CASE 3.9

Walmart de Mexico

Sam Walton was born on March 29, 1918, in Kingfisher, Oklahoma, a small town 50 miles northwest of Oklahoma City. Sam’s father, a farmer, struggled to support his family during the Great Depression. The Walton family hopscotched around the country before finally settling in Missouri where Sam graduated from high school. After obtaining a degree in economics from the University of Missouri, Sam went to work as a management trainee with J.C. Penney Company at a monthly salary of $75. Following the outbreak of World War II, Sam enlisted in the U.S. Army and served until 1945.

Upon returning to civilian life, Sam Walton borrowed money from his father-in-law to purchase a small retail store in northern Arkansas. Walton purchased additional stores in Arkansas, Kansas, and Missouri over the following years. In 1962, Walton opened the first store branded as a “Wal-Mart” in Rogers, Arkansas, 10 miles from Bentonville, which would become the company’s corporate headquarters. Walmart expanded its operations across the continental United States over the next three decades. In 1992, the year Sam Walton died, Walmart surpassed Sears to become the largest retailer in the United States.

By 2012, Walmart employed over two million people, making it the world’s largest private employer. In that same year, four members of Sam Walton’s family ranked among the top 10 of the Forbes 400, the 400 wealthiest individuals in the United States.1 Those individuals, with a collective wealth of more than $100 billion, included his three surviving children and the widow of his son, John Walton, a former Green Beret who was awarded the Silver Star for heroism during the Vietnam War.

The Lowest Prices Anytime, Anywhere!

Walmart’s incredible growth was due to the hypercompetitive business model developed by Sam Walton. The central tenet of Walton’s business plan was the motto that he adopted for his company, “The Lowest Prices Anytime, Anywhere!” Walton reasoned that if he undercut the prices charged by his competitors, his company would generate sufficient sales volume to realize significant economies of scale. The most important of those economies of scale would be purchasing merchandise in bulk quantities at discounted wholesale prices that were not available to other retailers.

Walton’s simple business plan worked to perfection as Walmart routinely dominated the geographical markets that it entered. The ultimate result of Walmart’s alleged “predatory” business model was to drive large numbers of small retailers, including pharmacies, groceries, and general merchandise stores, out of business. In an op-ed piece written for the New York Times, Robert Reich, former Secretary of the U.S. Department of Labor, observed that Walmart “Turns main streets into ghost towns by sucking business away from small retailers.”2

In the early 1990s, Walmart became an international company when it opened retail outlets in Mexico and Canada. After replicating its successful business model in those countries, Walmart extended its operations outside of North America. Within two decades, approximately one-fourth of the company’s sales were produced by its 6,000 retail stores in more than two dozen countries scattered around the globe.

To date, Mexico has easily been Walmart’s most successful international venture. Walmart quickly seized control of the retail industry in that country by taking away large chunks of a market share previously held by domestic retailers that had operated in the country for decades. By 2012, Walmart’s Mexican subsidiary, Walmart de Mexico, was Mexico’s largest retailer and that nation’s largest private employer.

Bribery Allegations

In April 2012, an article published by the New York Times, “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle,” reported that Walmart had routinely bribed government officials to obtain building permits and other business licenses required by Mexican law. A former Walmart de Mexico officer testified that the bribes allowed the Mexican subsidiary “to build hundreds of new stores so fast that competitors would not have time to react.”3 The Pulitzer Prize-winning article in the New York Times, which was the culmination of an 18-month long investigation, insisted that the bribes violated the Foreign Corrupt Practices Act of 1977 (FCPA). The article also accused Walmart’s senior management of concealing those bribes from U.S. law enforcement authorities.

Walmart’s senior executives learned of the bribes being paid by their company’s Mexican subsidiary in late 2005 and immediately launched an investigation. “Wal- Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. . . . They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.”4

Following the discovery of the bribes, Walmart’s senior executives disagreed on how to address the problem. The New York Times article reported that Walmart’s management ultimately decided to resolve the matter quietly and internally. That goal was achieved by placing the Walmart de Mexico executive who had allegedly authorized the bribes in charge of the ongoing investigation of them. The investigation ended shortly thereafter. The subsequent internal report noted that “There is no clear evidence or clear indication of bribes paid to Mexican government authorities with the purpose of wrongfully securing any licenses or permits.”5

The former FBI agent who served as Walmart’s director of corporate investigations found the internal report inadequate. “The report was nonetheless accepted by Wal- Mart’s leaders as the last word on the matter.”6 Walmart’s senior executives informed the U.S. Department of Justice that their company may have violated the FCPA only after they had learned of the ongoing investigation by the New York Times.

