chapter 4 - ethics in the marketplace
TRANSCRIPT
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