Tuesday, November 22, 2011

Why monopolization cases are so difficult: AMD vs. Intel

Monopolization law (called "abuse of dominance" in Europe) is controversial (see the post below) and difficult, because there are no clear cut answers. The laws are brief, outlawing "monopolization" and "abuse" without defining exactly what they are. Typically rivals are injured, and can sue for damages, but the court has to decide if consumers (or the competitive process" is harmed as well. This typically involves weighing the evidence to determine whether it most favors the anti-competitive theory of the plaintiff, or the pro-competitive rationale of the defendant.

A variety of tests have been devised to help distinguish between the pro- and anti-competitive theories:

  • Effects-Balancing 
  • Profit-Sacrifice 
  • No-economic-sense 
  • Equally Efficient Competitor 
  • Disproportionality 
  • Complementary Market Monopolization

To illustrate how this process works, we use the recent case of Intel's loyalty payments to large customers (sympathetic view, skeptical view) in exchange for buying most of their chips from Intel instead of rival AMD.

AMD claimed that the loyalty payments made it prohibitively expensive for them to compete for large computer manufacturers who would lose large loyalty payments if they switched to AMD. This had the effect of reducing demand for AMD chips, which drove them up their average cost curve, and made it more costly for them to compete, which could harm the competitive process by driving AMD out of some markets.

However, the loyalty payments reduced price for the larger manufacturers which benefited their customers. The lower prices could be modeled as either a form of price discrimination or a discount justified by the lower cost of serving larger customers. They also could be justified as as eliminating the double mark-up problem, but plaintiffs argued that there were less anti-competitive ways of aligning the incentives of chip and computer manufacturers.

Intel eventually settled the case by paying AMD $1.25 Billion, and then faced investigations from US, Asian, and European antitrust agencies.

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