doings

4. equivalent goods: goods being sold are similar enough that buyers don't

care whose they buy.

5. unsubsidized: costs of producing or using goods is borne entirely by the

buyers & sellers

6. rational economic agency: all buyers and sellers act as egoistic utility

maximizers

try to buy (or produce) as low as possible

sell as high as possible

7. unregulated: no external parties such as governments regulate the price,

quantity, or quality of goods

Breakdown of the seven features

o 1-2 -- openness and distribution -- the "basic conditions"

o 3-6 are "idealizing conditions"

o 7 -- nonregulation -- a measure of how free the market

all real economies are mixed, mixing

free market elements

command elements

regulative admixtures justified by appeal to

social utility

distributive justice

rights -- especially positive or welfare rights

Essential presuppositions

o an enforceable private property system so buyers and sellers have

ownership rights to exchange

o a system of contracts to facilitate & control transfers of ownership

o an underlying system of production so there's goods to be exchanged

Self-regulation: the basis for the alleged moral benefits of competitive markets

o supply > demand

sellers bid prices down: assumes distribution among sellers

falling profits lead to decreased production: assumes openness

profits in one market sector falling below those in others

causes sellers to move into the other, more profitable,

sector

o demand > supply

buyers bid prices up: assumes distribution among buyers

rising profits lead to increased production: assumes openness

profits in one market sector rising above those in others

causes sellers to move out of the others and into the more

profitable sector

Equilibrium in Perfectly Competitive Markets

Principle of Diminishing Marginal Utility

o affecting demand

o states that each additional item consumed

is less useful or satisfying than each of the earlier items

consequently is less valuable than each of the earlier items

o consequence: "the price consumers are willing to pay for goods

diminishes as the quantity of goods they buy increases"

Principle of Increasing Marginal Costs

o affecting supply

o states that each additional item produced after a certain point costs more

to produce than earlier items

point determined by countervailing economies of scale & scarcity

or plenitude of resources

costs breakdown = ordinary costs + normal profits

"ordinary" costs of production & distribution

costs of labor

materials

marketing

distribution

etc.

"normal" profit: "the average profit the producers could

make in other markets that carry similar risks" (p. 213)

Equilibrium price: the price at which supply = demand, i.e.,

o the amount buyers will pay for a quantity of goods

o the production costs (including normal profits) of that quantity for the

sellers

Discussion: Perfect Competition as useful idealization

o only a few markets -- mainly agricultural commodities markets -- come

close to the ideal

o perfect competition and explanatory construct or idealization

enables economists to make predictions as with other useful

idealizations

use of equations governing "frictionless planes" to estimate

behavior of real inclined planes

use of equations governing "free fall in a vacuum" to

estimate the behavior of bodies falling in the atmosphere

etc.

ethically illuminating

provides us with a clear understanding of the advantages of

competition

and understanding of why it may be desirable to keep

markets as competitive as possible

Ethics and Perfectly Competitive Markets (PCMs)

