Monopolization gone haywire
14 May 2009
SUGGESTED
Regulation
Economic Theory
18 May 2009
Government and Institutions
In my recent article on monopolization cases under Article 82 of the European Union treaty, I criticized Neelie Kroes and the European Commission for the aggressive application of competition law in cases where the outcome was at best uncertain. The dangers of the Commission’s approach are highlighted by the recent EC Commission decision to impose a $1.44 billion fine on Intel for a rebate programme that it used to persuade original equipment manufacturers to use Intel chips in their products during the period from 2002 to 2007.
Cases of this complexity raise serious factual and legal issues. On the former, no academic has anything useful to contribute, except to note that Intel CEO Paul Otellini vigorous chastised the Commission for disregarding all evidence that tended to dispute its judgment that Intel had in fact engaged in these practices. But this academic at least can raise two doubts about the Commission’s attack on rebates.
First, no claim of consumer harm can look just at individual cases. It must look at overall market conditions. Here the Intel rebates lowered prices for the 80 per cent of consumers that used its products. What consumer harm could outweigh those particular gains in either the short or the long run? Without these rebates Intel’s share of the market would fall and that of Advanced Micro Devices (AMD), the complainant in this case, would rise from its 12 per cent share. Suppose AMD’s share doubled, Intel would still serve about 2/3rds of the market. Where is the net harm when more consumers are helped than hurt by the rebate?
Second, AMD, as a nondominant firm, could of course offer rebates (or larger rebates) for its products to increase its market share. Now price competition increases, which is all to the good. The EC’s Kroes has gathered the scalp of yet another large American company by intoning the phrase “abuse of a dominant position”. But in so doing she has converted Article 82 into an anticompetitive provision, just as her critics have long feared.
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago. He is the author of Free Markets Under Siege and a contributor to The Legal Foundations of Free Markets.
Cases of this complexity raise serious factual and legal issues. On the former, no academic has anything useful to contribute, except to note that Intel CEO Paul Otellini vigorous chastised the Commission for disregarding all evidence that tended to dispute its judgment that Intel had in fact engaged in these practices. But this academic at least can raise two doubts about the Commission’s attack on rebates.
First, no claim of consumer harm can look just at individual cases. It must look at overall market conditions. Here the Intel rebates lowered prices for the 80 per cent of consumers that used its products. What consumer harm could outweigh those particular gains in either the short or the long run? Without these rebates Intel’s share of the market would fall and that of Advanced Micro Devices (AMD), the complainant in this case, would rise from its 12 per cent share. Suppose AMD’s share doubled, Intel would still serve about 2/3rds of the market. Where is the net harm when more consumers are helped than hurt by the rebate?
Second, AMD, as a nondominant firm, could of course offer rebates (or larger rebates) for its products to increase its market share. Now price competition increases, which is all to the good. The EC’s Kroes has gathered the scalp of yet another large American company by intoning the phrase “abuse of a dominant position”. But in so doing she has converted Article 82 into an anticompetitive provision, just as her critics have long feared.
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago. He is the author of Free Markets Under Siege and a contributor to The Legal Foundations of Free Markets.
8 thoughts on “Monopolization gone haywire”
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It’s a mystery to me how Intel are harming consumers by offering rebates to its customers. Sure, there’s murkier stuff afoot here, but people can always buy Apple computers, which are miles better anyway!
It’s a mystery to me how Intel are harming consumers by offering rebates to its customers. Sure, there’s murkier stuff afoot here, but people can always buy Apple computers, which are miles better anyway!
There’s nothing wrong with normal rebates, based on volume, or anything like that. What is clearly anti-competitive is offering significant rebates on condition that your customer doesn’t buy any of a competitors product as well. This is just one of the practices that Intel was found guilty of.
Competition should be based on cost and quality, not on what are essentially bribes not to use a competitors product.
The fact that there is harm is obvious – if Intel could have competed effectively without spending the extra money they would have. Therefore competition was diminished by what Intel did.
There’s nothing wrong with normal rebates, based on volume, or anything like that. What is clearly anti-competitive is offering significant rebates on condition that your customer doesn’t buy any of a competitors product as well. This is just one of the practices that Intel was found guilty of.
Competition should be based on cost and quality, not on what are essentially bribes not to use a competitors product.
The fact that there is harm is obvious – if Intel could have competed effectively without spending the extra money they would have. Therefore competition was diminished by what Intel did.
The key problem with your statement is the assumption that Intel was offering a better deal to its customers (”the Intel rebates lowered prices … What consumer harm could outweigh those particular gains…?”). So-called rebates by a monopolist (I mean of course a firm with subdtantial market power) can be artificial price schedules resulting in higher average unit prices. Indeed, why would a rational, profit-maximizing monopolist choose a price schedule yielding lower profits? Besides, it is simplistic to describe the EU case as concerning “rebates”. Intel made direct payments to Dell to delay launch of AMD-based laptops and desktops, and paid a major retailer not to carry any AMD-based PC.
The key problem with your statement is the assumption that Intel was offering a better deal to its customers (”the Intel rebates lowered prices … What consumer harm could outweigh those particular gains…?”). So-called rebates by a monopolist (I mean of course a firm with subdtantial market power) can be artificial price schedules resulting in higher average unit prices. Indeed, why would a rational, profit-maximizing monopolist choose a price schedule yielding lower profits? Besides, it is simplistic to describe the EU case as concerning “rebates”. Intel made direct payments to Dell to delay launch of AMD-based laptops and desktops, and paid a major retailer not to carry any AMD-based PC.
It should be noted that the findings of the case represent the EU’s interpretation of Intel’s actions. The EU is hardly an exemplar of high ethical standards and it is well known that much of its legal activity is politically motivated.
Even if Intel engaged in such behaviour it can be argued it is part of the ‘rough and tumble’ of competition between businesses. There is an economic cost to such strategies, potentially giving competitors a price advantage. Private contracts between consenting parties should generally be left alone by the state, particularly in instances where it is very difficult to demonstrate significant harm to third parties.
It should be noted that the findings of the case represent the EU’s interpretation of Intel’s actions. The EU is hardly an exemplar of high ethical standards and it is well known that much of its legal activity is politically motivated.
Even if Intel engaged in such behaviour it can be argued it is part of the ‘rough and tumble’ of competition between businesses. There is an economic cost to such strategies, potentially giving competitors a price advantage. Private contracts between consenting parties should generally be left alone by the state, particularly in instances where it is very difficult to demonstrate significant harm to third parties.