Pricing Decisions and The Law

Chapter
17
Pricing Decisions and the Law
by Dennis P. W. Johnson
Image copyright IgorGolovniov, 2010. Used under copyright from Shutterstock.com

• Which U.S. agencies are charged with prosecuting illegal pricing actions, and which
laws govern their inquiries?
• What is the difference between horizontal price fixing and vertical price fixing?
• What policies can a firm set in the United States regarding non-price restraints that
represent a low legal risk yet can strongly improve profits?
• When is price segmentation legally risky in the United States?
• How are the legal risks surrounding pricing policies different in Europe and other
parts of the world than in the United States?
I
t would be foolish to wait until you have invested great effort and time developing a
pricing strategy and only then ask whether the path you laid out is legal. Even though
the rules are sometimes murky, assessing legal risks needs to inform the entire process
of developing pricing strategy. The ultimate conclusion sometimes requires more detailed
analysis than you can provide yourself. Your immediate goal should be to recognize the clear
legal boundaries so that you can identify areas where you need to seek help early on as you
develop your pricing strategy. With that in mind, this chapter provides a simple overview of
U.S. federal antitrust law and identifies some constraints that it imposes on pricing decisions.1
303
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304 Chapter 17 Pricing Decisions and the Law by Dennis P. W. Johnson
Over many years now, federal antitrust enforcement has become more business-
friendly. Nonetheless, familiarity with the antitrust laws remains essential because criminal
violations can result in real jail time, significant financial penalties, or both. Federal
antitrust statutes authorize both criminal prosecutions by the U.S. Department of Justice
and civil suits initiated by the Department of Justice or the Federal Trade Commission to
enjoin unlawful behavior. Criminal fines are steep—computed with a maximum limit of
twice the amount of gain or loss—but prosecutions are reserved for the most egregious
violations, typically price-fixing schemes among competitors. Although government civil
suits may seem less of a concern, they are just as costly because they require extensive
investigations. Perhaps most importantly, though, federal antitrust laws encourage private
enforcement by rewarding successful plaintiffs with their attorneys’ fees—at defendants’
expense—and further penalizing defendants by awarding treble (triple) damages in many
cases. It’s a one-way street: prevailing defendants cannot make the losing plaintiff
reimburse them for their fees. That said, the good news is that so-called private plaintiffs
nonetheless face an uphill struggle.
The goal of this chapter is to give you a working framework for asking whether a
particular pricing scheme is likely to be challenged. Unfortunately, there are very few clear-
cut rules in the law of pricing, and a court’s inquiry is likely to be fact-intensive. Thus,
this chapter first provides a basic overview of the goals and aims of federal antitrust laws
regarding pricing to help you better understand how courts evaluate challenged pricing
schemes. This chapter then discusses several types of pricing behavior that the law has
recognized, explaining what has generally been deemed permissible and impermissible.
The Aims of the Law of Pricing

