23-6 Loyalty Payments Intel made large loyalty payments to HP in exchange for 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 billion to AMD. What incentive conflict was being controlled by these loyalty payments? What advice did Intel ignore when they adopted this practice?

Answer

The incentive conflict between HP and Intel is exclusion. Intel was giving large loyalty incentives to HP to exclude competitors such as AMD. This action by Intel is illegal because they are making it more costly for rivals to enter the chip market. This type of vertical contract is illegal in the US, therefore violating antitrust laws. The advice Intel failed to follow was: If you have significant market...