Chapter 21: Understanding the Business Environment: The Economics of Regulation
EFFECT OF THE MICROSOFT CASE ON OTHER COMPUTER FIRMS
Discussion Question Answer:
Several possible reasons can reconcile these facts. First, the stock market did not expect the suit
would have much affect on these other firms. Either the market expected Microsoft ultimately to
prevail through appeals, or the ultimate effect of the government actions against Microsoft on
Sun, Netscape, and Apple was negligible. Related to the first reason, the market might have been
expecting such a long protracted legal fight that the discounted value of the future actions would
be small. Second, the power of the tests to detect an effect is low. The cost to Sun, Netscape, and
WORLD MOTORS
Discussion Question Answers:
1. Companies can use government regulation as a strategic tool to increase firm value. The
Emission Standards. Tighter emission standards increase the marginal cost of cars and thus drive
up the price of cars which reduces demand, and hence, WM’s profits.1 One of WM’s competitors
Labor Union Laws. Labor laws that increase the bargaining power of unions generally increase
Worker Safety Rules. Again, like emission standards, worker safety rules such as those enforced
by the Occupational Safety and Health Administration (OSHA) increase the cost of
manufacturing an automobile. In general, WM will oppose tighter OSHA rules unless it has an
1 Throughout this discussion we assume that World Motors faces a downward sloping demand curve. Hence, not all
cost increases or decreases can be passed on to the consumer.
Miles-per-Gallon Standards. The tighter proposed federal miles-pergallon standards will either
cause production costs to rise or WM to modify vehicle design so that vehicles weigh less. Both
Import Quotas. Government regulations limiting the number of foreign cars imported into the US
This case highlights some of the ways government regulations can affect firm value. Notice that
World Motors does not automatically oppose nor support all government regulations. Moreover,
In particular, it is important that managers be able to forecast the effects of regulation, forecast
2. The WM labor unions will take the following positions on the proposed government
regulations:
Emission Standards. WM’s labor unions are likely to support WM’s lobbying activities because
Worker Safety Rules. WM’s labor unions also might support this OSHA proposal since it will
Miles-per-Gallon Standards. WM’s labor unions are likely to oppose these rules because it
Import Quotas. WM’s labor unions will support such legislation to the extent the unions believe