Question

Intel made large loyalty payments to HP in exchange for HP buying most of their chips from Intel instead of rival AMD. AMD sued Intel under the antitrust laws, and Intel settled the case by paying $1.25 billion to AMD.

Address the following in your discussion post:

• What incentive conflict was being controlled by these loyalty payments?
• What advice did Intel ignore when they adopted this practice?
  • How did the Robinson-Patman Act apply to their practice?
• Why did they ignore the advice?

Answer 1

These loyalty payments controlled the incentive conflict of exclusion. Intel made it costly for HP to buy from any of its competitors by providing the loyalty payments.  

While making this decision, Intel did not consider the effect of its planned actions on its competitors. Therefore, it ignored the advice that - if a firm has significant amount of market power, then it should consider the effect of its planned actions on its competitors before taking any action.  

The Robinson-Patman act applied to this practice as it injured the competition. As per this act, a firm should treat all its customers in a proportionately equal manner. Any promotional allowances must be informed about to all the customers and it should be available for all its customers. Also, Intel violated the anti-trust law by giving cost advantage to its competing customer.  

Intel ignored the advice because it thought that this action justified its costs. But it did not consider that this could result in an anti-trust violation as it harmed the competition.