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Intel's monopolistic practices explored

Japanese report dissects the stuff
Thu Mar 10 2005, 12:16
A PAPER by Koki Arai, an analyst at the Institute of Social and Economic Research at Osaka University, comprehensively breaks down the ruling of the Japanese Fair Trade Comission this week that Intel has been involved in monopolistic activity in the Japanese market.

The paper, which runs to 30 pages, explains in clear detail the anti-competitive practices of ChipZilla as found by the Fair Trade Commission, and tests its behaviour against common theories of monopoly. It is worth some time in analysis here.

The Law
In March this year, the JFTC investigated Intel under the provisions of the Japanese Antimonopoly Act. The act states that:

Article 3: No entrepreneur shall effect private monopolization or unreasonable restraint of trade
Article 2(5): 'Private monopolization'...shall mean such business activities... [which] excludes or controls the business activities of other entrepreneurs... contrary to the public interest.

If you're familiar with US antitrust law, its provisions are pretty similar to those in Section 2 of the Sherman Act.

The Practices
The activity that the Commission primarily objected to was the conduct of the firm's Rebate Programme, the details of which are outlined.

According to the Commission, in order to obtain a discount on processor prices from Intel, PC manufacturers had to meet a number of different criteria. The first was to sell a base ratio of Intel processors. In 2001, NEC received rebates to the tune of millions of dollars (although the exact amount is withheld in the paper) in return for setting a baseline ratio of Intel processor sales.

Sony switched from AMD processors in 2003, establishing an Intel baseline ratio in return for rebates that paid for model catalogues and magazine advertising.

The second requirement of the rebate programme was the requirement to reject a competitor's CPU, even if that CPU was better performing or had more features. Fujitsu got a large price discount per thousand pieces for the rejection of AMD processors.

To a lesser extent, the JFTC objected to the Intel Inside co-marketing fund, which provides money to manufacturers bearing Intel's logo. One of the 'requests' from Intel was that AMD logos and machines were moved to pages buried deeper within their websites.

Those are the facts of the case as the Commission found them.

Theories of Monopolisation
Arai then goes on to apply these facts to common theories of monopolistic behaviour. The first is the Aghion-Bolton principle. This boils down to a simple pattern of behaviour: that an incumbent seller facing the threat of a competitor entry to the market will sign deals to try to prevent the entry of lower cost producers. In this situation, the incumbent is better off and the buyer is no worse off than he was previously. If all sellers believe the others will sign, the risk associated with the deal is minimised.

This is a simple, but effective way of examining Intel's behaviour, that describes it at a high-level. There are a couple of issues with this analysis, however. The fact is that buyers welcomed the entry of AMD into the market precisely because it avoids monopolisation and the domination of Intel. The theory doesn't take into account the reluctance of buyers to support an incumbent monopoly. It also fails to take into account the fact that buyers are ultimately seeking to satisfy market demand, and so a competitor can gain ground by creating that demand.

The Judd-Ashiya state that an entrant in to a single market can be allowed to credibly limit his capacity by the incumbent, allowing the incumbent to react less aggressively to entry.

By allowing a competitor into the market, the exit cost for the incumbent is small and may, in fact, prevent the entry of a stronger firm. This is a strategy that Intel appeared to have adopted with regards to laptops: we would suggest that the appearance of Transmeta Crusoe machines in the Sony lineup was not disputed by Intel in the hope of preventing the stronger competitor - AMD - from gaining a foothold there. That, however, is speculation.

Relating to the real world
Relating these theories of monopoly back to the real world requires a little more thought. Intel clearly conceded some product space to AMD to allow it to enter the market with its low-end processors such as the K5 and K6, back in the day. The weak firm, however, has grown strong enough to compete by expanding its product line to include high-end processors such as the Athlon, and, today, cutting-edge technology like the Opteron. As AMD entered the high-end, Intel monopolised rather than conceded and saturated the market with offerings for every conceivable type of product. Arai suggests that it is especially important to watch for monopolisation by any company with multiple differentiated product lines, since this offers ample opportunity for such anti-competitive acts as predatory pricing. That would appear to be born out by the facts of this case.

This Japanese ruling will undoubtedly cause some waves in Intel, especially since the parties mentioned - NEC, Fujitsu, Sony - are all major clients of Intel's in the Japanese territory and, indeed, worldwide. As AMD prepare for a high-profile CeBit, and Intel ring the changes at their HQ, it's clear that the CPU market is in a transition where AMD is growing more powerful. Whilst there have been analyses of the market in recent weeks that suggest that AMD may not have capitalised fully on its technology leadership over the past year, it is clear that as long as Intel keeps shooting itself in the foot with cases like this, it will always have a helping hand.

Intel, in a press release, said that it was currently evaluating the report before deciding if and how it would respond to the report. It said that it believed its business practices are both fair and lawful. An Intel spokeswoman wouldn't comment any further.


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