Capitalist distributive justice is well served by perfectly competitive markets

o contributive justice: to each according to their contribution

counting capital or ownership of the means of production as a

contribution

counting the value of workers contribution as = the price their

services command on the job market

accords with the practice of counting "normal" profit as a cost of

production

Economic utility or efficiency is best served

o demand is served: sellers sell and producers produce what consumers

want

o efficiency is forced on producers & distributors by competition

o consumers individual preferences are served

each gets what they in particular most want

from among the goods available

Negative rights are well respected, especially rights of economic liberty

o to buy and sell whatever you choose

o whenever you choose

o to and from whomever you choose

Limitations on Perfectly Competitive Markets' Claims to Moral Superiority

o Justice under competing conceptions not so well served

egalitarian justice violated by income & wealth disparities arising

under PCMs

distribution according to ability to pay vs. need is contrary to

needs-based conceptions

counting the value of labor as the price it commands on the job

market contrary to Marxian contribution-based justice

value of labor = fair-market value of product minus

the ordinary costs of production

"normal" profit not counted as a cost of production

o Justice and benefits alleged accrue only to market participants or those

with money to buy

it's only their demand that are served

it's only their individual preferences that are served

o Positive rights of the poor may be violated: e.g., rights to

food & shelter

education

health-care

o Conditions for perfect competition may conflict with care

rational egoistic utility maximization neglects caring -- it's selfish

efficiency demands of competition may conflict with caring

if I'm too caring

pay my help substantially more than my competitors

if I spend substantially more on pollution controls

than my competitors

if I spend spend substantially more on safe working

conditions than my competitors

then I may lose out in the competition

my production costs will be higher

my competitors will undersell me

putting me out of business

o Certain bad character traits may be encouraged and certain good traits

discouraged by competitive markets

discouraged good traits

kindness

caring

generosity

negative traits encourages

greed & self-seeking

materialism

o Imperfections of real markets

insofar as they fall short of perfect competitiveness

they may fail to deliver even the promised benefits of

serving capitalistic justice

maximizing utility

securing negative rights of economic liberty

4.2 Monopoly Competition

In monopoly conditions the first two of the seven conditions defining perfect

competition are violated

o not distributed but concentrated

instead of "numerous sellers, none of whom has a substantial

share of the market"

one seller has a 100% share of the market

o not open but closed

instead of other sellers being able to "freely and immediately

enter"

other sellers are prevented from entering due to various factors

patent laws

high capitalization costs

anticompetitive machinations of the monopoly holder

etc.

o Monopoly markets

Definition: "markets . . . in which a single firm is the only seller in

the market and which new sellers are barred from entering." (p.

221)

Principal Market-Distorting Effect

inability of other competitors to enter the market

thereby increasing supplies

thereby bidding prices down

results in artificially high prices

above the "natural price" or equilibrium point

natural price = cost of production + going-rate-of-

profit (CP + GRP)

Monopoly Competition: Justice, Utility, and Rights

Monopoly Markets & Capitalist Justice

o Capitalist justice says: "to each according to their contribution of labor

or investment.

o Equilibrium point is where Capitalist justice is served.

o Under monopoly conditions prices kept above equilibrium

so the seller charges more than the goods are worth (i.e., their

natural price)

so the prices the buyer is forced to pay are unjust (i.e. > CP

+GRP)

Monopoly Markets & Economic Utility

1. Monopolies foster distributive inefficiency: demand is not served

monopolies create (virtual?) shortages (indicated by high profits)

other firms unable to enter the market to make up these shortages

excess profits absorbed by the seller are resources not needed to

supply the amounts of goods the consumers are getting:

if others were free to enter the market

the same goods would be supplied for less.

2. Monopolies remove competitive pressures making for productive

efficiency

3. Discretionary preferences of consumers not as well-served:

consumers forced cut back more than they would have had to

(under "normal" conditions)

to buy the monopolized goods

Monopoly Markets and Negative Rights of Economic Freedom

o Sellers not free to enter.

o Buyers buy under duress: monopoly sellers can dictate terms to buyers

goods they may not want:

"You have to buy the Service Agreement with that."

Example: Microsoft marketing of Explorer

quantities they may not desire: "sorry it only comes by the dozen."

o GM's reply to Bill Gates (humor)

4.3 Oligopolistic Competition

True monopolies are rare: but a second type of "imperfectly competitive

market" is common.

Oligopoly conditions: a few firms control most of the market

o relatively common ("business as usual")

o have similar dynamics and anticompetitive effects

In oligopoly conditions the first two of the seven conditions defining perfect

competition are violated

o not distributed but concentrated

instead of "numerous sellers, none of whom has a substantial

share of the market"

a few sellers have a near 100% share of the market

o not open but closed

instead of others sellers being able to "freely and immediately

enter"

other sellers are prevented from entering due to

high start-up costs

anticompetitive machinations of the oligopoly firms

long-term contracts with buyers

etc.

Concentration

o the fewer the firms controlling the market the more "highly

concentrated" the market

o the more firms controlling the market the less "highly concentrated"

Horizontal mergers: the chief cause of oligopolistic conditions

o horizontal merger =

"unification of two or more companies that were formerly

competing in the same line of business"

e.g., Daimler, Disney-Times-Warner

anticompetitive Dynamic: Creation of Virtual Monopoly Conditions via

Collusion

o with only a few firms in the market it is relatively easy for them to join

forces and act as a unit "much like a single giant firm"

by agreeing to set prices at the same (excessively high) level

tacitly: a "gentlemen's agreement"

explicitly: price fixing

by agreeing to restrict output & control supply (OPEC)

o with similar anti-competitive & consequently dubious ethical

consequences

violations of capitalist justice

negative impacts on economic utility

distributive inefficiencies

productive inefficiencies

diminished discretionary preference satisfaction

o with similar negative (economic freedom) rights violations

others are prevented from entering the market

sellers dictate terms

buyers have no recourse

since the "competition" has agreed to dictate the same

terms

Explicit Agreements

Price fixing: managers meet (secretly) & agree to set prices at a artificially high

levels.

