On the Edge Fixing the Computer Memory Market All PCs need memory chips, called

Question

On the Edge Fixing the Computer Memory Market All PCs need memory chips, called DRAM for “dynamic ran- dom access memory,” which are sold in units of gigabytes (Gb)megabytes (Mb). The $20 billion per year DRAM mar- ket is dominated by Micron, Infineon, Samsung, Hynix, and a few smaller companies who sell their DRAM to computer mak- ers such as Dell, Compaq, Gateway, and Apple. In the late 1990s, the DRAM makers invested in bigger factories leading to a market glut, large inventories, and intense price competi- tion. By February 2001, unsold inventories and a recession took DRAM prices into a steep fall (see Figure 4.5), dropping to about $1 a unit by the end of 2001, a price well below manu- facturing costs. In early 2002, while inventories were still high and the recession was in full swing, prices strangely rose and peaked at about $4.50 a unit in April (see Figure 4.5). That month, Michael Dell of Dell Computers accused the compa- nies of “cartel-like behavior,” and the U.S. Department of Jus- tice (DOJ) began to investigate the possibility of price-fixing. Prices now reversed, falling to $2 by the end of 2002, about 20 to 40 percent below manufacturing costs. The DOJ later released a November 26, 2001, e-mail written by Kathy Rad- ford, a Micron manager, in which she described plans by Micron, Infineon, and Samsung to move their prices upward in unison: “the consensus from all [DRAM] suppliers is that if Micron makes the move, all of them will do the same and make it stick.” On September, 2004, Infineon pled guilty to “participating in meetings, conversations, and communica- tions” with other DRAM makers during 2001 and “agreeing during those meetings, conversations, and communications” to “fix the prices for DRAM.” Infineon paid the U.S. government $160 million in fines. The DOJ announced it was investigating the other DRAM makers.

Estimate the equilibrium price from the graph.

Who ultimately paid for any monopoly profits above the equilibrium price?

Did the companies do anything unethical? Explain.

Explanation / Answer

1) The equilibrium price is the price from the graph is the relatively stable price seen in the year 2003 and is around the price level $3 per unit. This is close to the manufacturing costs.

2) The monopoly profits made by the DRAM makers were resulted in increase of computers which meant that cost for computer makers such as Dell increased and this was ultimately paid by end consumers who purchased the computers.

3) It was not ethical for them to form a cartel and make super normal profits as that meant the prices was higher than determined by market forces which meant that end consumers had to pay higher prices and felt the brunt of monopoly practice.

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