Intel’s Loyalty Rebates: Why the Interventionists Are Wrong

Thom Lambert —  31 October 2007

The New York Times isn’t the only one calling for the FTC to go after Intel for its purportedly exclusionary discounting. The reliably interventionist American Antitrust Institute concurs. In a recent letter to the FTC, it wrote:

Based on allegations by AMD [Advanced Micro Devices] in a private U.S. case and on what we have been able to learn about the [European Commission’s] complaint (the details of which are not yet public), not to mention a settlement in Japan and an ongoing investigation in Korea, there seems to be substantial reason to worry about Intel’s rebate policies, in particular, which appear to be fashioned for the purpose of keeping Original Equipment Manufacturers [i.e., computer makers] from switching orders to a chip that, on the merits, they may prefer to purchase from AMD. The U.S. government — especially the FTC — should reclaim its traditional role as the leading antitrust enforcer, especially when it is two U.S. corporations that are involved and the rest of the industrialized world is so concerned.

Let’s unpack this. It seems AAI is saying that the FTC should pursue action against Intel because (a) one of Intel’s competitors sued it under the antitrust laws, and (b) several foreign antitrust authorities have gone after Intel’s rebate policies. AAI apparently assumes that, since others have complained, Intel must have done something wrong in offering its rebates (which are, of course, retroactive price cuts). Or perhaps the AAI subscribes to the view — recently challenged by Josh — that more antitrust intervention equates to better antitrust intervention. Or perhaps both. AAI’s not real clear on why Intel’s rebates are anticompetitive.

Its recent working paper on the Intel matter doesn’t clarify much. In that paper, AAI Senior Fellow Norman Hawker contends that similarities between Intel and Microsoft in terms of market position and conduct establish that Intel’s rebates have harmed competition and injured consumers (just as Microsoft’s conduct purportedly did). Hawker explains:

[1] Intel dominates the PC chip market almost to the same degree that Microsoft dominates the PC operating system (OS) market (many refer to the two companies collectively as “Wintel”). [2] As in the Microsoft case, Intel’s aggressive marketing tactics prevented OEMs from offering rival products to consumers. [3] And like Microsoft, Intel has engaged in this conduct to maintain its existing monopoly. [4] Microsoft’s conduct served as the basis for two antitrust actions by the United States Department of Justice. (It should also be noted that the EU’s Court of First Instance has upheld the European Commission’s decision that Microsoft abused its dominant position by refusing to supply competitors with information needed for interoperability of their products and by tying the Windows Media Player to the Windows OS.) [5] These parallels between Microsoft and Intel suggest that Intel’s anticompetitive practices harm consumers, including American consumers, by denying them access to innovative products at lower prices from rivals.

So let me get this straight: [1] Both Microsoft and Intel are the biggest players in the markets in which they participate. [2] Both Microsoft and Intel have acted aggressively to get their customers to buy their products. [3] Both Microsoft and Intel have undertaken these aggressive efforts to sell their wares in order to avoid losing business to rivals. [4] Microsoft was sued by U.S. and EU regulators. [5] Ergo, “Intel’s anticompetitive practices harm consumers, including American consumers, by denying them access to innovative products at lower prices from rivals.”

This, my friends, is what we call a non-sequitur.

Just because Microsoft and Intel are both successful and aggressive does not mean that Intel’s “aggressive marketing tactics” — price cuts given to loyal computer manufacturers and passed on to PC buyers — bear any resemblance to Microsoft’s challenged behavior. And if they don’t, the similarities Hawker cites are just irrelevant. Lawyers are familiar with the notion of a distinction without a difference. Well, this the flip-side: similarities without significance. Moreover, a great many of the practices for which Microsoft was sued (e.g., the company’s decision to include in its operating system a media player — something practically all customers want) did not “harm consumers,” the claims of protectionist European regulators notwithstanding. Thus, AAI’s argument by analogy fails.

More importantly, AAI’s position is inconsistent with both theory and evidence. First, theory. AAI’s (and AMD’s) claim is that Intel’s discounts and rebates preclude better, cheaper AMD products from making their way to market. In AAI’s words, Intel’s loyalty discounts “harm consumers, including American consumers, by denying them the access to innovative products at lower prices from rivals.” The claim here is that AMD is a more efficient producer than Intel but is unable to persuade OEMs to use its processors because doing so would cause them to lose out on Intel’s discounts. But if AMD is truly a more efficient producer than Intel, then it ought to be able to match any Intel discount, as long as Intel is still pricing above its own cost. Put simply, an above-cost discount — even one that’s offered in exchange for loyalty — can always be matched by an equally efficient rival. Given the lack of any serious evidence of predation (below-cost pricing) on Intel’s part, AMD ought to be able to compete with Intel’s discounts by lowering its own prices.

And what about the actual evidence on consumer welfare? It would suggest that price competition is vigorous in the market for processors and that Intel’s discounts — far from monopolizing the market and leading to higher prices — are benefiting consumers. Consider, for example, this graph showing price changes on Intel’s Quad Processors. (The graph shows a steep decline during a period of purported monopolization.) How about this one showing the price trend on AMD Athlon 64 Processors (yet another steep price decline). Look here to see some combined AMD / Intel price data (again, downward price trends). And note that, by AMD’s own account (see paragraphs 33 and 34 of its complaint), Intel’s allegedly exclusionary discounting is accompanied by increasing operating margins — an observation that’s inconsistent with any claim that Intel is in the first stage of a predatory pricing scheme. I’m sorry — can you remind me how consumers are being harmed here?

Now obviously this is not a rigorous econometric analysis. It could be that prices would have fallen even faster absent Intel’s loyalty rebates. But in light of these downward trends in prices, the burden would seem to rest on AMD, AAI, and the foreign regulators to point to something solid — empirical evidence, a credible theory about how efficient rivals could be excluded, … something more than some minor similarities between Microsoft and Intel — that would justify government intervention into a discounting program.

The FTC is quite properly staying its hand on this one.

(HT: Danny Sokol)

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

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