Dell, Intel, Exclusivity Payments, and Robinson-Patman

http://www.futureofcapitalism.com/2010/07/dell-intel-exclusivity-payments-and-robinson

The Securities and Exchange Commission this week announced a settlement with Dell and five present and former executives related to their public characterization of the company's earnings. The case centers on what the SEC calls "exclusivity payments" made by Intel to Dell in exchange for Dell's promise not to use its competitors' microchips. The complaint in the case is worth reading. Here's a key section:

In recent years, these payments have been the focus of at least five different government antitrust investigations, as well as a major private antitrust suit launched by AMD. The primary claim in these investigations has been that Intel was paying its customers to limit their purchases of AMD products. In Dell's case, the claim was that Intel·was paying Dell to boycott AMD entirely.

In January 2003, Intel changed the name of the rebate program from MOAP [Mother of All Programs--ed.] to MCP, which was short for "Meet Competition Program." "Meeting competition" is a concept under the Robinson-Patman Act of 1936, an antitrust statute that prohibits price discrimination. The Robinson-Patman Act generally prohibits a vendor from selling the same product at different prices (or on generally different terms) to different customers. The Robinson-Patman Act recognizes a defense to this general prohibition, however, that allows companies to charge different prices to different customers, if one of the customers has a competing vendor offering a better price.

This Robinson-Patman Act is an important provision to focus on. It basically is a government intervention between two consenting parties that otherwise might negotiate a lower price. I'm not here defending Dell or Intel. But just as a matter of basic common sense, if the government is going to pass a law that so obviously interferes with a basic function of free enterprise as allowing a manufacturer to price his product, is it a huge surprise that companies would try to find a way around it? The simplest and best way to fix this problem might not be to unleash the SEC and the antitrust regulators on manufacturers and purchasers, but to repeal Robinson-Patman, so that the simple price of the chip conveys the full information, rather than having to be obscured with MOAP and MCP.

The argument for Robinson-Patman, originally, was that it would protect, say, small grocers like Richard Nixon's father from being under-priced by huge supermarket chains. But a) it didn't work that well, because big chains have other economies of scale besides purchasing goods, and b) the person paying the price for protecting Nixon's father is the consumer, who as a consequence of the law has reduced ability to save money by paying lower prices at the chain store. What the law has done is enrich lawyers, who get paid to help their clients dream up complex ways to charge their customers different prices without violating Robinson-Patman.

by Ira Stoll  |  Jul 23, 2010 at 12:40 pm Related Topics:  Hayek, SEC receive the latest by email: subscribe to the free futureofcapitalism.com mailing list