It is important to understand both what the antitrust laws seek to police and what they
do not. The general goal of U.S. antitrust law is to promote competition, not to protect
competitors. The law therefore targets pricing behavior that deprives consumers of the
benefits of competition. This is the conceptual starting point for any court evaluating a
pricing scheme. Although it is too soon to know how future administrations may change
federal antitrust enforcement, the current administration’s policy statements promise a
renewed focus not only on enhancing competition but also preventing exclusionary or
predatory conduct that may harm competition and ultimately consumers.2
Price fixing is the historical core of U.S. antitrust laws. Begin with a classic price-fixing
case: Two competitors selling the same grade of gasoline from adjoining stations agree
that they both will charge the same price. They have agreed to stop competing, with the
result that they have “restrained competition.” To judge the impact of this agreement upon
competition, courts began with a straightforward assumption: By its very nature, the effect
of an agreement to no longer compete must be to lessen competition. Drivers who need
to fill their tanks in that neighborhood no longer can enjoy the lower prices that are the
fruits of competition. This assumption became the so-called “per se standard” that courts
applied to analyze most types of price fixing. Although courts gave lip service to the notion
that only “unreasonable” restraints on competition violate Section 1 of the Sherman Act,
the U.S. Supreme Court long ago decided that an agreement to charge the same price must
fall in that prohibited category. Classic cases of price fixing, such as bid rigging, still apply
this conclusive presumption, as do cases involving market allocations, by which one com-
petitor agrees not to sell a common product in the same territory served by his competitor.
The two competitors may not offer any analysis of the actual effect that their agreement
has upon competition or claim that it is justified by its special purpose.
It has taken decades of slow economic enlightenment to expand the exceptions to this
presumption, which now largely have swallowed the “per se” rule. Those exceptions instead
are judged by examining their actual effect on competition through the “rule of reason,”
Chapter 17 Pricing Decisions and the Law by Dennis P. W. Johnson 305
which weighs all the circumstances in a detailed inquiry into the market impact of the
restraint. When the rule of reason applies, the defendant company is permitted to
demonstrate that its challenged pricing practice actually enhances competition rather than
restrains it.
Over decades of evolving antitrust analysis, most types of pricing practices now fall into
one of these two categories: per se or rule of reason. Some types of cases noted here have
been moved from the per se category to the rule of reason. Finally, the line between the
two categories is not always readily apparent. This has given rise to categories of cases that
require courts to begin with only a “quick look” using the rule of reason before inferring
anticompetitive effect, because it seems at least intuitively obvious.
For at least the past three decades, the rule of reason has been the starting point for
antitrust analysis. Even cases that at first glance involve price fixing now receive a more
careful examination under the rule of reason. Although old-fashioned, simple price fixing
remains per se illegal, courts now analyze far more types of pricing systems under the rule
of reason. As a result, what is prohibited by U.S. antitrust laws today depends in large
measure upon the impact that the particular scheme has upon competition.
Unlawful Pricing Behavior

Broadly speaking, the law recognizes four categories of anticompetitive (and therefore
prohibited) pricing behavior: (1) price fixing, (2) non-price vertical restraints, (3) exclu-
sionary and predatory pricing, and (4) price and promotional discrimination. Each will be
discussed in turn in the next sections.
PRICE FIXING
Price fixing may be horizontal (by competitors selling to common customers) or vertical
(by firms in the same chain of distribution). Manufacturers of competing products that
both sell to distributors (horizontal competitors) may not agree to set or maintain the
price or terms of sale of common products. This is the clearest single example of conduct
that will land you in jail.
Vertical price fixing (“resale price maintenance”) involves an agreement between a
manufacturer and its distributors to sell at a stated price. Unlike horizontal price fixing,
these vertical pricing agreements are not illegal per se, as described later in this chapter.
The first conclusion is that despite the language of Section 1 of the Sherman Act, not every
“contract, combination, or conspiracy” is one considered “in restraint of trade” without
further analysis. Courts decide which agreements restrain trade rather than promote it by
applying the rule of reason and determining that the economic impact of the particular
agreement contributes more to competition than it takes away.
Horizontal Price Fixing and Other Agreements

Competitors cannot agree upon prices. However, Section 1 has never prohibited unilateral
decisions to fix prices. You can refuse to sell to anyone who declines to pay your price. But
Distributor A cannot agree with Distributor B (its competitor) on the price at which both
will sell to Retailer C. Nor can they agree that neither will sell to Retailer C. Although not
formally “price” fixing, other non-price agreements among competitors to boycott suppliers
or to refuse to deal with particular customers are likewise illegal per se. The same is true
of agreements not to compete in certain geographic areas.
Agreements can be proved in several ways. Courts do not require a written
contract between competitors (“direct” evidence) to demonstrate a collective agreement.
Price-fixing conspiracies, like any other type of conspiracy, can be proved by a mosaic of
indirect (“circumstantial”) evidence without an explicit agreement. Courts even may
infer an agreement where entities are imitating their competitors—known as “conscious