The author of the New York Times article charged that Walmart’s “relentless pursuit of growth” had compromised its commitment to the “highest moral and ethical standards.”7 A follow-up article in the New York Times in December 2012, “How Wal-Mart Used Payoffs to Get Its Way in Mexico,” described the methods used by

Walmart de Mexico to gain an unfair advantage over its competitors. That article also dismissed the suggestion that Walmart was a “victim” of a corrupt business culture in Mexico that obligated companies to bribe governmental officials.

The Times’ investigation reveals that Wal-Mart de Mexico was not the reluctant victim of a corrupt culture that insisted on bribes as the cost of doing business. Nor did it pay bribes merely to speed up routine approvals. Rather, Wal-Mart de Mexico was an aggressive and creative corrupter, offering large payoffs to get what the law other-wise prohibited. It used bribes to subvert democratic governance—public votes, open debates, transparent procedures. It used bribes to circumvent regulatory safeguards that protect Mexican citizens from unsafe construction. It used bribes to outflank rivals. 8

After reporting the potential FCPA violations to the U.S. Department of Justice in December 2011, Walmart instructed its audit committee to use “all resources necessary” to “aggressively” investigate the company’s “FCPA compliance” not only in Mexico but worldwide. The audit committee hired KPMG and a major law firm to assist in the forensic investigation.10 Walmart’s board also created a network of international “FCPA compliance directors” that would report to a Bentonville-based “Global FCPA Compliance Officer.” In an April 2012 press release that addressed the bribery allegations made by the New York Times, Walmart officials declared that “We will not tolerate non-compliance with the FCPA anywhere or at any level of the company.”11

Since 2012, Walmart officials have discussed the status of the ongoing internal and external FCPA investigations in their company’s periodic registration statements filed with the SEC. Those disclosures have consistently warned the investing and lending community that it is “probable” that Walmart will eventually incur a loss stemming from the alleged FCPA violations but that the amount of the loss can- not be “reasonably estimated.” Nevertheless, company management reports that the expected loss is unlikely to have a “material adverse” effect on Walmart’s operations. The company also regularly discloses the cumulative cost that it has incurred in connection with its internal FCPA investigation. By early 2016, that figure had topped $600 million. Finally, the company’s interim reports on the FCPA matter reveal that potential FCPA violations have been uncovered within the company’s operations in countries other than Mexico, including Brazil, China, and India.

There has been widespread speculation in the business press concerning the ultimate outcome of the joint SEC and U.S. Department of Justice investigation of Walmart’s alleged FCPA violations. Much of that speculation has focused on the magnitude of the monetary fines the federal agencies might levy on Walmart. Many observers believe that those fines could surpass the $450 million in FCPA-related fines imposed on the German engineering and electronics firm Siemens AG in 2008.

The FCPA: From Watergate to Walmartgate

Walmart’s widely publicized FCPA problems refocused attention on the origins and nature of that federal statute. The FCPA was a by-product of the scandal-ridden Watergate era of the 1970s. During the Watergate investigations, the Office of the Special Prosecutor uncovered large bribes, kickbacks, and other payments made by U.S. corporations to officials of foreign governments to initiate or maintain business relationships.

Widespread public disapproval compelled Congress to pass the FCPA, which criminalizes most such payments.12 The FCPA also requires U.S. companies to maintain internal control systems that provide reasonable assurance of discovering improper foreign payments. In a 1997 Accounting and Auditing Enforcement Release, the Securities and Exchange Commission (SEC) highlighted the importance and need for the accounting and internal control requirements embedded in the FCPA.

The accounting provisions [of the FCPA] were enacted by Congress along with the anti-bribery provisions because Congress concluded that almost all bribery of foreign officials by American companies was covered up in the corporations’ books and that the requirement for accurate records and adequate internal controls would deter bribery.13

In the two decades following the passage of the FCPA, the SEC seldom charged U.S. companies with violating its provisions. In fact, in 1997 when the SEC filed FCPA- related charges against Triton Energy Ltd., an international oil and gas exploration company, more than 10 years had elapsed since the federal agency’s prior FCPA case. At the time, the SEC conceded that the filing of the FCPA charges against Triton Energy was intended to send a “message” to U.S. companies that “it’s not O.K. to pay bribes as long as you don’t get caught.”14 At the same time, an SEC spokesperson predicted that his agency would be filing considerably more FCPA charges in the future.15

