Daniel A. Crane, professor of law at the University of Michigan Law School, drafted an analysis of the FTC’s case against Intel (based on the requirements of the Sherman Antitrust Act) and found it lacking. Crane argues that:
From the face of the FTC’s complaint, it is unlikely that the case will withstand scrutiny in the courts. While appearing to accept that, in at least some contexts, it may have to prove that Intel’s loyalty rebates resulted in predatory pricing, Complaint Counsel argue that the measure of cost used in their predatory pricing analysis must include a share of Intel’s fixed sunk costs on every CPU or GPU it sells. Such an effort to force a manufacturer to cover a share of sunk costs on every unit sold has been widely rejected by the courts, and for good reason. Consumers’ interests would be seriously harmed by a rule requiring producers to price based on an arbitrary sunk costs allocation formula rather than upon the changing demands of the marketplace.
In the first section of this paper, I discuss the importance of using a cost- price test to decide the legality of all forms of unilateral discounting or rebating by dominant firms. Without such analysis, it is impossible to determine whether the supposedly thwarted competitors fell victim to the dominant firm’s misconduct or to their own inefficiency.
In the second section, I show why courts have used an incremental or marginal cost test for predation claims rather than requiring the defendant to cover fixed costs, as the Complaint Counsel now suggest. One of the key intuitions behind this approach is that it would be suicidal for a firm to follow a self-imposed rule of recouping a pro rata share of sunk costs on every unit it sells. Sunk costs are often incurred in research and development or production functions that serve many different products or potential products at once, and allocating these costs among various product lines in a “pro rata” way is simply not something that businesses can or should do. Further, businesses make real-world pricing decisions based on their competitive position in the marketplace and the costs of producing further units, not based on their bygone costs.
Crane notes that the paper was funded by the Intel Corporation, but the views expressed were solely his own.
The full article can be downloaded here: Dan Crane- Predation Analysis and the FTC’s Case Against Intel