parallelism”—if additional factors are present. These additional factors may include
circumstances where the pricing behavior would be against an entity’s self-interest if acting
alone, but beneficial if acting in concert and where the given entities had been in communi-
cation or otherwise had the opportunity to agree (“collude”). One competitor’s conscious
following of another’s price alone is insufficient to demonstrate a conspiracy.
The law is relatively straightforward: Competitors cannot agree to fix prices. When
courts pronounce these schemes per se illegal, what they mean is that the agreement
without anything more violates the law; no effect has to be demonstrated. Bookseller A
cannot call up Bookseller B down the street and set the price that both will charge for
the same book. Both are free to charge the publisher’s list price; but they cannot, for
example, agree to discount the publisher’s list price to a specific amount, or by a specific
percent. This includes agreements, like those described previously, that can be proven only
indirectly. In addition, per se illegal agreements are not limited to agreements between
competitors to fix prices; they also include agreements to fix terms affecting price, such as
warranties, discount programs, financing rates, and production quotas.
Vertical Price Fixing

The law as it pertains to vertical price fixing, including resale price maintenance, is more
nuanced. Courts test the legality of agreements to fix prices within the supply chain under
the rule of reason by, as described previously, balancing the anticompetitive effects of
a given scheme against its pro-competitive effects. Vertical agreements to set maximum
resale prices (“ceiling” prices) have been tested under the rule of reason for more than
a decade; yet agreements between manufacturers and dealers to set minimum prices
(“floor prices”) were subject to the per se rule until 2007. The latter agreements usually
are addressing discounting. By allowing manufacturers to reward dealers for providing
point-of-sale services (for example, knowledgeable salespersons, showrooms, and higher
inventories), these agreements enhance interbrand competition by eliminating the
advantages that free-riding competitive retailers otherwise enjoy. Remember, however,
that the rule of reason is a balancing test—the positive effects on interbrand competition
resulting from agreements to set resale prices must, and will, be balanced against any
negative effects on competition that the agreements might also engender.
Manufacturers also may unilaterally set either maximum or minimum resale prices by
announcing their policies and refusing to sell to any reseller that will not comply, so long as
there is no agreement between the parties. Resellers may lawfully adopt similar policies as
well. Unilateral resale pricing policies, in which compliance is truly voluntary, are legal and
are not even tested for anticompetitive effects under the rule of reason.
However, any and all suggestion of agreement must be avoided, and the law can
prove tricky in this respect. Not only must obvious forms of agreement, like contracts,
be avoided, but behavior that is less intuitively indicative of agreement must be avoided
as well. For example, suppliers wisely simply choose to cease selling to a noncompliant
reseller without warnings, threats, or probationary periods because those techniques
suggest that the supplier has coerced an agreement with the reseller. In other words, the
policy must be implemented on a “take it or leave it” basis. Conversely, resellers should
avoid any communication that may be taken as an assurance that they have agreed to
comply with the supplier’s demand.
Genuine consignment, agency, and brokerage arrangements allow suppliers to dictate
resale prices unilaterally because they retain title. Supplier and reseller alike must maintain
a bona fide consignment to prevent the arrangement from being perceived as per se vertical
price fixing. Courts examine whether the reseller has assumed the risk of loss and other indicia
of ownership of the product, the supplier’s purpose in adopting these systems, as well as
whether the reseller willingly entered into the arrangement rather than being coerced into it.
Manufacturers may provide suggested resale prices to dealers in writing or through

advertising to the dealers’ customers can even provide preticketed resale prices on the
product. In these instances, the dealers must decide independently whether to follow
them but also must remain free to reject them. The manufacturer may encourage dealers,
but some arrangements will require a jury to decide whether the supplier crossed the
line between persuasion and coercion. Thus, risk-averse manufacturers may choose less-
aggressive approaches. Tactics that the reseller’s competitor views as coercive but do not
yield some sign that the reseller assented are not signs of agreement. A manufacturer in
theory may even terminate a dealer in response to complaints that the dealer has not
observed “suggested” resale prices, but lawsuits that require trial to decide whether
the manufacturer’s action was truly unilateral rather than the product of its agreement
with other complaining dealers are high prices to pay and result in long periods of
uncertainty. An illegal agreement between manufacturer and distributor to maintain
resale prices requires proof that the manufacturer sought the distributor’s acquiescence
or agreement and that the dealer somehow communicated its assurances in response, even
if by a lesser means than an explicit agreement.
Resale Price Encouragement