The SEC was true to its word. By 2015, the SEC was investigating potential FCPA violations by 74 public companies. Those companies included such prominent firms as Bristol-Myers Squibb, Cisco Systems, Halliburton, United Technologies, and Wynn Resorts. The World Bank has reinforced the need for the SEC and other global law enforcement agencies to rein in corporate bribery since it estimates that more than $1 trillion in bribes are paid annually in the U.S. alone.16

The FCPA is not without its critics. Many corporate executives have complained that the federal statute places U.S. multinational companies at a significant competitive disadvantage to multinational firms based in countries that have do not have a comparable law. Those same executives also find the recent “overzealousness” in prosecuting alleged FCPA violators inappropriate. “We are seeing companies getting scooped up in aggressive enforcement actions and investigations. A culture of overzealousness has grabbed the Justice Department. The last time I checked, we were not living in a police state.”17 In response to that complaint, a representative of the U.S. Department of Justice observed, “This is not the time for the United States to be condoning corruption. We are a world leader and we want to do everything to make sure that business is less corrupt, not more.”18

To date, the FCPA has not had a significant impact on the auditors of SEC registrants. An audit firm has been named in only one FCPA complaint filed by the SEC. In that case, a representative of KPMG’s Indonesian affiliate was charged with paying a bribe to a governmental official to reduce the tax bill of its client. The KPMG affiliate settled the charge by agreeing to a cease and desist order but was not fined.19 As the FCPA complaint against Walmart unfolded, a reporter for the Reuters international news service noted that it was unlikely that Ernst & Young, Walmart’s longtime auditor, would become a target of that investigation.

In fact, the FCPA has created a new revenue stream for the major accounting firms that serve as the auditors of most SEC registrants. For example, Deloitte’s website lists “Foreign Corrupt Practices Act Consulting” as an ancillary service that it provides to public companies.

Our Foreign Corrupt Practices Act (FCPA) Consulting practice helps organizations navigate FCPA risk and respond to potential violations. Utilizing the network of Deloitte member firms and their affiliates including their forensic resources in the United States, Canada, Europe, Russia, Africa, Latin America, and Asia, we have worked on a variety of FCPA engagements including investigations, acquisition due diligence, and compliance program implementation and assessments in over fifty countries for some of the world's leading companies

1. Identify control activities that Walmart could have implemented for Walmart de Mexico and its other foreign subsidiaries to minimize the likelihood of illegal payments to government officials. Would these control activities have been cost-effective?

2. What responsibility, if any, does an accountant of a public company have when he or she discovers that the client has violated a law? How does the accountant’s position on the company’s employment hierarchy affect that responsibility, if at all? What responsibility does an auditor of a public company have if he or she discovers illegal acts by the client? Does the auditor’s position on his or her firm’s employment hierarchy affect this responsibility?

3. Does an audit firm of an SEC registrant have a responsibility to apply audit procedures intended to determine whether the client has complied with the FCPA? Defend your answer.

4. If the citizens of certain foreign countries believe that the payment of bribes is an acceptable business practice, is it appropriate for U.S. companies to challenge that belief when doing business in those countries? Defend your answer.

A researcher was interested in assessing the prevalence of internet addiction risk (IAR) on a college campus in California. Data was gathered by having students complete a questionnaire on orientation day at the beginning of the school year. 1. What study design was used in this scenario?

Coding for study variables:

IAR – internet addiction risk; 1 = low; 2 = medium; 3 = high

SEX – 1 = male; 2 = female

YEAR – 1 = freshman; 2 = sophomore; 3 = junior; 4 = senior

Researchers were interested in determining whether a new drug could be used to ease post-traumatic stress disorder (PTSD) symptoms among veterans. Three hundred patients were recruited from 10 Veterans Affairs hospitals; half were given the new drug while the other half were given a placebo. The results indicated statistically significant improvements in sleep quality index (SQI) scores for patients taking the new drug as opposed to patients taking the placebo. However, side effects like dizziness (DIZZ) were also greater among patients taking the new drug.

Coding for study variables:

MED— 1 = medication; 2 = placebo

SQI— sleep quality index; overall score 0-21

DIZZ – 0 = no dizziness; 1 = dizziness

A study was conducted to determine the source of an outbreak of influenza A (H5N1) in Hong Kong. A total of 45 cases with fever plus cough or sore throat and 90 matched controls without symptoms were interviewed with a standardized questionnaire. Exposure to live poultry (EXP) in the week before illness was significantly associated with H5N1 infection.  What study design was used in this scenario?