Manipulation of Supply: firms agree to limit their production

o result in artificially induced shortages

o hence in artificially high prices

Exclusive Dealing Arrangements: firms sell to retailers on condition

o that retailers will not buy from certain other companies (contra

openness)

o or will not sell outside of a certain geographical area (contra distribution)

Tying Arrangements: the seller agrees to sell to buyer only on condition that the

buyer agrees to buy other products from the firm.

Retail Price Maintenance Agreements: manufacturer sells to retailer only on the

condition

o that they agree to charge the same set retail price for the goods.

o effects

diminishes competition between retailers

removes competitive pressure on the manufacturer to

lower prices

decrease production costs

Price Discrimination: charging different prices to different buyers for identical

goods.

o Examples

Continental Pie Co. underselling Utah Pie Co. in Salt Lake City

Most famous case: Standard Oil cornering of the oil market at the

end of the 19th century

used regional price discrimination region by region

to undersell the locally based oil companies & drive them

out of business.

The airlines?

o Price differences are legitimate only when based on

volume differences

other differences related to true costs of

manufacturing

transporting

packaging

marketing

servicing

Tacit Agreements

Explicit agreements to undertake many of the anti-competitive practices just

named are illegal

Most collusion between oligopolies, consequently is based on unspoken or

"tacit" forms of cooperation

Genesis of unspoken cooperation

o firms each come to recognize that competition is not in their best interest

o that cooperation would be in the best interests of all

o so without any explicit agreement to cooperate

they undertake to act as if there were such an agreement

you might say there is such an agreement de facto or in practice

Price-setting: when one major player raises prices, all the would-be

competitors follow suit

o each realizes all will benefit as long as they continue to act in this

concerted fashion

o "price leader" version

the oligopolies recognize one (dominant) player as the industry's

price leader

and tacitly agree to follow suit in setting prices at whatever level

this firm sets

Bribery

Bribes can be used to secure the sale of products

o serve to shut out other sellers

o hence, are anticompetitive

Not all bribes are of this sort: e.g. "tips" customarily given to customs agents in

some countries to "expedite the process"

Ethical rules for bribery: potentially excusatory & mitigating questions

o Is the offer of payment initiated by the payer?

if so, this is a morally culpable act of bribery

if not -- if the payee initiates the transaction by demanding

payment (usually accompanied by an explicit or implicit threat:

e.g., the processing won't be "expedited")

it's more like extortion by the payee than bribery by the

payer

the payer is absolved of moral responsibility or their

responsibility is at least diminished

o Is the payment made to induce the payee to act in a manner contrary to

the duties or responsibilities of their office

if so: it's a morally culpable bribe: the payer is inducing the payee

to act immorally

if not -- as in the case of the customs official -- it may not be.

o Are the nature and purpose of the payment considered ethically

unobjectionable by the local culture

if so (again as in the case of the customs agent)

then it may be morally excusable

if not done for anticompetitive purposes

if not done for the purpose of inducing the payee to

do something immoral

may be ethically permissible on utilitarian grounds:

otherwise the process won't be "expedited"

might, however, still be a legal violation of the Foreign

Corrupt Practices Act of 1977

agreement with local practices won't be a mitigating or excusing

factor

if it is done for anticompetitive purposes

or if it is done for the purpose of inducing the payee to do

something immoral

Oligopolies and Public Policy

The problem

o Competition within industries has declined & is declining.

o What to do in light of this fact?

The Do-Nothing View

No Problem:

Competition between industries with substitutable products takes the place of

competition within

o example: steel industry, though highly concentrated, faces competition

from plastics, aluminum, etc.

o question: what to do when Alcoa & U. S. Steel & 3M merge?

"Countervailing power" of other large corporate groups blunts the effects of

concentration

o unions & government

o large corporate buyers not so easy to dictate terms to

Chicago School: markets are economically efficient with as few as three

significant rivals

Big is good

o economies of scale

reductions in unit costs of production

using the same fixed resources

o offsets drawbacks:

excessive profits

offset by incredible cost savings

o necessary to meet foreign competition from subsidized industries

o Velasquez is dubious: "research suggests that

in most industries expansion beyond a certain point

will not lower costs but will instead increase them."