These techniques are also called vertical non-price restraints. Rather than directly dictating
particular resale prices to their dealers, suppliers can induce their adherence to a desired
resale scheme through various incentives. Such incentive schemes are judged under the rule
of reason.
These incentives often take the form of advertising allowances. For example, many
suppliers use Minimum Advertising Price (MAP) programs. Under a MAP program, a
retailer must agree to a supplier-determined lowest price at which the supplier’s product
may be advertised to receive advertising allowances from the supplier.
Similarly, a manufacturer may:
• Provide rebates directly to its dealer’s customers or even reimburse dealers who
paid it to their customers, if the dealer remains free to set its own price
• Provide promotional allowances to reduce wholesale prices, if the dealer remains
free to determine whether to reduce its resale price
• Offer dealer assistance programs that require the dealer to pass a manufacturer’s
price reduction down to the dealer’s customers, if the dealer continues to set its
own prices
• Use cooperative advertising programs that deny reimbursement to dealers who
failed to conform to the manufacturer’s directions to include its suggested retail
price or no price at all
• Agree with one dealer that the prices that the manufacturer charges will be no
higher than those that it charges to other similarly situated dealers
• Use voluntary national account pricing among its dealers, so long as independent
dealers remain free to solicit those accounts outside the national account program
However, manufacturers may not impose a price maintenance scheme together with
territorial or customer restrictions because the latter restrictions are per se illegal.
NON-PRICE VERTICAL RESTRAINTS

Manufacturers also may use various non-price restraints on dealers to control the
marketing of their products and combat against discounting and dealer free-riding. These
include the customer or territorial restrictions or product restrictions discussed later in
this chapter, which are evaluated under the rule of reason applied under Section 1 of the
Sherman Act. Courts uphold such a restraint if its pro-competitive effect on interbrand
competition outweighs its anticompetitive effect on intrabrand competition. In addition,
when the seller imposing such restraints enjoys substantial market share, plaintiffs may
challenge the restraint under a second antitrust law—Section 2 of the Sherman Act.
Section 2 of the Sherman Act makes it unlawful for a company to “monopolize, or attempt
to monopolize,” trade or commerce.
Customer and Territorial Restrictions

