THE BLOG

True "Equality" In the Chip Market?

03/18/2010 05:12 am ET | Updated May 25, 2011

In Kurt Vonnegut's short story "Harrison Bergeron," set in the year 2081, everyone is equal. Equal not only in opportunity, but in performance, appearance and result. That is made sure by the government's "Handicapper General" who fits those of above average intelligence with special earpiece devices to broadcast loud noises designed to disrupt sustained thought. Those who are stronger than average are required to carry bags of weights around their necks to "equalize" them. Beautiful people are required to wear grotesque masks. There is no competition and no need for competition because everyone is truly equal.

The Federal Trade Commission's copy of "Harrison Bergeron" might well have been in the Bureau of Competition's war room as the FTC drafted its recent antitrust complaint against Intel. The complaint charges that Intel acted unfairly to protect its market share in the computer microprocessor market at the expense of its rivals, Advanced Micro Devices ("AMD") and Nvidia, a company that primarily manufacturers graphics chips. The Commission seeks an order requiring Intel to discontinue certain business practices, and share its patented technology with competitors. The FTC claims it is leveling the playing field by "restoring" competition, but a close look at the FTC complaint reveals instead a strong desire for a market in which all manufacturers are equal - not just in opportunity, but in market share; a "utopian" microprocessor market managed by the FTC and devoid of direct competition among the participants.

The FTC v. Intel complaint was filed on December 16, ironically the same day the European Commission ended its long antitrust case against Microsoft with a consent decree requiring Microsoft to promote competing Internet browsers. The complaint alleges that Intel has harmed consumers by raising prices and reducing consumer choice. In support of this charge, the FTC offers Exhibit A: direct evidence that Intel acted aggressively to maintain its market share by the most nefarious of means -- cutting prices. Setting aside the immediate contradiction between the supposed result (higher prices) and the means used (lower prices), this practice has caused computer companies (Original Equipment Manufacturers or OEMs) to prefer Intel chips in their computers. Intel's competitors are relegated to the "unequal" position of having less market share.

But, the FTC's solution would make even Vonnegut's Handicapper General happy. Intel will no longer be allowed to cut prices because this could hamper AMD and Nvidia's growth in the market. Intel must also license its x86 central processor unit ("CPU") technology to its competitors, including Nvidia, a company largely focused on the market for graphics processing units or "GPUs." The FTC believes that it would be desirable, it its view, to have Nvidia gain market share in the CPU market too. A mighty blow for marketplace "equality"! But, unfortunately, a mighty blow against competition, consumers and intellectual property rights.

There are countless ironies and inconsistencies in the FTC's complaint. The FTC alleges that when Intel learned that an OEM was considering building a computer with AMD chips that it threatened to "penalize" the OEM by suspending its delivery of Intel microprocessors. Handing over business to a competitor is an odd response to a competitive threat, if what the FTC alleges is true. This "threat," coupled with the FTC's claim that AMD processors were superior to Intel processors, represented a golden opportunity for AMD to increase its market share and expand its capacity (it claimed publicly that it was capacity-constrained and sold all processors it manufactured). Yet, the FTC uses these facts as the basis for its complaint that Intel somehow excluded AMD from market expansion.

This tangled web of logic is truly difficult to follow. The FTC tells us that OEMs prefer inferior processors and would prefer to jettison any support of a microprocessor manufacturer who makes a superior product knowing instead that it is fueling the ravenous appetite of a monopolist with an inferior product that will soon jack up prices to extract monopoly profits from the entire OEM sector once the superior producer is eliminated. What motivates these OEMs to act directly contrary to their self interest?

These OEMs, including Dell, HP, IBM, Toshiba and others -- whose collective turnover is billions of dollars per year -- had the most incentive to stop Intel's behavior, if the FTC's claims are in fact correct. But the OEMs did nothing. They did not file suit; they did not complain to the FTC; they did not complain to their senator. Instead, they enjoyed the benefits that a price war brings to its customers: lower priced chips with better performance. Indeed, all major OEMs bought Intel chips; many also bought AMD chips as well. Intel sold all it could make. AMD also sold all it could make. Most importantly, AMD gained market share. From 2001 to 2009 computing power in the PC increased substantially and PC sales increased exponentially. Over the same time span Intel's stock price was flat. Finally, Intel and ADM settled their private antitrust case in November 2009. These are not exactly outward signs of a market in competitive distress or held hostage by a monopolist.

But, back to the FTC's primary claim that Intel's repeated response to an OEM's interest in using a competitor's processors was to lower its prices to keep the business. In a remarkable re-characterization of absolutely unremarkable marketplace behavior that occurs each and every day around the world in every industry, the FTC calls Intel's price cuts and rebates "bribes." This is similar to calling a "sub club" card entitling lunchtime consumers to a free sub after buying five at regular cost an unlawful "kickback" scheme.

The current FTC complaint places Intel between the proverbial antitrust rock and hard place. Aggressive competition here has led to the FTC's complaint. But, what would have happened if Intel failed to compete? Hypothetically speaking, let's suppose that Intel was prescient enough to guess that the FTC would challenge its aggressive price cutting and large market share in the CPU market. In order to insure that the FTC would be comfortable with market dynamics it could have called a "truce" with AMD, for example, and agreed that it would not cut prices of its chips until the AMD share of the microprocessor market reached say 40%. Intel also might have agreed to share technology with AMD. Sounds fair doesn't it? This is in fact essentially a paraphrase of the FTC proposed remedy in the case just filed.

But how quickly would a case under Section 1 of the Sherman Act, which bars agreements between two firms in restraint of trade, be filed if such an agreement were even discussed? How about instantly. Indeed, the entire concept that a participant in the marketplace should not engage in price cutting in an attempt to retain or grow market share (i.e., to edge out competitors) is an anathema to the Sherman Act.

There is something regressively European in the FTC's complaint against Intel (the European Commission has of course sued Intel too). The United States has wrestled with antitrust policy in a deep and thorough way that Europe has not. What economists and courts in the United States left behind in the 1970s is the now prevalent theory of antitrust in Europe: a market is only "healthy" when there is an equally distributed market share among several manufacturers roughly equal in strength. Outgoing EC Competition General Neelie Kroes made this clear during the Microsoft cases in Europe, stating that she would be happy when Microsoft's market share dipped to 50% or below. This is a statement of market equality that has little to do with economics, efficiency, and real life competition. It is an antitrust theory that is also wholly inconsistent with U.S. Supreme Court caselaw.

Those who would eschew vigorous - even cutthroat - competition in the marketplace should indeed read "Harrison Bergeron" carefully. While the world in 2081 had no competition it was also marked by stuttering television announcers, musicians barely able to read music, and clumsy ballerinas unable to dance without tripping. Mediocrity was the rule; excellence was outlawed. These are the natural consequences of government efforts to restrict competition.