Intel or not Intel

When corporate giants wield their pricing power as a weapon to smash pygmies, consumers win – but only for a while. That is why regulators must be vigilant. This week, the New York attorney general, filed an anti-trust complaint against Intel, following a case that has already led to regulatory action in Europe and Asia.

The pricing discounts that suppliers like Intel give to large volume customers are welcome, even when those discounts reinforce the inherent advantages of a market leader in an industry which, like semiconductors, relies heavily on scale economies. But if price discounts are used as a predatory weapon, prompt action is essential.

It is for the courts to draw that line, based on the facts of the case. But there are some obvious pointers. If volume discounts are made dependent on conditions that extend beyond the pure volume that a customer buys, that should raise a red flag. In Intel’s case, discounts were tied to the condition that PC makers did not buy chips from its smaller rival AMD.

The court should examine the alleged all-or-nothing nature of Intel’s volume discounts; economic logic suggests that smaller discounts should be available on smaller volumes. Intel cut off all discounts to those who turned to AMD. Intel has said it will defend itself against the allegations.

Other factors will help to decide the case, such as whether Intel offered the same discounts to all customers, or used them selectively. If a court determines that it has crossed the line, heavy fines are the best deterrent. Persistent wrongdoing should result in closer regulatory supervision – for instance, requiring more transparency through the publishing of volume discounts. With Intel, matters have not reached that point yet.

Some have argued for tighter restrictions, such as absolute limits to the discounts that a dominant company like Intel can apply. Price regulation, however, is a last resort justified only in cases of total market failure.

If anything, the AMD example argues the opposite. It lacked its rival’s massive financial strength, but beat Intel in the race to the first generation of multi-core chips. Indeed, it was the desire of Dell and others to buy these more advanced chips that led Intel to wield its power in a way that watchdogs argue was too extreme. AMD’s experience is a reminder that tech innovators can flourish even against dominant rivals – but only if regulators remain alert.