Sellers may mandate that dealers sell their product only to certain customers or only
within certain geographic territories. Courts will uphold these arrangements if the
pro-competitive effect on interbrand competition outweighs the anticompetitive effect on
intrabrand competition. These arrangements are rarely invalidated, so long as they are
purely vertical. Different standards apply than those relating to vertical price restrictions,
although the practical effect of both price and non-price restrictions is similar.
The risk of running afoul of the law arises when a seller enjoys a substantial market
share. The greater the market share, the greater the potential for an anticompetitive effect
from customer or territorial restrictions. Such sellers are advised to consider methods to
control marketing short of outright restrictions. For example, a seller might consider imple-
menting a “primary area of responsibility” arrangement, wherein its dealers are permitted to
sell outside their primary area but must exercise their best efforts to increase sales within it.
Quotas can be implemented to give these programs teeth. Another arrangement that sellers
may use is known as the “profit passover” in which sellers permit dealers to sell outside
their designated primary territory but require that they split revenue with the dealers in
those other territories. These are both effective ways to minimize discounting that stems
from free-riding on the marketing efforts of other dealers.
Product Restrictions
Refusals to Supply. Generally speaking, suppliers may refuse to sell to whomever they choose—
manufacturers or customers—so long as the decision is not part of a horizontal agreement
with competitors or part of a strategy to acquire or maintain a monopoly. Thus, for example,
a supplier may lawfully agree to sell only to a particular dealer within a given territory.
Exclusive Dealing Agreements. Manufacturer-imposed product restrictions on dealers
are also typically upheld. Manufacturers use “exclusive dealing contracts” to prevent
retailers from purchasing a certain type of product from other manufacturers. Courts
widely recognize that these agreements have the pro-competitive effect of creating
dedicated dealers that actively promote the seller’s product. For example, they provide
attractive stores, well-trained salespersons, long business hours, sizable inventory, and
warranty plans. These agreements also simultaneously prevent discounters or online
sellers from free-riding off those dealers. Courts generally uphold these agreements
when they result in retailers providing extra services to customers. The legality of an
exclusive dealing agreement is most likely to be questionable—as is true for most non-
price vertical restraints—where manufacturers enjoy large market share. For example,
courts are not likely to uphold an exclusive dealing contract by a powerful manufac-
turer that results in competing manufacturers being denied access to enough retailers
to sustain a viable amount of sales. Such manufacturers are advised to implement less
legally risky methods of creating dedicated dealers, such as requiring dealers to purchase
minimum quantities of their product.
EXCLUSIONARY OR PREDATORY PRICING

Other pricing arrangements involve various means of using a manufacturer’s market
power to either force additional sales or drive competitors out of the market.
Tying
In a tying arrangement, the seller conditions the sale of one product (the tying product) on
the simultaneous purchase of a second, usually less-desirable product (the tied product).
Several different antitrust statutes apply to these arrangements, and services, franchises,
and trademarks can also serve as the tying “product.” Older cases treated tying arrange-
ments as per se illegal, but the test that courts now apply to most arrangements closely
resembles the rule of reason. The seller must have sufficient market power with respect
to the tying product to restrain free competition in the market for the tied product, and
must use it to coerce the sale of the tied product. The tying arrangement must affect a “not
insubstantial” amount of commerce. The seller must have enough power to force the pur-
chaser to do something that he or she would not do in a competitive market, but it does
not need to have monopoly power. Even a seller with a patented product is not assumed
to have market power. In addition, just what dollar amount of commerce constitutes a
“not insubstantial” amount is determined on a case-by-case basis. Cases in which the seller
demands an exclusive dealing relationship with the buyer or forces its full line of products
on the buyer apply similar analyses.
Predatory or Below-Cost Pricing

Predatory pricing is one means by which a seller may use its monopoly power unilaterally
to preserve or attempt to gain a monopoly. Both are violations of Section 2 of the Sherman
Act that require definition of the “relevant” market in terms of the products and geographic
boundaries. A seller that already has monopoly power may not maintain it through
anticompetitive conduct, as distinguished from robust competition. The line is not clearly
drawn, and courts attach conclusory labels to distinguish “exclusionary conduct” from
mere “vigorous competition” by examining whether the seller intentionally acts without
other business justification to exclude competitors from the market, with the likely effect
that monopoly power is maintained, enhanced, or acquired.
Pricing below the seller’s cost of production for the purpose of eliminating competitors
in the short run is prohibited. However, courts explicitly recognize that price cutting to
increase business is classic competition; what distinguishes predatory pricing is the seller’s
dangerous probability of being able to recoup its short-term losses by long-term profits
after it has driven a competitor out of its market. This requires pricing below marginal cost
or average variable cost, after first determining which costs are incremental rather than
fixed. The analysis is further complicated by the need to replace accounting labels with
principles of economics. The federal courts of appeals have applied various and sometimes
conflicting analyses of these issues. In addition to defining what the predatory act is, courts
struggle to measure its scope and duration, the predator’s financial ability to endure short-
term losses and the whether the market is one that will sustain monopoly pricing after the
victim has been driven out. These cases often involve claims that what the seller defends
as promotional or temporary discounts are in fact maintained for sufficiently longer periods
of time to become predatory, but no firm tests of these principles exist. Price squeezes
invoke power that the predator has in one product that is an input or component and it
sells at a supra-competitive price in one market while charging an unjustified lower price
for the finished product in a second market. Under current cases, the defendant seller must
have either monopoly power or a dangerous probability of it in the downstream market
in which the plaintiff competes.
PRICE AND PROMOTIONAL DISCRIMINATION

