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Key993f - BUSINESS 702 MANAGERIAL ECONOMICS FINAL EXAM KEY...

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BUSINESS 702 FINAL EXAM KEY FALL 1999 MANAGERIAL ECONOMICS PLEDGE: "On my honor, I have neither given nor received any unauthorized aid on this exam, nor am I aware of anyone giving or receiving any unauthorized aid on this exam." ________________________________________ Signature ________________________________________ Name (Print) SHORT PROBLEMS (40 pts, 10pts each) 1. Tying Contracts (P13.4 ) . In a celebrated case tried during 1998, The Department of Justice charged Microsoft Corporation with a wide range of anti-competitive behavior. Among the charges leveled by the DOJ was the allegation that Microsoft illegally “bundled” the sale of its Microsoft Explorer Internet browser software with its basic Windows operating system. DOJ alleged that by offering a free browser program Microsoft was able to extend its operating system monopoly and “substantially lessen competition and tend to create a monopoly” in the browser market by undercutting rival Netscape Communications, Inc. Microsoft retorted that it had the right to innovate and broaden the capability of its operating system software over time. Moreover, Microsoft noted that Netscape distributed its rival Internet browser software Netscape Navigator free to customers, and that it was merely meeting the competition by offering its own free browser program. A. Explain how Microsoft’s bundling of free Internet browser software with its Windows operating system could violate U.S. antitrust laws, and be sure to mention which laws in particular might be violated. B. Who was right in this case? In other words, did Microsoft’s bundling of Microsoft Explorer with Windows extend its operating system monopoly and “substantially lessen competition and tend to create a monopoly” in the browser market? SOLUTION A. Section 3 of the Clayton Act forbade tying contracts that reduce competition. A firm, particularly one with a patent on a vital process or a monopoly on a natural resource,
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