Coding for study variables:

EXP—live poultry exposure; 1 = yes; 2 = no

·          H5N1—Influenza A (H5N1) infection; 1 = yes; 2 = no

The Nurses’ Health Study is one of the largest prospective investigations of risk factors for major chronic diseases in women. Using data from food frequency questionnaires and mortality records collected between 1986-2010, researchers examined the association between long term gluten intake (GLUT) and development of coronary heart disease (CHD). The results indicated that consumption of foods containing gluten was not significantly associated with risk of CHD, even after adjusting for race, body mass index (BMI), and other known risk factors. What study design was used in this scenario?

Coding for study variables:

GLUT—gluten intake; 1 = lowest; 2 = low; 3 = medium; 4 = high; 5 = highest

RACE – 1 = White; 2 = Black; 3 = other

BMI – body mass index (kg/m²)

CHD —coronary heart disease; 1 = yes; 2 = no

It is 2020. The US government has passed a new federal minimum wage of $11.00/ hour. It will go into effect on January 1, 2021. Please follow the instructions, given the background information in items A, B, C, and D below.

Instructions

1. Calculate the immediate financial impact in 2021 (change in hourly wages) on the profitability of the company due to the impending increase in the minimum wage. Ignore tax issues such as employment tax in your calculation.

2. Identify at least three (3) courses of action (options) for the owner of this company that will offset the increase in labor costs from #1 above. Explain why you think these options are viable options for the small company. Your course of action must quickly offset the effect of the increase in wages and the decrease in profitability of the company due to the minimum wage increase.

3. Lastly, recommend the one course of action from among your list of three courses of action that you think is the best option for the small business owner and his or her company. Justify your response.

Background Information

A- The company has 19 employees, which includes two assistant managers. The owner is the only shareholder of the company.

B. 6 employees earn $8.00/ hour which is slightly above the current federal minimum wage, but $3/ per hour below the new federal minimum wage.

C. The other employees earn the following:

ii. 6 earn $13/ hour

iii. 3 earn $18/ hour

iv. 2 earn $22/ hour

v. The 2 managers each earn $50,000 per year

See Table 1 on the next page.

D. The company earned a profit last year of $100,000 based on sales of $1,500,000 that was passed through to the owner as the owner’s only source of income.   This year sales are on track to be approximately $1,500,000 again due to industry conditions. The owner’s family just bought a new house for their growing family and has a mortgage of $141,000 with monthly payments of $1,008 per month.

E. The owner’s spouse does not work and the family cannot justify the spouse getting a job of any kind because the wages from a new job would not cover the weekly cost of day care and after school care for the family’s three young children, ages 2, 5, and 7.