When Congress first passed legislation directed at price discrimination, World War I had
not yet begun. In 1936, the Robinson-Patman Act amended Congress’s first effort, but
it left businesses with a counterintuitive, if not outright competitively harmful, law that
requires some patience to traverse. Congress has never fixed this statute. The good news is
that only some of the practices prohibited by this Act may be criminally prosecuted, and
that has not happened in about the last fifty years.3 In fact, the Department of Justice has
essentially left enforcement to the Federal Trade Commission, and its enforcement activity
has been minimal. Plaintiffs also have a lower likelihood of succeeding with these claims,
but that is no guarantee that you will not be sued and exposed to the high cost and serious
distraction of a competitor’s or customer’s suit. Thus, you must still understand and com-
ply with the civil prohibitions that your customers or competitors may try to use against
your promotional and other pricing activities.
The Robinson-Patman Act prohibits:
• Sellers from discriminating between different buyers when it adversely affects
competition, unless the sellers are matching a competitor’s price (“meeting
competition”)
• Buyers from knowingly inducing or receiving such a discriminatory price
• Sellers from granting and/or buyers from receiving certain commissions or
brokerage fees except for services actually rendered
• Sellers from providing or paying for promotion or advertising in a product’s resale
unless they offer equivalent terms to all competing buyers
Some basic coverage issues often lead to the failure of those few private suits attempted
under this law. Discrimination of course requires more than one sale. Any prohibited sales
must result in injury to competition (meaning the process of competition, not just lost
sales to a single competitor). Competition is assessed based on what “level” is involved:
competition among sellers is labeled “primary line” competition; competition at the buyer’s
level is “secondary line” competition. In some cases, the distinction between the two levels
determines whether the pricing action violates the Act. Both sales compared and chal-
lenged must be made in interstate commerce—at least one of the sales involved must pass
from one state to another. The connection to interstate commerce for Robinson-Patman
cases is applied more narrowly than in price-fixing cases.
Price discrimination requires that a single seller sell two products to two purchasers at
different prices. Services are not commodities. The items must be of “like grade and quality”
based upon characteristics of the product itself rather than brand names and labels, packaging,
or warranties. Physical differences in products place them outside this test.
The price difference must cause competitive injury, another thoroughly litigated concept.
The injury may more than a reasonable possibility or a probability. It either (a) may substan-
tially lessen competition or tend to create a monopoly or (b) injure competition with anyone
who grants or knowingly receives the benefit or with customers of either of them. As has
been the case with other antitrust concepts, the competitive injury requirement has shifted
to a more objective predatory pricing standard. Whereas older cases focused more upon the
seller’s intent, since a 1993 case, the Supreme Court has rejected a purely subjective intent
test and replaced it with the cost-based test that is applied to predatory pricing cases under
Section 2 of the Sherman Act (that also prohibits predatory pricing). There is still plenty of
room for disagreement and litigation: to perform this test, the Supreme Court only required
use of “an appropriate measure” of the seller’s costs.4
As noted previously, injury to competition may be measured not only at the seller’s
own level (primary line), but also at the buyer’s level (secondary line). The latter requires
competition between favored and disfavored purchasers, who must compete in the same
geographic market. You might reasonably expect that to prove injury to competitors, a
plaintiff would need to prove that it lost sales; but often the inference of injury is enough.
It may rest on a substantial price difference over a substantial period of time on a product
that is resold by sellers involved in “keen” competition. A challenged company may defend
its pricing scheme by rebutting this inference of injury to competition via showing that the
very customers who might be inferred to have suffered declines in sales and profits instead
have prospered.
As if these undefined tests were not already hard enough to apply, the Supreme Court
has required plaintiffs who bring such lawsuits to begin them with allegations that go
beyond accurately stating the required legal conclusions put in terms of correct labels; they
must allege sufficient facts at the outset to at least suggest they will be able to prove the
required elements. However, even though it is unlikely that your company will be sued for
violating this statute and lose, the uncertainty of these tests make it difficult to decide for
yourself whether a price that you want to charge is legal. In addition, the different federal
circuits do not all agree on how to decide key issues like those previously discussed. Thus,
even if you asked a lawyer to assess the legality of your prices, the answer may come out
differently in different geographic areas of the country simply because different courts
apply different standards. Even beyond this, the Supreme Court has left unresolved basic
uncertainties such as whether the injury to be proved must be an actual injury, rather than
the inferred injury that has been sufficient historically.
International Antitrust Enforcement

