Forcing producers to charge higher prices now, to accommodate entry, and eventually lead to lower prices than we have now is the purpose of the policy. The result is still lower prices – we just have anti-competitive behaviour that prevents entry into some markets.

That doesn’t make any sense to me. What entrant would not consider post-entry conditions? How do high prices before entry encourage entry if the entrant expects them to change? Isn’t it the changed price that matters?

Is there a single example anywhere of anti-trust induced higher prices causing entry which actually lead to lower long term prices? The very fact any regulator that crazy is operating would convince me immediately that I should put my capital elsewhere!

See Baumol’s 2002 book, the Free Market Innovation Machine. Baumol’s central argument is that the main reason by capitalism beats the hell out of every other economic system is that it is the only system which produces oligopoly. And oligopolies, with their deep pockets and market power, are ideal to engage in technilogical arms races against one another, the result being routinized and massive innovation. He shows oligopolies are responsible for the great majority of innovation (not invention) in modern economies, easly shading universities.

Baumol gives us a good reason to like duopoly.

Most economists would disagree with you on that I think. Fixed costs are not usually considered a barrier to entry that antitrust should concern itself with – they properly regulate the entry of new firms. It is not helpful to have authorities encouraging entry for the sake of competition – doing so will almost certainly mean fixed costs are incurred with no commensurate benefit – if there was, entry would have (or can be anticipated to) occur.

There is tremendous danger in what the EU is doing. Intel is in a dynamic industry and the cost of a regulatory mistake that seriously interferes with Intel and all other participatns now and into the future is potentially enormous because of the missing markets problem. Firms, especially in dynamic industries, of which microchips is the flagship, need to be free to innovate on all dimensions including price. It is ridiculous for the EU to jeopardise so much for such trivial gains. Property rights really matter in that sort of industry marked by large, long run investments.

The EU could use some Schumpeter.

The strength of the effective competition depends on the barriers to entry. First we can have significant fixed costs – the higher the fixed costs the greater the market power the incumbent can use.

Now you are completely right that if this is the only issue we can look past it – as the entrant will only come in if they can recoup fixed costs in the long-run anyway!

However, if we have large fixed costs that have to be sunk, and the incumbent can make it believable that they would be willing to fight a price war in the case of entry, they can prevent commitment and the price charged can be in excess of the price that would be charged if the incumbent was willing to accommodate.

If the EU commission believes that the subsidies are part of a signal to do this, or part of an investment in a credible commitment mechanism, then they can pull out the idea that they could be a form of predatory pricing.

One thing that strikes me is that if we start with a monopoly then go to a duopoly, would the resulting market output and price be less and more respectively than the predatory pricing situation? Given that predatory pricing requires a commitment to keep prices low (otherwise when they went back up sufficiently it would trigger entry) the predatory pricing must be maintained.

I really shouldn’t be thinking about this – I have a stack of other work to do!

But that ignores the endogeneity between entry decisions and prices. Now this doesn’t matter if there are no significant fixed costs.

But when fixed costs are significant, keeping prices “down” now compared to the monopoly level can be seen as anti-competitive if it can prevent future competition that leads to lower prices.

Now we need a reason for that to happen (as at first glance we still seem to have sufficient effective competition – or else the threat of entry would not be subgame perfect). Credit imperfections, asymmetric information (signaling namely) and the vertical structure of a market can both be discussed to allow for this.

Furthermore, in the current case of Intel there is a suggestion that they are directly increasing the barrier to entry with the payments – not subsidising the per unit cost. This is even more obviously anti-competitive than the strict predatory pricing case.

As a result, I can see scope for the European Commission to suggest there is anti-competitive behaviour here. We could have a counterfactual where Intel’s behaviour has made consumers worse off – even if prices have been falling and quantity has been rising (which is actually the result of technology anyway).

Presumably if a firm has a degree of market power then it has the ability to extract rents via the fact that pricing under imperfect competition leads to a DWL.

However, if predatory pricing leads to an equilibrium closer to the perfect competition paradigm then this is a good thing, no? If the counterfactual is that it is not close enough to the competitive market paradigm then this is simply imperfect competition and not a problem with predatory pricing.

@What would Hayek say

The very essence of what we are looking at here depends on how we think Intel’s choices have influenced entry. As long as the commission believes that, in some markets, Intel’s behaviour has prevented, delayed, or reduced entry then it is anticompetitive.

Off the top of my head there are two ways it could work in this case:

1) They could note that the industry has increasing returns to scale over some level (not enough to satisfy market demand), and given product specificity they know that if they can get a high enough market share they get a cost advantage over any competitor. In this case the temporary incentives to shift which leads to higher long run prices.

2) The subsidies weren’t just to increase demand for Intel products – but were directly meant to interfere with AMD’s current contractual relationships. If Intel was paying to directly create barriers (rather than simply subsidising per unit) this could be anti-competitive.

Now I can buy the first reason in the current industry, and the second reason matches some of the descriptions I’ve heard.

If I had to apply value judgments I would ultimately weigh against anti-competitive behaviour myself – but I trust the analysis of the European Commission more than my implicit feelings.

As I can see scope for anti-competitive behaviour, I thought it was worth raising why this could be the case 🙂

Just refreshed and saw Paul Walkers comment, so i’ll stop and just agree with his comment of 2pm 🙂