Table 1. Summary of Current Costs of Payroll

Fukui Prefecture is situated on the northwest coast of Japan, over 400 kilometers west of
Tokyo. In 2014, over 95 percent of Japanese-produced eye-glass frames were made in Fukui
Prefecture, principally in the cities of Fukui and Sabae. In the early 20th century, the Fukui
economy was dominated by agriculture. Taking advantage of the seasonal lull in
employment during the winter months, Mr Masunaga Gozaemon and his brother Kohachi
started a business in the village of Shono to manufacture celluloid eye-glass frames.
Initially, the quality of Fukui-made eyeglasses was low. To raise standards, Mr
Gozaemon established a guild like system in which full-fledged craftsmen could set up their
own businesses. Production took off during World War I, and by 1937, the Fukui industry
comprised 70 factories employing 800 workers, and producing 1.5 million pairs of eyeglasses
a year.
In the 1980s, Fukui manufacturers perfected the production of titanium frames. These
are light and sturdy, and cause fewer allergies than conventional metals, but require
considerable skill to make. The strong tradition of craftsmanship in Fukui enabled the
production of titanium frames.
Mr Shoji Gozaemon, great grandson of the pioneer, Masunaga Gozaemon,
emphasized, “One of the characteristics of Japanese craftsmanship is a kind of redundancy of
detail. There is a tendency to pay careful attention to the minutest details. The spirit of
Japanese craftsmanship often involves spending more time and effort over producing
something than is strictly necessary” (Nippon.com 2012).
Besides manufacturers of eye-glass frames, the Fukui industry also includes
manufacturers and suppliers of lenses, sunglasses, reading glasses, parts, materials such as
titanium wire and preformin, and machines and tools.
With the entry of low-cost Chinese manufacturers into the market, the manufacturing
of eye-glasses in Fukui prefecture peaked in 1992. Within twenty years, by 2012, 40 percent
of Fukui eye-glass manufacturers had gone out of business, and employment and production
dropped by one-third. Another challenge is demographic. Japan is a rapidly ageing society.
In just eight years between 2011-17, the working population of Sabae fell by 11 percent to
30,000.
One possible response is automation. Fund manager, Howard Smith, asserts that
“with chronic depopulation challenges in rural areas, most companies must adapt or die. That
involves planning for succession and investing heavily in automation” (Financial Times,
2018).
(c) 2018. I.P.L. Png. This case is based in part on “Sabae, Fukui: A Town with an Eye for Design”,
Nippon.com, 24 April 2012, “Luxottica Group Invests in ‘made in Japan’”, Press Release, Luxottica
Group, 6 March 2018, and “Made in Japan: can handcrafted glasses survive an automated world?”
Financial Times, 4 April 2018.
2
Mr Ryozo Takeuchi is chairman of Takeuchi Optical, founded in 1932 and presently
employing 80 persons. Mr Takeuchi is also president of the Fukui Optical Association. He
describes automation as a buzz-word, and maintains that metal frames must be finished by
hand. In his factory, titanium frames pass through the hands of ten different workers and are
then polished for 72 hours in a bath of pulverized walnut shells.
Another response has been to shift away from the previous OEM (original equipment
manufacturing) model, in which Fukui produced eye-glasses and parts for international
brands such as Prada and Dior. In 1996, Fukui manufacturer Boston Club launched its own
brand, Japonism, and followed up in 2002, by opening a retail store in the fashionable
Minami-Aoyama district of Tokyo.
Chief designer of Boston Club, Kasashima Hironobu, remarked, “Traveling to
international fairs overseas … brought home to me that constantly emphasizing the technical
know-how we have built up over the years is not enough to make us internationally
competitive. ... We need to promote the worldview expressed by our brand and appeal to the
consumer by emphasizing the values that lie behind it” (Nippon.com 2012).
Boston Club’s previous strategy had been to design products that could only be made
with Japanese technology. Turning design convention on its head, Boston Club decided to
emphasize durability – to produce eyeglasses which could be used for life. It developed the
new Rudder Hinge which can be detached and replaced when necessary. With replaceable
parts, the frames can be used almost indefinitely.
In 2003, over 20 Sabae manufacturers joined to develop an industry brand, “291.” In
2008, they opened Glass Gallery 291, a retail outlet in the Aoyama district of Tokyo and then
another outlet in the Megane Museum at Sabae. In 2017, Masunaga Optical, the company
founded by pioneer Masunaga Gozaemon, employed 173 workers at its factory, and operated
retail stores in Tokyo, Osaka, Nagoya, and Nara.
However, not all Fukui eye-glass manufacturers have been able to adapt. Some lack
the managerial expertise or capital. Looking out from his factory, Mr Takeuchi pointed to
three businesses that had recently gone bankrupt.
Some owners are selling. Founded in 1966, Fukui Megane presently employs 170
workers and specializes in making titanium and solid gold frames. It pioneered multi-colored
gold frames and is still the only the producer in the world. In March 2018, Fukui Megane
sold a 67 percent stake to multinational eyeware manufacturer, Luxottica, which owns brands
including Ray Ban and Oakley, and manufactures for brands such as Chanel, Prada, and
Giorgio Armani.
Luxottica Group Executive Chairman, Mr Leonardo Del Vecchio, explained that “The
acquisition of Fukui Megane represents a first step for the entry of our Group in the world of
Japanese production. We intend to continue investing to recreate a productive pole of
excellence in Sabae, in line with the Luxottica model. For the first time in the history of
3
eyewear, we will have under the same roof two great artisan schools such as the Italian and
the Japanese ones” (Luxoticca 2018).
The aging ownership of other Fukui eye-glass manufacturers without successorship
plans presents an opportunity for mergers and acquisitions. Specialists, Nihon M&A Center,
M&A Capital Partners, and Strike, can help find buyers and consolidate and automate the
industry.
In 2007, former investment banker, Mr Kenzo Matsumura, bought five companies
that were spun off from the merger of Japanese toy manufacturers Tomy and Takara. Among
them was a trading house that sold reading glasses through a television shopping channel. Mr
Matsumura expected that, in a fast ageing society, the demand for reading glasses would
boom. However, the reading glasses were bad and hardly profitable. The cost of production
was 3,300 Yen, the trading house charged a wholesale price of 3700 Yen, while the television
channel priced the glasses at 10,000 Yen.
The condition of the factory in Sabae was parlous. In Mr Matsumura’s words, “The
machinery was battered and looked 40 years old. There were women doing lens coatings by
hand. Everything was manual. The defect rate was 30 percent” (Financial Times, 2018).
Major lens manufacturers like Hoya and Nikon outsourced production to China and
Thailand. Mr Matsumura criticized their strategy, “If you fully automate a factory, you can
be in Japan running that factory more productively and at lower cost than in China”
(Financial Times, 2018).
He set up an automated factory in Chiba prefecture, east of Tokyo, which produces
Hazuki reading glasses at a rate of 20,000 a day. Shrouded in secrecy, with further
automation, the factory is expected to triple the rate of production.
Hazuki has also repositioned the product as a sophisticated fashion item, while
maintaining the retail price at 10,000 Yen. In February 2018, during the Winter Olympics,
Hazuki spent US$5 million on television advertising, which led to a spectacular boost in sales.