The Antitrust View

Reinstitution of competitive pressures

o is necessary in order to rein in excessive oligopoly profits

o requires breaking up large firms into smaller units (each controlling not

more than 3-5% of the market)

Expected results

o higher levels of competition will emerge

o along with a decrease in explicit and tacit collusion

o bringing about the beneficial consequences

lower prices for consumers

greater innovation

increased development of cost cutting technologies

The Regulation View

Oligopoly corporations should not be broken up

o economies of scale would be lost if they were forced to decentralize

mass production

mass distribution

etc.

o these economies should be passed on to consumers in the form of

cheaper products

more plentiful products

To pass savings due to economies of scale along to consumers requires

proper regulation of large corporations

o nationalization -- government take-over of operations

the regulative extreme

controversial

sometimes necessary & beneficial, some argue

never necessary or beneficial others argue

leads to unresponsive bureaucracy

removes competitive pressure from these firms or

industries which negatively effects

productivity

efficiency

innovation

o proponent of regulation usually have in mind measures less extreme than

regulation

to ensure that markets continue to be structured competitively:

to ensure that firms maintain competitive market relations

between themselves

i.e., to prevent collusion

may be voluntarily followed or legally enforced

justified insofar as competition is necessary to best secure

utilitarian benefits

distributive justice

rights to negative freedom

Case for Discussions

Playing Monopoly: Microsoft (ABC News CD-ROM)

Case History

1977: Bill Gates & Paul Allen begin writing programs for the Apple II PC,

rename their company Microsoft, and move to Seattle "where, with 13

employees, it ended the year with revenues of 1.4 million."

1980: IBM belatedly decides to enter the PC market & finds itself in need of an

operating system fast

o CP/M (a multiplatform OS) turns down IBMs offer to license its OS for

IBM

o Approach Bill Gates who says he can provide them with an OS

o "Gates went to a friend who he knew had written a ... 'knock-off of

CP/M' and paid him $60,000 for the rights to this 'knock off': Gates did

not tell his "friend" about the IBM offer

o IBM's share of the market grew to 40% by 1987.

"MS-DOS became the standard operating system for computers built to IBM

standards," roughly 90% of all PCs

o thousands of applications including Microsoft's own MS Word and

Mulitplan developed for this OS

1984: Apple Computer develops operating system with graphical interface

1987: Microsoft releases its Windows OS also featuring graphical interface

o Apple sued Microsoft for infringement: claiming that because Windows

copied the "look and feel" of the their copyrighted MacIntosh OS

o Apple lost the case and with it the competitive advantage it had briefly

enjoyed"

o Microsoft continues to control some 90 percent of the personal computer

market

Netscape

o Netscape Navigator after its release in December of 1994 Navigator

quickly captured 70% of the internet browser market

o browsers do not only display text and graphics but can execute

instructions (software programs) much like an OS, making them a

potential competitors to Windows.

o Bill Gates' 1995 memo: "A new competitor "born" on the internet is

Netscape. Their browser is dominant, with a 70% usage share. They are

pursuing a multi-platform strategy where they move the key API

[applications programming interface] into the client to commoditize the

underlying operating system."

Java

o a programming language developed by Sun Microsystems in 1995

o can operate on any computer equipped with Java software regardless of

the OS, again threatening to make Windows obsolete

o "This scares the hell out of me," Bill Gates wrote in an internal e-mail.

Navigator + Java! Oh no!

o Netscape agreed with Sun to incorporate Java into Navigator

o So Java programs didn't need Windows: they could run on any Navigator

equipped computer

o Furthermore, this made Navigator a "major distribution vehicle" for Java

Microsoft kills Navigator

o Microsoft's "offer you can't refuse"

Offer: Microsoft would supply the browser for the Windows

operating system and Netscape would provide browsers only for

other operating systems.

Since this would be to exchange 70% market share for a 10%

market share, Netscape naturally refused

Microsoft punished Netscape for this by refusing to share the

codes for Windows 95 to impede Netscape from developing a new

version of their browser to take advantage of the Windows 95 API

o Microsoft's Internet Explorer

competing browser released in 1995

failed to make the major inroads in Netscape's market share that

Microsoft wanted

Microsoft executive Christian Wildfeuer wrote in a 1997 memo

that it would be "very hard to increase browser share on the merits

of Internet Explorer 4 alone" and proposed that Microsoft

"leverage our Operating System asset to make people use Internet

Explorer instead of Netscape Navigator."

o Implementation of the bundling strategy

Window 95: incorporated a copy of Internet Explorer that

automatically installed with the OS

Windows 98: fully integrated Internet Explorer with the OS so

that IE couldn't really be removed: Windows 98 called on IE to

perform crucial operations despite the fact that

this slowed its operations

made it more crash prone

made it difficult and risky for PC owners to try to replace

IE with Navigator as their default browsers

undercut Netscape on pricing by giving away IE "for free,"

as Microsoft put it

Microsoft further required computer manufacturers to agree

not to promote Netscape's browser [by making it the default

browser] and offered incentives to manufacturers not to

install Navigator at all.

