Social Responsibility & Ethics: Student Loans and Google

Well, having just finished up our sessions on Social Responsibility and Ethics in Basic Marketing, I was surprised to see two of the topics covered show in the New York Times in the following days. 

Code of Conduct for Student Loan Companies

First, eight student loan companies - seven of them were being investigated by the New York Attorney General, Andrew Cuomo for misleading students about the obligations and attractiveness of various student loans - agreed to a new "code of conduct" and put up $1.4 Million to fund efforts to educate students and their parents about the risks and responsibilities inherent in taking out student loans. [You can see the NYT's article here.]  

If you go the Attorney General Cuomo's web site, you can see the kinds of things that are now prohibited under the code of conduct, which include: 

using logos and return addresses that made it look like the lender's solicitation to consumers was from the federal government or the student's current lender;

mailing fake checks or false rebates offers on current loans to entice students to take out loans;

giving inducements to students, such as gift cards, iPods, and GPS devices, to distract students from focusing on the (sometimes onerous) terms of the higher education loans being promoted;

offering inducements to students to convince their friends to take out loans with particular lenders;

making false and misleading representations as to the advantages of private student loans over lower-cost federal loans;

providing illustrations of loan costs or terms that are available only to a tiny fraction of borrowers without disclosing that fact;

failing to guarantee that advertised borrower benefits, such as discounts on the interest rate of the loan during the repayment phase of the loan, follow with the loan, regardless of who purchases the loan in the future.

What's kind of amazing is how these seem like very straightforward - and commonsense  - ethical obligations. But sometimes, when companies get into the thick of things in trying to compete with others, they can lose perspective of what's ethical and what's not. Also - as is clear from the code, which is based on questionable practices that already existed in the industry - is that what's best for the customer clear gets lost!!  Hence, to the point made in class, having an explicit code of ethics is so critical for so many companies. If everyone knows what's "OK" and "what's not," then it's a lot more likely that everyone will act appropriately and not start down the slippery slope of doing things that, in hindsight, clearly look wrong. 

Also, to the point of our conversations, it's interesting that it took the threat of legal action by the New York Attorney General to make this happen. So again, the role of government and the law have a role to play in making consumers better off. 

Is Google behaving monopolistically? 

Another article was fascinating because it deals with whether Google is acting in a monopolistic fashion in dealing with its customers (who buy advertisements from Google) and its channels (who sell advertising space using Google). 

One source estimated that Google controls nearly 70% of the on-line advertising market through its various programs that sell and buy space on Google web searches and a plethora of other web sites. OK, by classic Industrial Organization Economic's standards, that's sounding pretty monopolistic. 

Of course, the "Chicago School" would argue that just because Google does a better job than any other service of matching buyers and sellers of advertising doesn't make them "bad." 

I fall somewhere in between - in kind of an "it depends" area. I agree that being successful and, therefore, controlling 70% of the market doesn't mean that a company is "bad." The key underlying concern of the antitrust laws is that a company doesn't act in monopolistic - and, therefore, anti-competitive - ways to prevent competition. (Just to be clear, that's where I think the Chicago School economists were way off base regarding Microsoft, which did use its market power to prevent competition and, therefore, maintain a monopoly in operating systems and create a new one in web browsers.) 

Anyway, back to the article, I think the case against Google is without merit - at least as portrayed in the New York Times article. The key to the article was a case study of Mr. Savage, who built a business model based on the following: 

Mr. Savage estimates that he was paid around 10 cents every time someone clicked an ad on his site. The difference between that and what he paid Google to advertise against search terms — usually around 5 or 6 cents —was his profit.

The article goes on to state that Mr. Savage's business model was pretty much destroyed when Google changed how it bought and sold ads. 

But it doesn't appear to me that Mr. Savage has much of a case. His entire "business model" was based on arbitrage opportunities - the difference between what Google could be selling ads for and what it was selling ads for. If Mr. Savage's "service" actually had value beyond arbitrage  - he runs Sourcetool.com, which is a directory of business-to-business companies - he'd be able to charge: (1) companies who wanted to be listed on his service and/or (2) people who wanted to access his directory. But since he made his service free and then made his money by buying Google ads cheap and selling ads back for twice as much, it appears that the market cleared a bit and Google finally figured out a way to leave less money on the table for arbitrators. 

Well, regardless of what I think, if you read the article you'll get a pretty good sense of why policing anti-competitive behaviors can be difficult. It also highlights the challenge of when people use anti-trust laws to challenge a company, even when there is no merit to the case - whether that's the situation with Sourcetool.com or not. If people cry "monopoly" too often, I think the courts and justice department become overwhelmed and have less to time spend on actual violations of anti-trust laws.