Cuomo Goes After Intel (to Get AMD Plant for NY?)

Thom Lambert —  14 January 2008

New York Attorney General Andrew Cuomo has issued a subpoena to Intel Corp. as part of an investigation into whether Intel’s discounting practices violate federal or state antitrust laws. According to Cuomo’s press release, the subpoena

seeks documents and information concerning Intel’s pricing practices and possible attempt to exclude competitors through its market domination. The information sought is relevant to whether Intel, among other things:

Penalized its customers, primarily computer manufacturers, for purchasing x86 computer processing units (CPU) from competitors;

Improperly paid customers for exclusivity;

Illegally cut off competitors from distribution channels.

This is not very specific, but, given that the press release refers favorably to Intel investigations by the European Commission and Korean and Japanese antitrust regulators, we can assume Cuomo is concerned about the behavior that troubled those foreign regulators. That purportedly troubling conduct is really just loyalty discounts — giving computer manufacturers a price-break, either an up-front discount or a rebate, if they agree to take the bulk of their requirements from Intel rather than from its competitors.

Cuomo’s characterization of these discounts is dysphemistic: computer manufacturers are “penalized” for purchasing competitors’ products only in the sense that doing so deprives them of a cheaper price from Intel; customers are “paid for exclusivity” only in the sense that Intel is giving discounts and rebates conditioned on loyalty and will thus end up charging the lowest per-unit prices to customers who buy from it exclusively; competitors are “cut off from distribution channels” only to the extent they can’t or won’t match Intel’s discounts and thereby maintain or expand their customer bases. Assuming Intel’s discounted prices are above its costs of production, any equally efficient producer could match Intel’s discounted pricing, so the only competitors destined to lose business because of Intel’s discounts are those that are either less efficient than Intel or unwilling to compete as aggressively on price.

[Note that there have been some accusations that Intel’s discounted prices are below-cost. That would change the competitive dynamic and might justify government intervention here (an equally efficient rival cannot meet a below-cost price and thus could be excluded by such pricing). But below-cost pricing is not the focus of Attorney General Cuomo’s investigation. Moreover, it is highly unlikely that Intel’s discounted prices are below its marginal or average variable cost of production; the variable costs of producing the sort of high-tech devices Intel sells are incredibly low.]

Any antitrust intervention that sought to protect a discounter’s less efficient or less price-aggressive competitors at the expense of consumers, who reap immediate benefits from loyalty discounts, would be perverse. Antitrust should not sacrifice the bird-in-the-hand of lower prices in order to protect laggard competitors. Thus, as I’ve previously argued, the FTC’s decision not to pursue this matter is entirely appropriate.

So why is Attorney General Cuomo pursuing this European-style, competitor-focused antitrust inquiry? Perhaps he is, as he claims, just looking out for the interests of New Yorkers. But not in their status as computer buyers (where they’d be helped by aggressive price competition). Instead, he’s looking out for their prospects of employment and for his state’s coffers. It seems that Intel’s chief competitor, Advanced Micro Devices (AMD), has promised to build a $3 billion plant in upstate New York. Thus, it makes sense that Mr. Cuomo would jump on the bandwagon led by Senator Charles Schumer and Representative Kirsten Gillibrand (D-NY), both of whom have pushed for a federal inquiry into Intel’s loyalty discounts.

So what we have here is really a protectionist move that may benefit New York’s workers (who may land sweet AMD jobs) and politicians (who’ll have more tax revenue to spend), but at the expense of computer consumers generally. What’s more, other potential discounters will know they might face inquiries from aggressive states like New York, and they may therefore forego consumer-friendly discount arrangements.

It’s bad enough that American businesses have to worry about competitor-focused European regulators. We’re in real trouble if rogue states start acting like antitrust bullies.

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.