In addition to enforcing U.S. antitrust laws against firms whose conduct has domestic
competitive impact, the Department of Justice’s Antitrust Division currently emphasizes
the importance of consistent enforcement of common antitrust prohibitions, so that firms
operating in the global economy will be evaluated under consistent standards.5 This
requires a level of coordination with other countries’ laws that prohibit anticompetitive
actions similar to those prohibited under U.S. law. For example, in the European Union (EU),
Article 81 of the Treaty of the European Communities (the European Community’s compe-
tition law) prohibits cartels and vertical agreements that restrain competition within the
common market. The statute also prohibits price fixing and market sharing, but it exempts
collusion that promotes distributional or technological innovation if the restraints are
not unreasonable (“disproportionate”) and do not risk eliminating competition. Article 82
prohibits dominant firms from abusing their position by price discrimination and
exclusive dealing, similar to U.S. antitrust laws. EU law prohibits mergers that might
significantly impede effective competition, similar to U.S. law. Canada and Japan have
similar provisions.
Intel Rebates Case Exercise

On July 28, 2007, the European Commission (EC), an antitrust authority, accused Intel Corp.
of abusing its market dominance over rival Advanced Micro Devices (AMD) in the chip
market. After conducting an investigation, the European Commission leveled a € 1.06 billion
fine against Intel on May 13, 2009. Intel felt it had followed the law and believed the claims
against it were false. As such, Intel chose to appeal to the European Court of First Instance.
Read the following reference articles concerning Intel and the European Commission’s
investigation (listed under item 10) and address the following questions:
1. What were the allegations against Intel regarding its rebate program?
2. What were the positive commercial purposes of Intel’s rebate program in terms of
generating sales for Intel?
3. What were the positive and negative commercial aspects of Intel’s rebate program
for its customers?
4. What were the negative commercial aspects of Intel’s rebate program for its
competitor, AMD?
5. Was Intel’s rebate program an abnormal practice for industrial firms?

