Communications - June 2010

like a monopolist and AMD has been squeezed out of the market. Computer manufacturers know how to play off their two suppliers to their advantage. Intel claims that the payments to customers were not tied to exclusive or near-exclusive purchasing commitments, but were volume-based discounts enabled by economies of scale in production. Thanks to Intel’s discount policy, consumers benefit from lower prices. The prices were always higher than Intel’s costs. Therefore Intel cannot be accused of selling below cost to drive out AMD.

Whose story should we believe? How can we tell who’s right?

In order to decide between the two versions, the first thing to do is of course to look at the facts. This is not easy for an outside observer (including this writer) because the evidence is off limits. Only the public statements and official decisions are available. In the U.S. lawsuits, the State of New York’s complaint and the FTC’s statements total less than 100 pages. In the EU case, the material is more abundant. The European Commission’s decision against Intel runs to more than 500 pages and cites numerous statements by the parties. For example, a Lenovo purchasing manager wrote in an email message dated December 11, 2006, “Last week Lenovo cut a lucrative deal with Intel. As a result of this, we will not be introducing AMD-based products in 2007 for our notebook products.” Thousands of figures are also reported. Unfortunately, in order to respect business secrecy, almost all the figures have been deleted from the public version of the decision. Thus, there is no information about the amount of the discounts granted to Dell.

A factual approach is also hampered by the absence of formal contracts. What Intel requested in exchange for the payments to its customers is not mentioned in written documents. Most of the agreements were oral and sealed with a handshake. The few written agreements raise no antitrust concerns. The State of New York and the European Commission accuse Intel of having deliberately removed from the written documents the litigious clauses with respect to antitrust law. If the allegations were proved true, the antitrust agencies would be dealing

the problem of
access to the
data and evidence
makes it impossible
to verify the validity
of the different
viewpoints.

with a situation akin to a cartel. Since the agreements were secret, evidence is scant and often only indirect.

For want of being able to decide on the basis of the facts, an outside observer can call theory to the rescue.

The first principle to recall is that antitrust law seeks to protect consumers, not competitors. It does not oppose the elimination of less-efficient competitors; it prohibits behavior of firms that results in higher prices or lower-quality products. While clearly detrimental to AMD, did Intel’s actions harm consumers?

In the case of the naked restrictions, the damage to consumers is not in doubt. Let’s take the example of Intel’s lump sum payments to HP, Lenovo, and Acer in exchange for delaying the launch of their AMD-based computers. That practice (if proven) did hurt consumers: some had to wait before buying the product they preferred, while others, in more of a hurry, had to buy hardware that was not their first choice. Moreover, consumers who were not interested in buying AMD-based desktops and notebooks did not gain anything. The money paid by Intel did not affect the OEMs’ marginal cost and, consequently, the price of their computers. Intel and the firms it paid off were the only beneficiaries of these transactions.

The case of the rebates is a more
complicated situation. When rebates
are linked to volumes purchased, they
are good for consumers. They enable
manufacturers to pass on some of the
savings from economies of scale in
production and distribution. In other
words, they bring prices down for the
consumer. But retroactive rebates tied
to market share targets (for example,
the buyer receives a rebate if it cov-
ers X% of its requirements with the
same supplier) are a different story. If
a competitor wants to obtain a signifi-
cant share of the customer’s purchas-
es, it must compensate for the loss
of the rebates. For example, if Intel
offers $100,000 on the condition that
HP fulfills 95% of its requirements
with Intel, AMD will be forced to offer
the same amount if it wants HP to buy
more than 5% of its chips from AMD.
That threshold effect can have sur-
prising effects. It would explain, for
example, why HP refused AMD’s offer
of a million Athlon XP processors free
of charge. If the gift is worth less than
the rebate forfeited by not purchasing
95% of its requirements from Intel, it
is rational for HP to refuse it.

conclusion

Economic literaturee shows this threshold effect can lead to the exclusion of competitors that are at least as efficient as the firm offering the rebates. And consumers lose out on two counts. First, there are no more competitors to push down the price set by the dominant firm. So consumers pay higher prices. Second, there is no competitive pressure driving the firm to innovate. So products are manufactured at higher cost and their quality stagnates.

The European Commission sought to show that Intel’s loyalty rebates indeed had a foreclosure effect. According to the Commission, a rival with the same costs as Intel would have been excluded. Intel contests this conclusion by finding fault with the Commission’s calculations. But once again, the problem of access to the data and evidence makes it impossible to verify the validity of the different viewpoints. Theory without the facts is unfortunately of little use for vindicating either the defendant Intel or the plaintiffs.

e See, for example, Nicolas Economides, “ Loy-alty/Requirement Rebates and the Antitrust Modernization Commission: What is the Appropriate Liability Standard?, Antitrust Bulletin 54, 2 (Summer 2009), 259–279.