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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2 could use licensing or other arrangements to restrict competition. One such method was the tying contract, whereby a firm tied the acquisition of one item to the purchase of another. For example, IBM once refused to sell its business machines. It only rented machines to customers and then required them to buy IBM punch cards, materials, and maintenance service. This had the effect of reducing competition in these related industries. The IBM lease agreement was declared illegal under the Clayton Act, and the company was forced to offer machines for sale and to separate leasing arrangements from agreements to purchase other IBM products. Clearly, in the 1998 case, The Department of Justice argued that Microsoft had engaged in a similar pattern of anticompetitive behavior. If the market for Internet browser software can indeed be seen as distinct from the market for desktop PC software, then DOJ would appear to have a case that Microsoft illegally “bundled” the sale of its Microsoft Explorer Internet browser software with its basic Windows operating system.
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This note was uploaded on 07/31/2011 for the course ECON 1201 taught by Professor Smith during the Spring '11 term at Waseda University.

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

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