6. In light of your research and analysis, what advice would you provide a CEO of
an industrial firm regarding rebate programs specifically, and price structures that
cannot be matched by competitors in general?
7. When should a firm use a legal price structure that cannot be matched by
competitors, and when might it avoid such a price structure even if it was
anticipated to improve profits?
8. Discussion Question: How would you analyze whether to run different programs
in the United States as opposed to areas governed by EC standards?
9. Discussion Question: To make the decision for the U.S. market, would you need to
answer the same questions given previously? Explain why or why not, and if not,
what questions would you want to answer?
10. Intel Case References
a. Don Clark, “Intel to Face Antitrust Charges in Europe.” Wall Street Journal
(July 27, 2007): B-4.
b. “Intel in Euro-Land,” Wall Street Journal (July 31, 2007): A-14.
c. Jennifer L. Schenker, “Intel’s in Hot Water in Europe,” Business Week
Online (September 2007); http://www.businessweek.com/globalbiz/content/
sep2007/gb20070921_968706.htm?chan5top1news_top1news1index_
businessweek1exclusives (accessed on August 21, 2010).
d. Charles Forelle, “Intel Confronts EU Antitrust Allegations; AMD Says Chip
Giant Used Illegal Discounts, Rebates to Fix Market,” Wall Street Journal
(March 12, 2008): B-12.
e. Don Clark and John R. Wilke, “FTC Begins Formal Inquiry into Intel’s Chip
Pricing; Case over Incentives to Makers of PCs Could Benefit AMD,” Wall
Street Journal (June 7, 2008): A-3.
f. Charles Forelle, “EU Says Intel Paid to Hinder AMD Products,” Wall Street
Journal (July 18, 2008): B-6.
g. Nikki Tait and Richard Waters, “Brussels accuses Intel of retailer pay-offs,”
Financial Times (July 18, 2008): 21.
h. “Business: A billion-euro question; Intel’s antitrust ruling,” The Economist 391,
No. 8631 (May 2009): 70.
i. Charles Forelle and Don Clark, “EU Shows Its Cards Behind Intel Case—In Emails,
PC Makers Feared Retaliation by Chip Giant; ‘Best Friend Money Can Buy,’ ”
Wall Street Journal (September 22, 2009): B-1.
j. Nikki Tait, “E-mails central to EU’s case against Intel,” Financial Times
(September 22, 2009): 20.
Notes
1
State antitrust laws typically mirror the federal ones discussed here. Differences among states can be
significant, and you should assume that any product sold in the United States is subject to one or more
state laws. International antitrust laws are beyond the scope of this chapter. Articles contained in the
Treaty of the European Communities are comparable to the Sherman Act prohibitions of price fixing
and other “concerted” activity among competitors and monopolization (the EC terms are “abuse . . . of
a dominant position within the common market”). However, the results reached by the EC in specific
cases—for example, applying these provisions to rebates and imposing stiff fines on Intel in May 2009
for rebates in exchange for future exclusive purchases—may be more harsh than U.S. rulings on the same
facts would be.
2
Christine A. Varney, Assistant Attorney General, Antitrust Division, U.S. Department of Justice; “Vigorous
Antirust Enforcement in this Challenging Era,” Remarks as prepared for the U.S. Chamber of Commerce
on May 12, 2009 (withdrawing a portion of a Bush administration policy statement that provided greater
latitude to dominant firms to avoid so-called over-deterrence).
3
The criminal provisions include charging “unreasonably low prices for the purpose of destroying competition
or eliminating a competitor,” but the Supreme Court has interpreted that to prohibit below-cost prices
implemented with predatory intent. United States v. National Dairy Products Corp., 372 U.S. 29 (1963).
Criminal provisions also prohibit territorial price discrimination “for the purpose of destroying
competition or eliminating a competitor and failing to make discounts, rebates or allowance available
to the recipient’s competitors in the sale of goods of “like grade, quality, and quantity.”
4
Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). Lower courts have used different
measures of costs for this test, including average variable and marginal costs.
5
Christine A. Varney, Assistant Attorney General, Antitrust Division, U.S. Department of Justice; Remarks as
prepared for the 36th Annual Fordham Competition Law Institute Annual Conference on International
Antitrust Law and Policy (September 24, 2009).

Pricing Decisions and The Law

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Chapter

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The Aims of the Law of Pricing

Unlawful Pricing Behavior

Horizontal Price Fixing and Other Agreements

infer an agreement where entities are imitating their competitors—known as “conscious

Vertical Price Fixing

Manufacturers may provide suggested resale prices to dealers in writing or through

Resale Price Encouragement

NON-PRICE VERTICAL RESTRAINTS

Customer and Territorial Restrictions

EXCLUSIONARY OR PREDATORY PRICING

Predatory or Below-Cost Pricing

PRICE AND PROMOTIONAL DISCRIMINATION

International Antitrust Enforcement

Intel Rebates Case Exercise

5. Was Intel’s rebate program an abnormal practice for industrial firms?

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