סמינר באסטרטגיה ויזמות

Speaker: Michelle Sovinsky, Department of Economics, University of Mannheim (http://sovinsky.vwl.uni-mannheim.de

Abstract: 

Vertical restraints between upstream suppliers and downstream customers often raise anti-competitive concerns. While the extant empirical and theoretical literature focuses on static analyses of such arrangements, this paper empirically documents their effect in a dynamic environment. Our study focuses on the x86 processor industry during the years 2002-2010 which saw an incumbent, dominant upstream supplier (Intel) attempting to maintain its dominant position versus a smaller contender, Advanced Micro Devices (AMD). Intel's strategy included a controversial program, "Intel Inside," through which it offered its downstream clients rebates and subsidies that were conditioned on the volume purchased from it and, sometimes, on the volume purchased from AMD. This prompted substantial legal action by both AMD and various competition authorities around the world, finally compelling Intel to curb the scope and nature of the program. We use this observed variation to study the effect of the program on the downstream adoption of AMD's technology. Our analysis integrates several datasets, including detailed sales and prices of downstream PC products, rich details about the provisions of the heterogeneous vertical restraints imposed by Intel on various downstream clients, a comprehensive account of the various lawsuits and complaints launched against Intel during the sample period, and data on the evolution of the two firms' technology and capacity. Using these detailed data, we investigate the impact of the Intel Inside program on downstream technology adoption using both linear and nonlinear dynamic panel regression methods, delivering similar conclusions. Our results indicate that the adoption of AMD's technology by a given downstream customer responds negatively to (i) the extent of payments via "Intel Inside" to the downstream customer itself, (ii) Intel Inside payments to Dell, (iii) specific restrictions on the extent of usage of AMD's technology imposed by the Intel Inside arrangement, and (iv) a measure of Intel's technology performance.  We further find that the extent of adoption responds positively to (i) a measure of the AMD technology performance (ii) a measure of AMD's production capacity, and (iii) the extent of anti-Intel litigation. We interpret these findings as reflecting the importance of dynamics in the technology adoption process. Downstream customers need to weigh the potential benefits from adopting AMD's technology against its costs, reflected in losing benefits from the Intel Inside program. Evaluation of both the benefits and the costs crucially depends on firm's expectations regarding several strategic variables: AMD's production capacity and technological progress contrasted with that of Intel, and the future viability of Intel's vertical restraints. The empirical evidence is therefore consistent with a nuanced form of foreclosure: one not targeted at eliminating a rival, but rather at preventing it from driving a rival off of the market entirely, but rather at keeping this rival below a certain threshold of production, ensuring that it does not develop the capacity and size that would allow it to threaten the incumbent's dominant position.