Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, February 23, 2010

The FTC's Anticompetitive Pricing Case Against Intel

Posted by D. Daniel Sokol

Herb Hovenkamp (Iowa Law) provides his thoughts on The FTC's Anticompetitive Pricing Case Against Intel.

ABSTRACT: The FTC’s wide ranging complaint against Intel Corporation indicates that the FTC intends to rely on the “unfair methods of competition” language in §5 of the FTC Act to reach beyond the proscriptions on unilateral conduct contained in §2 of the Sherman Act. The Supreme Court has expressly authorized such expansion, and statutory text, legislative history and legal policy all support it. While §2 reaches only conduct that threatens to “monopolize” a market, the “unfair methods of competition” language can reach improper abuses of a dominant position that fall short of creating monopoly. Further, the FTC has expertise that courts of general jurisdiction cannot command and is not encumbered with jury trials. Because private parties cannot enforce §5 there is no need to worry about the potential for socially costly tagalong private antitrust suits.

One important concern that arises when the FTC reaches beyond the Sherman Act is that the remedy itself not be contrary to the consumer welfare goals of the antitrust laws. Pricing is particularly complex in a market with high fixed costs and short product cycles, as is the case for Intel’s processor chips. The combination of high R&D costs plus high fixed setup costs, plus relatively low production costs, means that the key to success in the microprocessor market is high volume. When setting a price a firm such as Intel faces two types of risk to its high volume – one is general market risk and the other is risk of customer defections. A firm in Intel’s position might profit by bearing the market risk, which is largely outside of the control of both its customer and itself. But the risk of customer defection is one that it needs to control if it is to keep its output high and per unit cost down. The price Intel can bid is critically dependent on the number of sales it can confidently predict. Bids conditioned on market share discounts, quantity discounts and related practices such as exclusive dealing give Intel the assurance of output that it needs to bid a low price.

In this case the FTC requests that Intel be required to keep prices at an irrationally high level. Limitations on “below cost” pricing would require Intel to include a mandated multiple of fixed costs into its bids, even though any firm in Intel’s situation could profitably bid prices down to its incremental costs. Some market share discounts would apparently be forbidden without any proven relationship to cost. Relief such as this will serve the goal of giving Intel’s rivals a price umbrella under which they can profit, but it is not calculated to produce competitive solutions that will benefit consumers.

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