MGSC05 Midterm Notes

Lecture Important Concepts

Bank Mergers Case:
4 of 5 banks in Canada tried to make mergers amongst themselves. TD with CIBC,
RBC with Bank of Montreal. They had to get approval from the government to move
forward.

The public media claimed that the banks were going to win this proposal, because
they believed that the big players of the economy would make it certain that would
make it pass.
From public policy point of view:
● Many people believed it to be good with merging.
○ Globalization and sovereignty
● The internationalization of banking and economy made it difficult for the 5
big banks to be a player, they needed to merge to become more influential.
● Also makes it difficult for other global players from entering the Canadian
banking market.

Conservatives are more concerned with business and market success.

Leftist are more concerned about nationalism; the reason is historically

anti-American → pro-Canadian control over government and business

NDP (new democratic party) were having problems with the banking sector with the
transaction fees, they would only have the power over them is they are Canadian
banks. As America banks they have other global options.

1. Psychological (Framing Issues)

● The banks were thinking in the ST, whereas government were thinking
in LT. Government did not like how they were trying to take control.
They were basically thinking in two different mindsets.
● Paul Martin – the Liberal finance minister – thought they were trying to
make it a fact of being by creating such a buzz about the merger and
all he had to do it say yes.
 ● The lion’s share of the costs would be felt in those two years, the
benefits would not come until after the 2 years (closing of branches,
closing of product lines, layoffs of employees)
● So the banks were thinking of the LT way of benefits outweighing the
initial costs.
● These two conflicts of framing played a big part in the mergers.
2. Political Issues
● Banks made mistakes thinking if they were powerful financially they
were also powerful politically → most population dislike banks
● They didn't seek coalition with other org. to lobby for their cause, they
had no supporters.
● The banks were not liked by their people so as the government trying
to win votes, this was not the way to go. They needed support from
somebody.
● Scotia bank did not want to merge, that meant that somebody within
its own sector did not want the merger to go forward.
● Canadian Banking Association said they were not going to help the
banks, depriving them the use of the skilled government relations
there.
● TD wanted to waiver because CIBC had a very bad quarter in 1998.
● Politically, they had not support for their cause, and the initial support
they had became wavering.
3. Policy Issues
● The banks had a number of arguments to make:
○ Their return on equity were falling for the first time, however their
profits were in the all-time high.
○ Economies of scale, however the course of 1998 the political events
that was most critical was the major Asian banks failed because they
were too big. →“The Asian market gave the largest retort to the
argument” → made the argument far less credible.
○ They argued that the bigger, the better
● President of RBC “don't we want to kick ass in the states?” → not very
Canadian.
 ● The banks have been quietly selling off to international banks, so the
sovereignty argument is invalid → lack of consistency between words and
actions.
● The banks were arguing that if they weren’t allow to merge, they would have
to start closing some branches that were not profitable, close up jobs, get out
of providing services etc. however it would happen anyway when they do
merge, so either action would cause the same result → it’s a non-issue
○ Argued that to increase efficiency, it is essential to close branches, lay
off people. “If you approve mergers, it will be good for us; if you turn
them down, it would bad for Canadians”
○ Very selfish, did not talk about the benefits for Canadians, creation of
skilled financial class for Canadians, they tried to generate fear among
Canadians to get the merger through, basically tried to bully the
public.
In conclusion:
● When talking to the Government, know the public’s interest, have good sense
of politics → appeal to the public
● Know how to construct a good argument.

