07 June 2008

Intel Under Attack

On Friday, the Federal Trade Commission (FTC) began investigating Intel, the giant integrated circuit manufacturer, for its pricing policies.  The impetus for the investigation seems to have come from the complaints of one of Intel’s competitors, Advanced Micro Devices (AMD).  As a NY Times article puts it, AMD “has waged a global and public relations campaign against Intel hoping to persuade American and foreign regulators that Intel’s pricing practices violate antitrust laws.”  

Until now, this campaign has received attention primarily from foreign government agencies, like the Korean Fair Trade Commission, which recently ruled against Intel for its policy of offering rebates to customers who promised to use Intel devices instead of AMD parts.  Now the United States government is joining the attack.

Let’s stop for a moment to consider the two relevant facts and determine which company, Intel or AMD, is violating rights:

*  Intel offers $37 million dollars in rebates to two customers, Samsung and Trigem, in exchange for their promise not to use AMD parts in their products.

*  AMD enlists foreign and domestic governments to use legal force against Intel to extract benefits it could not achieve in a free market.  

Which of the companies is exerting force?  Which is predator and which is prey?

To the casual observer who unquestioningly accepts antitrust premises, Intel’s activities do indeed appear to be “predatory.”  Intel fits the image of the Big Bad Corporation forcing its products down its customers throats and forcing its competitors out of business.  The intervention of the FTC seems nothing more than the government stepping in to protect the “little guy” from the big bully.

A more careful observation, however, reveals that the exact opposite is true.  By offering rebates to its customers, Intel is effectively reducing the prices of its own products, which is great for manufacturers and consumers.  Samsung and Trigem (and any other customer) are free to accept the terms of the exchange or not.  Intel cannot indefinitely discount its products below what it can afford or it will drive itself out of business.  Even if Intel could temporarily lose money in order to “undercut” AMD long enough to drive AMD out of business (and this is highly dubious), it would subsequently have to increase its prices to make up for it, inviting more competitors into the market.  In the meantime, consumers will have benefited from Intel’s price cuts and will benefit again when other competitors jump in.

In a free market, there is only one explanation for a single company dominating a market for a number of years: that company provides a more valuable product or service than does anyone else.  The fact that Intel can afford to offer a $37 million rebate to its customers is not an indication that it is a bully.  It is an indication that it has consistently provided more value than its competitors.  It is a measure of its success.

The point I wish to emphasize is that in no conceivable way has force been used by Intel.  On the contrary, it is AMD that has initiated force - not directly, of course, but in the only legal way it could: via the government.  Indeed, it is precisely because governments are the only legal instigators of force that in a free market coercive monopolies are impossible.  

AMD claims that Intel’s pricing practices are “unfair,” yet when we look closely we see that the only “weapons” that have been wielded by Intel are products that lots of manufacturers and consumers have demanded for many years.  Whether Intel’s circuits are better than AMD’s is not the point; that they have been chosen freely by consumers is the point.  The only way for Intel to have achieved this market share unfairly is if they had used legal force to block competition.  But Intel did not do that.  AMD is doing that.  

I don’t know the intricacies of anti-trust laws in the United States or elsewhere, but in terms of pricing policies they seem to boil down to these three rules:

If you are a big company and charge more than your competitors, you are committing “price gouging” and must be stopped by the government.

If you are a big company and charge less than your competitors, you are a “predator” that is “undercutting competition” so you must be penalized by the government.

If you are a big company and charge the same as your competitors, you are part of a cartel guilty of colluding against consumers and must be dismantled by the government.

These three rules reduce to just one: if you are a big company, you are under the perpetual threat of government punishment.  A company is at the mercy of the government’s whims, and the more successful it is - that is, the more it has earned its market share - the more it is likely to draw the attention of “trust busters.”  And apparently, all it takes to get the FTC stirred up against one is to have one’s competitor whisper in its ear.

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