Success! Navigator's market share plummeted and Explorer's

soared.

Microsoft "pollutes" Java

o Microsoft negotiates a license to distribute Java with Windows from Sun

Sun "not knowing that Microsoft was planning to change Java"

(Velasquez)

[Or were threats employed, as with Netscape. Perhaps MS made

Sun "an offer they couldn't refuse".]

o Microsoft distributes an altered version incorporating changes that

prevent regular (Sun) Java programs from running on computers using

MS-Java.

o Since 90% of machines are now MS, applications programs began to be

written for MS Java & not Sun.

o The "strategic objective" to "kill cross-platform Java" by expanding the

"polluted Java market" (as and internal MS document puts it), had been

achieved: "Microsoft had turned Java into a part of Windows"

(Velasquez)

U.S. DOJ (under Janet Reno in 1998) accuses Microsoft of "a pattern of

anticompetitive practices designed to thwart browser competition on the merits,

to deprive customers of choice between alternative browsers, and to exclude

Microsoft's Internet browser competitors" that was in violation of the Sherman

Antitrust Act, the DOJ charged, on four counts.

o Judge Jackson finds Microsoft guilty on three of the counts

o Ordered MS to be broken up into two separate companies

MS OS marketing & development

MS applications program marketing & development

o Furthermore ordered

MS could not punish or threaten computer manufacturers for

installing and promoting competitors' products

MS had to allow computer manufacturers to remove any MS

applications from the Windows OS [i.e., unbundle the aps.]

that MS would not have to implement his orders until it had time

to appeal

Ruling on Appeal

o Jackson's findings of fact were accepted

o Jackson's breakup penalty was reversed: MS argued his bias against

Microsoft affected the severity of the remedy he imposed

o A new penalty would have to be devised.

New Penalty: Negotiated in 2001 between MS and "the new Republican-

appointed head of the DOJ" John Ashcroft

o MS would share its API with rival applications software companies

o MS would give computer makers and users the ability to hide icons for

Windows applications

o MS could not prevent competing programs from being installed on

Windows computers

o MS could not retaliate against computer makers that used competing

software.

o however, MS could continue to bundle applications into the OS

Ongoing Pattern

o MS tried to corner the server market to share APIs with competing

server software programmers

o MS bundled its Windows Media Player together with Windows 2000

o 2004 European Commission

fined MS $613 million

ordered MS to disclose the APIs to competing server software

programmers

ordered MS to offer a version of Windows without Windows

Media Player

o On appeal: MS doesn't have to offer that version until appeals are

exhausted: that will take several years

Linux -- a free open source OS -- is an emerging alternative to windows

Questions for Discussion

1. Identify the behaviors that you think are ethically questionable in the history of

Microsoft. Evaluate the ethics of these behaviors.

2. What characteristics of the market for operating systems do you think created

the monopoly market for Microsoft? Evaluate this market in terms of utility,

rights, and justice.

3. In your view, should the government have sued Microsoft for violation of the

antitrust laws? Was Judge Jackson's order that Microsoft be broken into two

companies fair to Microsoft? Was Judge Kollar-Kotelly's November 1, 2003

decision fair? Was the April 2004 decision of the European Commission fair to

Microsoft?

4. Who, if anyone, is harmed by the sort of market that Microsoft's operating

system has enjoyed? What kind of public policies, if any, should we have to

deal with industries like the operating system industry?

5. What other issues do you believe this case raises or what else to you think it

shows?

Archer Daniels Midland and the Friendly Competitors

Questions for Discussion

1. Evaluate Terry Wilson's assertion that the difference between the $1.20/lb.

price of Lysine when ADM entered the market and the $.60/lb. the price fell to

due to the oversupply that resulted from ADM's entry was money that the five

companies were "giving away to their customers" (p.201). What, if anything, is

wrong with the principle that "the competitor is our friend and the customer is

our enemy"?

2. Your text cites a number of factors that cause companies to engage in price-

fixing. Identify the factors that you think were present in the ADM case &

explain.

3. Was Mark Whitacre to blame for what he did? For which of the things that he

did? Do you feel that in the end he was treated fairly? Why or why not?

4. What other issues do you believe this case raises or what else to you think it

shows?

http://www.wutsamada.com/alma/bizeth/velasq4.htm