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Politics : Formerly About Advanced Micro Devices
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To: Bill Jackson who wrote (25073)10/20/1997 1:06:00 PM
From: nihil   of 1574868
 
RE: predatory strategy

Bill,

I think you need to look at duopoly theory (or to give Cyrix its due, triopoly theory}. Each firm seeks to maximize its own profits, given the reaction functions of its rival(s). AMD has stated its price reaction function: p(amd)= .75p(pII), presumably speed for speed. This allowed Intel to (relatively) underprice K6 with clone killer PMMX, so AMD had to abandon its original reaction function and to try to underprice PMMX. usw. As the markedly weaker rival, AMD is always forced to submit to the guidance of the master rival, while the master is able to set prices very close to those it would set in the absence of rivals (or if it had rivals which could not deliver sufficient product). In capacity terms, AMD never had a realistic possibility of taking 10 per cent share in Q3, and the results suggest that Intel achieved the sales that it had planned. Almost as if it ignored AMD. It was AMDs inability to produce parts that led to its earnings disaster, and it was Intel's problems in Japan and with flash memory that led to its 3 cent underperformance. Intel as a profit maximizer always understands that preemptive price cutting increases present sales at the expense of future sales.

Intel also understands that it cannot take any action, or even think of any action (in its internal discussions) that could reasonably be interpreted as an attempt to destroy or impoverish a rival. FTC and Digital (if it proceeds with its antitrust charges) will be able to read every internal Intel note and meeting minute about pricing in discovery. Intel must always internally and externally justify its pricing actions as reasonable and self-interested, given its assumptions about its rivals' pricing behavior. As long as it plans contingently based on its rivals' own announced prices and policy, it is safe from any accusations of predatory pricing.
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