Tobacco Case
Phillip Morris was the single largest taxpayer and RJR was not far behind. There was
an issue whether the industry should be paying for the healthcare costs, whether it
should be regulated as a drug, to what extent it should be advertised.
Original Deal:
Government got:
● 368B
● No ads with people or cartoon
● Tabacco would not fight FDA regulations
Tobacco got:
● No state lawsuits
● No class action law suits
● Capon individual lawsuits
● FDA would delay regulations
Other:
● $368B for medical care to 50 states that have to pay for patients with lung
cancers in the result of tobacco usage.
● They also agreed to not fight if the FDA wanted to regulate it as a drug, to not
use a cartoon characters to market their product.
● In return, Tobacco received certainty going forward which was important for
the industry. $368B was a lot but they could raise the price per packet by a
little over 60 cents and would recover the loss.
● Demand for Tobacco doesn't change with price, because people are
addicted.
● In effect, the tobacco industry does not do badly with eliminating the cartoon
characters as this was going to be across the board (it's a wash).
How did the deal come to an end?
● The emergence of whistle-blowers (in the 90s)
● There is now something that protects whistle blowing and became a part of
the culture. → Easier for politicians to go after the tobacco industries and
garner votes.
● Tobacco companies denied that tobaccos are addictive → individuals often
lost their lawsuits → saying that it's their choice to smoke
○ Fracture to this argument is that tobaccos causes second hand smoke
those people don't choose to smoke
● The environment become unfavorable for the tobacco industry and their
certainty is no longer guaranteed.
● The attorney general in every state realized that they can sue the tobacco
companies for healthcare expenses:
○ Unlike individual smokers, they don't have a choice and they have to
pay the expenses of healthcare
○ Michael Moore, AG of Mississippi realized that they had a case against
the Tobacco industry
○ In the mid-90s, three things happened:
■ Whistle blowers
■ Second hand smoke
■ Awareness of a new kind of lawsuit
 ● For the first time, a tobacco company settled to payout a class action suit
instead of going to court/ Liggett Company
● The statement made by the owner was that he was a General of a company
and settled because he knew that he would probably have to payout more if
they had to go to court.
● There was a disunity among the AGs as well:
○ Debate between Michael Moore and Hubert Humphrey III (AG of
Minnesota)
○ They leveraged this agreement and played a good cop/ bad cop
routine with the tobacco industry
○ Humphrey wanted to outright ban the tobacco industry
In April 1997 negotiations began with the CEO of RJR handling the easiest
issue first:
● The negotiations were private at first, then they were leaked to WSJ
● Phillip Morris shares went up by 11%
● People in the market knew that the Tobacco industry was heading into the
time of trouble, the market showed appreciation that the industry was
placing a ceiling on the costs.
● Jack Spitzer’s argument was that cars are more dangerous than tobacco and
he doesn't see why the government regulates tobacco not cars:
○ This didn't work in many factors, one of them being that cars serve a
social benefit to the public versus tobacco
● Burgess made the argument that government won’t create conflicting
policies (i.e., support for the farmers but no support for tobacco)
More reasons why the deal fail apart:
● Since the tobacco company wanted the deal so much, there must be more to
get → federal government came in and blew up the deal
○ Sometimes when the other side is too enthusiastically involved, they
might be getting a better deal than you originally have thought
● Congress did not approve the tobacco deal, instead made its own deal:
New Deal:
Government Got:
● $500B
● No longer be people or animal figures on their packet
Tobacco Got:
● Allow class action lawsuits
● No capon individual lawsuits
● FDA will regulate

● “That's the straw that broke camel’s back”

