Below is a case study about a price-setting scheme used by GE.... Can you please help me answer the following. Just a good solid paragraph to help me expand in the right direction would be appreciated!!
Apart from their legality, did the price-setting scheme set up in 1963 differ in any morally relevant ways from the earlier price-fixing schemes?
General Electric Prices
Note: the following case is copyrighted and may be copied and used only by current users and owners of the textbook, BUSINESS ETHICS: CONCEPTS AND CASES by Manuel Velasquez.
Clarence Burke began working for the heavy-equipment division of General Electric as soon as he graduated from college in 1926. Clarence was an energetic, hard-driving, and tenacious person and looked forward to a promising career at GE. The heavy electrical equipment division at GE was the oldest part of the company, around which the rest had been built, and it still accounted for a quarter of its sales. Moreover, GE dominated the heavy electrical equipment markets: It held 40 to 45 percent of the heavy equipment markets, followed by Westinghouse who held 30 to 35 percent, then Allis-Chalmers and Federal Pacific who held 10 percent apiece. By the 1950s, the combined sales of these companies would average $1,750,000,000 per year in the heavy electrical equipment markets alone.
Long before Clarence Burke began working for GE, the company was involved in a series of antitrust suits that continued through the 1940s. These suits are summarized in Table. In November 1946, as a response to these suits, GE formulated an antitrust directive which stated that it "is the policy of this company to conform to the antitrust laws." The directive (which came to be known as "directive 20.5") was repeatedly revised and filled out until it eventually read:
Directive Policy on the Compliance by the Company and its Employees with the Antitrust Laws No. 20.5
It is the policy of the company to comply strictly in all respects with the antitrust laws. There shall be no exception to this policy nor shall it be compromised or qualified by any employee acting for or on behalf of the company. No employee shall enter into any understanding, agreement, plan, or scheme, express or implied, formal or informal, with any competitor, in regard to prices, terms or conditions of sale, production, distribution, territories, or customers; nor exchange or discuss with a competitor prices, terms, or conditions of sale, or any other competitive information; nor engage in any other conduct that in the opinion of the company's counsel violates any of the antitrust laws.
Every manager was periodically asked to indicate in writing that he was adhering to the policy. The standard written letter the manager would sign stated:
I have received a copy of directive policy general No. 20.5, dated __________. I have read and understood this policy. I am observing it and will observe it in the future.
The letter was not signed under oath nor was a manager responsible to his or her immediate local superior for adhering to the policy. The letter was sent out from GE's central offices, and was returned to the central offices by mail. Any disciplinary action taken to enforce the directive also had to originate at the home office.
In 1945 Clarence Burke was promoted to Sales Manager of GE's distribution transformer department. Here he worked under H. L. "Buster" Brown, general manager in charge of sales for all transformer departments. In July 1945, a month after Clarence entered his new position as department sales manager, his superior, Mr. Brown, told him he would be expected to attend the regularly scheduled meetings of the National Electrical Manufacturers Association in Pittsburgh, meetings which were also attended by the sales managers of the other three or four major producers of electrical equipment. Conversations at the meetings gradually began to turn to prices and soon the managers were making informal agreements to quote "an agreed upon price" to all their customers. Clarence Burke went along and accepted the practice, especially after the managers were assured by "Buster" Brown that the company's antitrust directive did not refer to the sorts of informal agreements they were making: The only agreements that were illegal, according to Brown, were those which "gouged the public." Several years later Clarence Burke recalled that he and others had "understood" that what they were doing was what the company wanted.
Clarence Burke was not the only GE manager who moved into price-fixing arrangements with the other major electrical companies. By the late 1950s, W. W. Ginn, a GE vice-president, was meeting with competitors to fix prices for power transformers; Frank Stehlik, a GE general manager, was meeting to fix prices for power switchgear assemblies; W. F. Oswalt, another general manager, was fixing industrial control equipment prices; and G. L. Roark, a GE marketing manager, was fixing prices for power switching equipment. In fact, as later investigations showed, the managers of all the principal companies manufacturing heavy electrical equipment (General Electric, Westinghouse, Allis-Chalmers, and Federal Pacific) were meeting regularly to set prices for their products.5 Throughout the late 1940s, Clarence Burke was gradually introduced to the details of a practice that was accepted in the entire industry, as well as in his own company:
I was taught [the techniques] by my superiors back as far as 1945, who took me to meetings with them and told me that, instead of showing Pittsburgh [the place of the meetings] in your expense account, let's all show so-and-so. . . . From then on it was just inbred in me. . . . I ascertained that it [was the usual way to act] because my superiors at Pittsfield were doing it and asking me to do it. So it was their practice. [Statement of C. Burke]
In 1950, the general manager of GE's switchgear division, R. F. Tinnerholm, offered to move Clarence Burke to the more prestigious position of sales manager in a department of GE's switchgear division:
I was offered the position of manager of sales of the specialty transformer division in Fort Wayne, Indiana, and I accepted and I went there on February 1, 1950. . . . They wanted to replace the manager of marketing. . . . Walter F. Rauber, I think his name is; they had determined to replace him, and since I had had switchgear experience and had had large apparatus experience, they determined that I was a logical replacement for Mr. Rauber. . . . I was interviewed [by] . . . R. F. Tinnerholm, who was then manager of the switchgear division. . . . Mr. Tinnerholm . . . spelled it out very clearly: Mr. Rauber (to use his words as I remember it) was so "religious" that, since he had signed this slip of paper saying that he would observe policy 20.5, he would not talk with competitors. So he was "not broad enough for the job" and they would expect me to be "broad enough" to hold down that job. [Statement of Clarence Burke]
Part of what had led many managers to adopt price-fixing were the pressures they felt on them to meet corporate goals. Clarence Burke recalled several years later that the general manager of GE's switchgear division always insisted on a "reach budget," that is, a budget that increased the percent of net profit to sales over what it had been the year before. Burke claimed that he and the other managers felt that if they wanted to "get ahead" and have the "good will" of their superiors, they would have to attain these goals; and the only way to attain these, they felt, was to get together with their competitors.