Questions:

1. With reference to the Japanese eye-glass manufacturing industry, discuss why productivity differs within an industry.
2. What does a buyer get from acquiring a Fukui manufacturer of eye-glass frames?
Compare the benefits to Luxoticca vis-à-vis a private equity firm.
3. Do you agree with Mr Takeuchi that automation is a buzz-word?
4. If you were Mr Matsumura, where would you locate your factory? Discuss the advantages and disadvantages of locating in a cluster.

In 2009, New York First National Bank acquired New Jersey National Bank. In an exchange, New York First National Bank issued three series of preferred stock for New Jersey National Bank's net assets. Series Senior A (the most senior series), was given to four of New Jersey National Bank's creditors so that the debt could then be retired. The four preferred shareholders are listed as follows: two regional banks, one money center bank, and a non-financial corporation. Senior Series A has a total par value of $20 million, which carries a non-cumulative dividend per the following schedule:

New York First National Bank did not pay dividends in 2010, 2011, or 2013 however, they will start paying dividends annually at the start of 2014 thus, they will pay 20% on the Senior Series A preferred.

The Senior Series A stock may be called at any given time, at par plus dividends cumulated from January 1, 2010. New York First National Bank estimates that it can float a new issue of 10% non-cumulative preferred stock at par, with issuance costs amounting to $1,000,000. The new issue of preferred would be callable at par plus unpaid dividends.

Should New York First National Bank call in the Senior Series A and issue new preferred? (assume that the Senior Series A would be called effective December 31, 2013.)

Contrast the neoclassical economic theory with the new economic theories (new endogenous growth theory, new economic geography, and strategic trade theory)? Do the new economic theories reject the neoclassical economic theory? Substantiate your arguments with real world case(s) and example(s). ( Explain it in detail)

Health Economics quiz

1. The Evanston North acquisition of Highland Park hospital was unusual because:
   1. The FTC opened its investigation after the merger was consummated.
   2. Evanston North alleged substantial efficiencies were only available to the merged firm.
   3. The FTC had actual evidence of post-merger pricing with which to assess the competitive effects of the merger.
   4. The attorneys for ENK hired economists to conduct empirical   analysis of geographic market definition.
2. Did the FTC win the first round at the ALJ in its litigation against ENH?
   1. Yes
   2. No
3. On appeal, ENH’s case was judged by the Commission.
   1. True
   2. False
4. The Commission voted to uphold the FTC case against ENH.
   1. True
   2. False
5. The FTC initially sought to have ENH divest Highland Park but later settled for a provision that EN and Glendale must negotiate with payors such as Blue Cross/Blue Shield independently.
   1. True
   2. False
6. Which was the most dispositive evidence that the merger was anticompetitive:
   1. Concentration in the antitrust market was made substantially more concentrated by the merger.
   2. EN documents referred to Highland Park’s imposition of price discipline on EN.
   3. Price data was analyzed by Commission economists that showed substantial post-merger price increases.
   4. Documentary evidence of collusion among the five hospitals remaining after merger.
7. Following the Commission’s win over the merger defendants private parties filed suit against ENH for damages from price fixing.
   1. True
   2. False
8. Not all hospital patients can afford to pay for their hospital care and, as well, hospitals are not allowed to turn emergency room patients down or divert them to other hospitals. Allegedly, hospitals make up the deficit through cost shifting.
   1. True
   2. False
9. Unlike regulated firms cost shifting by hospitals is essentially price discrimination.
   1. True
   2. False