○ Camel cigarette would not longer have camel on their packages
○ Psychological facts > actual facts or merits
● Tobacco appealed broadly to the anti-tax org.
○ If smoking is very dangerous, they should just illegalize it. But
government didn't want more money by taxing
● Identified another person to take blame as well alcohol
○ 25% more years of life is lost to alcohol more than smoking
○ Drinking as some advantages but not smoking
○ Left-wing: people on the left think tobacco’s are worse,
○ Right –wing: People on the right think alcohol as sinful, which
encourages you to act in sinful ways
○ It was a blunder of tobacco to take that route, because they made an
active enemy of alcohol and it was counterproductive
○ While there are alcohol distributers, tobacco is an industry in a few
states
● Smoking saves government money:
○ Smokers on average die earlier, the do not cost Medicare too much
○ Public pension are not redeemed by people who smoke, usually
because they do not live long enough to receive it all
● Tobacco made argument that American adults should be able to decide to
make their own decisions
○ Problem with the argument:
■ Smoking targets towards people who are not adults
■ John Steward Mill said, as long as what a person chooses to do
to affect others → second hand smoke
● As a result, the states agreed to not sue Tobacco and tobacco had to pay
208B
Microsoft Case
Market Capitalism:
● Nothing wrong in principle for a firm to gain sales and become an oligopoly
● However, if the firm use the dominance in a different market:
○ Anti-trust issue
○ If you buy windows, you have to buy an Internet explorer.
○ Legal to dominate in one market, but unlawful to use the dominance
in that market to dominate in another.
○ Ex: AT&T cross subsidize in “long-distance” market although it has
dominance in local market. Justice department made it into small
companies
The Initial Case:
● Initial case with Microsoft and it was a consent degree:
○ Microsoft agreed to not charge PC manufacturers per computer,
regardless or not whether it was using MS
○ It also agreed to not bundle their products with others because it
would drive competitors out of the market
○ Ex: internet explorer and MS MS thought that both products were
integrative
● 2 years later, MS did it again but in software market bundle with IE and add-
ons.
Network Externalities:
● When a product come to dominate a market, there are few markets that
does not get dominated
○ If you getting in the market really early and gain consumer loyalty, the
value goes upself-enforcingexternality
The same or different?
● MS fighting two battles: legal (anti-trust, Netscape and bundling issue) and
net work externalities (dominance in one market might affect other markets,
everybody is on the Windows platform)
● The public was watching the legal issues and the government issue
● Argument MS made to the public to convince them that the browser and the
platform are the same product, an efficiency that emerges from putting the
 two products together, namely the elimination for a consumer to have to
choose which browser to get
● MS did not dispute the claim that IE is hard to uninstall, they accepted it
● MS also used Bill Gates to write opinion pieces to newspapers to defend
what it was doing in court
○ “Consumer have a certain expectation about what they are going to
get on their desktops when their operating system is windows. It’s like
if they are buying the New York Times newspaper and they see the
WSI business section inside. The consumer would be disappointed”
■ The online world is not like that anyway, so the metaphor
doesn't work → outdated
■ Not that easy for the consumer to throw out one browser
○ “Yes we are bundling explorer free with our operating system, but
think of it this way, when you go to a movie theatre to see a 3D movie,
you get free glasses. By providing the browser, you’re allowing the
customer to be able to access more products online. The relationship
between MS and Netscape is like that between the Optometrist and
the Movie Theatre”
● MS had to show that OS and browser are one bundle for people who are not
so sophisticated (i.e., judges, politicians)
○ Most consumers will not be able to change to Netscape even if they
wanted to.
○ Argue that by combining the two adds more value to convenience, and
the consumer will be paying for that price.
In Conclusion:
● Due to Bill Gates answers in the deposition, which were not vey informative,
it made him look undermine his own public appearance
● Number of evidence were also pulled showing Gates asking AOL how much
he would have to pay them to “screw” Netscape
● MS also lobbied to cut the funding of the anti-trust team
● “Because Gates love politics, their treatment is so inept”
● Judge Jackson, during the trial showed how the code in Explorer can be put in
Windows → meaning the judge was trying to prove that was “tech savvy”
 ● Rules that MS should be broken up. Reporter writes, “Windows was the
highway and Explorer were the cars. They didn't care that MS owned the
highway, they just said that they cannot restrict the access of the highway
solely to Explorer cars”
○ Better metaphor than ones that Gates tried to use
○ Metaphors are really important in government relations and they are
picked apart.
● There were some ideas to split MS into smaller companies that would have
to compete with other browsers
○ Bill Gates was paranoid that somebody would be brilliant enough to
upset his dominance in the market
○ First argument: “I behave like I am in a competitive market” –Bill Gates
○ Richard Wolf, MS or Gov’t shall write the rules of the Internet. The
govn’t felt threatened because they are the ones that write the rules of
things.
● MS went to appeal court, said he had his own issues, ego got in the way of
the judgment
● Gates even went on the Rosie O’Donnell show to demonstrate to the public
what a nice guy he was and his charity work with the Bill and Melinda Gates
foundation supported it as well
○ MS ended up being able to bundle their products again.
Left-wing politics – political positions or activities that accept or support social
equality, often in opposition to social hierarchy and social inequality. –politically
correct
● Social welfare programs
● Religious freedom and the separation of church and state
● Higher or more “progressive” taxes
● Environmentalism
● Trade protectionism
● Expansion of government into new areas
● Trade unions and industry regulations
● Social change or social justice
Right-wing politics – political positions or activities that view some forms of social
stratification or social inequality as either inevitable, natural, normal, or desirable.
 ● Reform of government-funded welfare programs
● Traditional or religious values, allowing those institutions to replace
government services
● Lower or flatter taxation
● International free-trade agreements
● Limiting the scope of government
● Reducing regulations on industry
● Religious liberty

