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Advanced Micro Devices
Antitrust and Intel

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By economaniac
August 7, 2001

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Antitrust and Intel

New to the thread (I'm a regular at RB) so I'll be gentle.

[eachus posted:]
First normally it is not illegal for a company to lower prices, even if they have a monopoly. But there is one exception. If you use profits in an area where you have a monopoly to drive competitors out of business in another market, that is called cross-subsidation, and it is illegal. This is why the focus of the Microsoft antitrust suit was on using profits on Microsoft Office and on operating systems to kill off the thread from Netscape. Microsoft's argument that Netscape still had a market when they gave their product away rang pretty hollow.

Cross subsidization is an economic phenomenon that happens all the time and certainly is not illegal. The most common example is airline travel where the high prices charged business travelers subsidize the low fares offered to leisure travelers (usually with restrictions that prevent their purchase by the latter) and visa versa. Antitrust regulation usually involves preventing a company from using its market power from a dominant position to unfairly harm competitors in that or other markets. The example you mention involving Netscape was a phenomenon known as "linking" where the dominant firm for one product forces customers to buy another product in order to get the monopolized good. Specifically, [Microsoft] leveraged its monopoly on the desktop OS to force consumers (and boxmakers) to buy (and install) Internet explorer instead of its competitor (Netscape). They did this by simply including it in the package with Windows and in the standard installation and by contractually requiring OEMs to install IE with Windows.

Intel has been accused of linking WRT processors when AMD had an advantage with Athlon on the desktop by threatening to withhold server and notebook chips (where they had an unchallenged monopoly) from vendors that used AMD on the desktop.

Other potentially illegal tactics include single source pricing, where the monopolist offers lower prices to customers that do not use alternative sources. Many otherwise acceptable pricing schemes are not available to a firm with a dominant position (term of art usually satisfied with 70% market share can be less), and this is one. It is acceptable to offer volume discounts as long as they can demonstrate an economic basis (in terms of savings to the seller), but not if the purpose is to exclude competition.

Finally, the big one of the moment. Predatory pricing. I think this is what you are getting at. The monopolist cannot price at a loss in order to defend his monopoly. The classic dynamic model of monopoly involves a firm which achieves a first mover advantage to dominate a market. They overbuild capacity, but monopoly price so they sell at a premium and have more capacity than they need. When a potential competitor enters the market (there must be some barriers to entry, in this case the high cost of design R&D and fabs) the monopolist cranks up production and drops prices, forcing the new firm to operate at a loss until they give up or run out of money (successful monopolists have deep pockets.) Then they can revert to their normal pricing and get back to banking monopoly profits. After a few unsuccessful challenges, the monopolist establishes a reputation that prevents further attempts, or at least makes it difficult for them to get financed. Meanwhile the monopolist gains more and more technical edge on potential competitors just by being the only ongoing firm in the industry.

Intel is allowed to cut prices on any product (broadly defined) on which they have a monopoly only so long as [they] continue to profit from sales of that product. For example if PIII on .18u yields a range of clockspeeds and some flawed chips which are salvaged as Celerons, the sum of the prices for the production must cover the total cost (including marketing, depreciation of equipment and provision for some administrative costs.) It is not necessary for the cheapest Celeron to sell for more than the average cost (cross subsidy again), just that the average chip from the process makes a profit. It would certainly be impermissible for the IAG to operate at a loss with market share of 80%, something they are right on the edge of now. The bottom line for a court is, Is Intel pricing this way to maximize revenues, or are they pricing below cost to hurt a potential competitor? Defending a monopoly market share is a per se illegal action under antitrust in both the US and EU.

Curiously taking advantage of a monopoly position to charge outrageous prices is not a violation of antitrust law, though there are provisions for the government to advocate the breakup of such a monopolist in order to promote competition, especially where the economies of scale/ barriers to entry are such that it would be impossible for a competitor to develop even in the absence of illegal anticompetitive actions by the monopolist.

AMD can do anything they want in terms of pricing until they have more than 60% of any single market (broadly defined: for example PC desktops or notebooks or servers each including corporate and retail). The only illegal move (antitrust) AMD could contemplate in the near term is an explicit agreement to limit market share in return for a cessation of the price war. That would be collusion in restraint of trade.

E