Wednesday, May 13, 2009

Computer Prices Have Fallen By 90% Over the Last Ten Years: Is That Evidence of Monopoly Power?

WASHINGTON POST -- The world's biggest semiconductor maker yesterday was fined a record $1.45 billion by European regulators for allegedly using its dominance to edge out rivals, a decision that has cast a spotlight on similar investigations by U.S. antitrust watchdogs.

After a five-year review of Intel's sales tactics, the European Union's competition commission said the company, with 70% share of the global chip market, gave hidden discounts to computer makers to use its chips and paid the firms not to use those made by competitor Advanced Micro Devices. It also paid a major retailer to stock only computers outfitted with Intel chips, the commission said.

According to
Dan Ackerman of CNET News, "Assuming Intel sells the Atom CPU (found in virtually every Netbook) to system makers for around $53, then it would only take 27,169,811 new Netbook sales to make up for the proposed fine."

MP: The chart above shows monthly "CPI for Personal Computers and Peripheral Equipment" back to January 1998 (
BLS data via Economagic here). Adjusting for quality improvements, computer equipment today costs only about 10% of what the same equipment cost in 1998. Consumers have never had it better when it comes to affordable computer equipment, so how can it be claimed that Intel is guilty of anti-competitive behavior that is damaging to consumers?

The true anti-competitive behavior of a coercive monopolist that should most concern government officials is when a producer (or group of producers, i.e. cartel like DeBeers or OPEC) restricts output and raises price. In the case of Intel, just the opposite has been happening: microchip output has been increasing, quality and speed have been improving significantly, and prices have been falling dramatically, and consumers have benefited enormously.

How can Intel be accused of anti-competitive behavior when it was giving "hidden discounts" to computer makers? A real anti-competitive monopolist, with true market power, possibly insulated from market competition (often because of a grant or license FROM the government), would be in a position to RAISE prices, not LOWER prices.

Unfortunately, in the bizarre world of anti-trust, ANY price can be illegal. The government could accuse a producer of anti-competitive, monopoly behavior when it charges prices that are "too high," i.e. higher than its competition, but it could also accuse a producer of anti-competitive behavior if its prices are "too low," i.e. "predatory." And if a producer happens to charge the same prices as its competitors, it could be charged with anti-competitive behavior of price-fixing or collusion. So producers, you better watch out - whether your prices are higher, lower or the same as your competitors, you could be accused of violating antitrust laws.

12 Comments:

At 5/13/2009 10:05 PM, Blogger Robert Miller said...

This comment has been removed by the author.

 
At 5/14/2009 1:12 AM, Blogger The Chinese Capitalist said...

This time I'm going to have to disagree, a firm like Intel engages in these behaviors so that it can put AMD out of business. Yes, in the short run, it costs money to do this, but once AMD is gone and Intel has monopoly control, they can raise prices and make monopoly profits.

The market depends upon competition to work. I have a saying that competition is the engine that drives capitalism. Competition makes sure the marketplace is "fair" and that innovation moves forward.

What Intel did was try to eliminate and reduce competition through their payouts. AMD once had the best processors for several years running, but for some reason they never captured the market share I thought they were going to get. If consumers don't see AMD products or can't easily get AMD processors, then AMD can't get market share and can't get the recognition it needs to be able to compete with a huge brand like Intel.

Some or most of the fine against Intel should go to AMD, after all they were the ones hurt. But I doubt that will happen. Right now, Intel clearly has the better chips and AMD is on its last legs. Intel can undercut AMD where their chips are competitive, and still make a profit on the high end where AMD has no product. What they're doing now is fair, they're winning purely based on a better product and competitive prices where they have competition. But a few years back, they were paying retailers to keep AMD products from the marketplace and that's definitely not fair and not legal.

 
At 5/14/2009 6:38 AM, Blogger 1 said...

"This time I'm going to have to disagree, a firm like Intel engages in these behaviors so that it can put AMD out of business"...

Oh dear! Competition is such an ugly thing...

I who at one time was a real fan of AMD chips and chipsets lost their technological edge...

Payouts?

At one time AMD tried this route to success too but they did it poorly...

 
At 5/14/2009 8:14 AM, Anonymous Rand said...

I prefer to buy AMD processors. I want them to stay in business, if only to provide some competition to Intel. Without competition, Intel may slow its rate of innovation.

 
At 5/14/2009 8:20 AM, Anonymous Anonymous said...

With more and more stuff being offloaded onto the GPU (Graphics processor) Intel already has lots of competition from ATI and Nvidia.

 
At 5/14/2009 11:04 AM, Anonymous gettingrational said...

Prof. Perry, thank you for your excellent commentary. Why is the European Union not strong arming OPEC? OPEC's prices do not have a record of falling consistently and it's product usability increasing consistently. The fines for Microsoft, Intel etc. are extortion on grand euro scale.

 
At 5/14/2009 11:59 AM, Anonymous Norman said...

I love your graphs but this one needed to have a log scale.

 
At 5/14/2009 1:39 PM, Anonymous Anonymous said...

AMD chips are great. I guess they don't know how to market.

 
At 5/14/2009 5:54 PM, Anonymous Dr. T said...

This story is a bit misleading, since much of the "quality improvement" is increased CPU speed and increased RAM. Most of those gains are sucked up by inefficient operating systems and bloatware applications. Using a word processor or spreadsheet is no more efficient today than fifteen years ago.

 
At 5/15/2009 12:59 PM, Blogger James Hanley said...

Chinese capitalist has a perverse understanding of competition. He believes competition is important, yet he wants to punish the company that's been competing well and protect the company that hasn't been very good at competing. Perhaps we can just put a salary cap in place and treat the chip makers like major league sports. (Oh, and let AMD get the first draft pick for newly graduated software engineers.)

 
At 5/15/2009 7:30 PM, Blogger Geech said...

My last three computers all used AMD chipsets. They will be the last AMD products I ever purchase.

 
At 5/16/2009 7:37 PM, Blogger aoco said...

"We may never get those jobs back."

But your assumption is that those specific jobs will never come back. The problem with such a statement is the implied lack of thought put to it. Sure, we may never get "those" jobs back but it does not mean we will not see any additional competitive jobs take the place of those jobs. If someone would simply think of the poor blacksmiths put out of work by those pesky automobiles. Those jobs should have been protected so that the cars of today would not be of the high quality they are!

 

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