Gas Guzzler Tax/Intercity Case

The Issue
● FOE (Fuel Efficient Group) made an argument based on fiscal considerations
to gain support from the opposing Conservative party.
● They claimed that the government should not solely profit from this, likely
referring to carbon-related revenue.
● The government defended its position, arguing that this policy would impact
only a small number of carbon consumers.
● The discussion then shifted to the deregulation of intercity busing in Ontario,
where small businesses faced certain challenges.
● In 1995, during an election campaign, people from rural and urban areas
advocated for deregulation, which required obtaining permission from the
Ontario Highway Board and a petition signed by potential consumers.
● Two major busing companies, Greyhound and Coach Canada, opposed this,
arguing that smaller operators would affect their profits. The Conservative
government, led by Mike Harris, aimed to remove the regulator, allowing
anyone to start a busing business without permission.
● Three years later, the regulator was still in place due to the influence of other
busing companies with their own interests.
● These companies were required to make stops, which was seen as a way to
gain public support and ensure re-election.
● The requirement for businesses to prove the existence of potential
consumers to regulators was considered odd.
 ● Mike Harris supported smaller businesses and the intercity busing
supporters but faced resistance from Greyhound and Coach Canada
lobbyists.
● The Minister of Transportation attempted to push the deregulation agenda,
with stakeholders including small-town mayors, the Ontario Highway and
Transportation board, heads of busing companies, and experts in various
jurisdictions.
● Small-town mayors were concerned that deregulation might lead to the loss
of unprofitable routes.
● Additionally, if Ontario deregulated while Quebec did not, Ontario companies
might face unfair competition.
● A coalition was formed to mobilize political interests, and it was clear that if
Ontario deregulated while Quebec maintained its regulations, Ontario could
be at a disadvantage. Quebec companies could take over routes without
regulatory oversight in Ontario.
Complexities and Concerns
1. Competition Between G and C: C had a license to operate between
Montreal and Ontario, which concerned G. G feared that C would use the
profits from Montreal routes to subsidize other routes, potentially giving C a
competitive advantage.
2. Concerns About Cross-Subsidization: There were concerns that without
regulation, Trentway Weygar (TW) would take over Greyhound's routes by
undercutting them. The fear was that TW could use the Montreal to Toronto
route to cross-subsidize and push Greyhound out of business.
3. Impact on Urban Transit: Deregulation raised concerns among urban
companies like the TTC and GO Transit, as intercity busing companies could
potentially expand into urban transportation, creating competition.
4. TW's Free Services from Peterborough to Toronto: TW offered free
services from Peterborough to Toronto, seemingly out of malice to harm
Greyhound. They wanted to demonstrate the efficiency of their system,
causing potential chaos for Greyhound.
5. Counterarguments: Some argued that mayors wouldn't necessarily lose
their services with deregulation, and a gentler approach could allow smaller
companies to fill gaps and remain profitable.
 6. Small Town Concerns: Small towns were worried about losing their services,
especially those without existing bus services. Some small town mayors saw
other mayors as "whiners" and didn't necessarily represent all small-town
commuters.
7. Language and Cultural Differences with Quebec: Quebec wasn't planning
to deregulate, which posed a risk to Ontario businesses. Language and
cultural differences were discussed but didn't seem to be a major concern.
8. TW's Concerns Over the Montreal-Toronto Route: TW had serious
concerns about the Montreal-Toronto route, fearing that Quebec could take
away the business.
9. Competitive Threat to GO and TTC: The deregulation presented a
competitive threat to GO Transit and TTC, as some intercity busing
companies could cross-subsidize using main routes and potentially
undermine less popular routes.
10.Impact on Public and Private Sector: TTC bus drivers were paid public
sector wages, which were higher than private sector costs. The principle of
intercity busing seemed irrelevant in the Greater Toronto Area (GTA), where
it was more like one large city.
11.Contracting Services: The argument was made that companies could
complement the existing public transportation system by offering cheaper
services. TTC and GO Transit could potentially contract with these private
companies.
12.Political Lobbying: G and TW employed skilled lobbyists and worked with
urban transportation systems to influence regulators. They hired experts to
provide reports to counter the influence against deregulation.
13.Deregulation's Consequences: There was a discussion that deregulation
could result in the downfall of the two major busing companies.

In summary, these notes highlight the various concerns and interests involved in
the deregulation of intercity busing in Ontario, including competition,
cross-subsidization, the impact on urban transit, and the role of lobbying and
expert reports in shaping the outcome.
Considerations of Deregulation
1. Small Companies and Local Service: Small companies would operate small
buses tailored to the needs of small towns. Deregulation was seen as a way
to maintain good relations, and it was believed that local companies could
easily serve local communities.
2. Exaggeration by Big Companies: There was a perception that larger busing
companies were exaggerating the threat of deregulation, potentially to
protect their interests.
3. Rural Mayors' Motivations: Some rural mayors supported deregulation
because they governed towns with no bus service. They were indifferent to
the loss of services as they had none to begin with. They felt that regulated
towns had an unfair advantage and were resentful of this situation.
4. Balancing Political Forces: Deregulation created a powerful political force
that opposed the political force supporting regulation. Provincial
representatives for each district, particularly those representing small towns,
played a significant role in shifting the political balance.
5. Convenience and Fewer Stops: Many rural passengers preferred fewer
stops on bus routes, opting to travel from larger city centers. This preference
for convenience was a consideration in the deregulation discussion.
6. Misunderstanding of Regulators' Views: There seemed to be a
misunderstanding of the views and motivations of regulators, which may
have impacted the deregulation debate.
7. Greyhound's Concerns About TW Monopoly: Greyhound expressed
concerns about Trentway Weygar (TW) potentially establishing a monopoly
on the Montreal to Toronto (MTL to YYZ) route. The fear was that TW might
use cross-subsidization to offer lower prices, which could impact
Greyhound's position.
8. New Pitch to Keep Regulator in Toronto: A new proposal suggested
keeping the regulator in small towns while removing it in Toronto. This
proposal seemed to align with the interests of the city.

In summary, these notes highlight the various perspectives, motivations, and

considerations in the context of deregulating the busing industry. It discusses the
interests of small companies, the concerns of big companies, the motivations of
rural mayors, the political dynamics, passenger preferences, and the potential
impact on specific routes, such as the Montreal to Toronto route.