The price-fixing agreements that the four main electrical switchgear companies entered into in 1950, according to Burke, were intended to "stabilize" prices and to ensure at the same time that each company retained its share of the market. Managers of the four companies met in a hotel room at least once a month and arranged to take turns submitting the lowest bids for upcoming contracts so that GE would wind up with 45 percent of the jobs, Westinghouse with 35 percent, Allis-Chalmers with 10 percent, and Federal Pacific with 10 percent. These were the approximate percentages of the market that each company had controlled before the agreements.
A major fear of the companies was that without the agreements, they might be forced into what Burke termed "a ruinous cutthroat competition." That fear seemed to be borne out in 1954 when GE decided to withdraw from the price-fixing meetings. The result was a financial downturn for the industry, as each company rushed to undersell the others, until prices were being cut by as much as 50 percent. After two years, the damaging effect of the price war led the four electrical companies to resort to fixing prices again in order to "restore stability" to the market:
The latter part of 1953 [General Electric] served notice on the rest of the industry people that [we] would not meet with them any more. . . . Through 1954 there were no meetings . . . and that is when prices began to deteriorate gradually. . . . Prices began to get farther and farther off book until the latter part of 1954 they were about 15 percent off book. Then in January 1955 they really went down to the bottom, about 45 to 50 percent off book. . . . That summer--and I think it was June or July 1955--Mr. Burens [general manager of GE's switchgear division] asked me to come over to his office, and he told me that he had to start meeting with competition again. . . . And he said something to the effect that he had no other alternative. [Statement of Clarence Burke]
The meetings resumed until the winter of 1957 when Westinghouse decided to withdraw from the price-fixing agreements and the market once again went down. Within months prices fell by 60 percent. In the fall of 1958, however, the agreements were reestablished and prices moved back to their prior levels where they remained until the price-fixing meetings were finally ended in 1960. General Electric's profits during the years of these price-fixing agreements are indicated in Table
Clarence Burke was not entirely unconcerned about his involvement in the price-fixing agreements. His reflections turned on what he saw as the effects of these agreements:
I will have to say that we did not charge everything [the market could bear]. Our purpose in meeting with competitors was not to dig the customers or anything. It was just to get what was a fair market value and would produce a fair profit for the industry and would keep the industry healthy. And I think if you will look over the records of the industry during that period, you will see that it did not make any huge profits. General Electric Company's maximum was less than 6 cents on the sales dollar. We were not meeting for the purpose of getting the most that the traffic could bear. It was to get a value for our product . . . I knew I violated the technicalities of the law. I salved my own conscience by saying I was not violating the spirit of the law. Because I was not establishing prices that would gouge the public, and I thought the spirit of the law was to prevent you from establishing abnormal prices, from making huge profits. [Statement of Clarence Burke]
In June 1960 a federal grand jury indicted the companies and managers involved in the price-fixing agreements. Clarence Burke was granted immunity in return for his willingness to testify against the other companies and managers. Seven executives of the companies pleaded guilty and were sentenced to jail; thirty-eight other managers were fined, and fines were brought against the companies. Although Clarence Burke was not prosecuted by the government he was fired by GE:
[The vice president of relations services] gave me this talk about how it would be to my advantage to resign from the General Electric Company. . . . They made it very clear that this had nothing to do with disciplinary action on 20.5 or because we pleaded guilty in the antitrust case. It was just the fact that because of the adverse publicity that had been received, that they would never put me in a position that my talents warranted. Therefore I would be better off if I resigned. . . . I asked him what the alternative to resigning was, and he said, "Well, if you don't resign you are off the payroll at 5 o'clock today." And that was between 4:30 and 5. [Statement of Clarence Burke]
Between 1960 and 1963, a pattern of strong competition emerged in many of the markets that had been subject to the price-fixing agreements. Prices fell by 15 to 20 percent.13 Then, in May 1963, General Electric published a pricing system that (as internal GE documents later revealed) it hoped would once again make it possible for the industry to set prices, but this time without entering into explicit collusion. The pricing system which GE published stated that (1) all of its book prices would be published, (2) all bids and discounts would be exactly 76 percent of book prices, (3) if GE offered any buyer a lower discount, it would be contractually (hence legally) bound to penalize itself, because it publicly guaranteed every customer that it would apply any lower discounts retroactively on all sales of the preceding six months, (4) all sales and orders would be published. Westinghouse immediately adopted the same pricing system, and the managers of the two firms now coordinated their prices by using public communications and public penalties instead of the secret methods that had sent some of them to jail in 1961. This pricing system continued for decades.