June 21, 2002
Anti-trust: Chips & Chickens
The Justice Department must be worried about having time on its hands after the Microsoft case winds down: It has cooked up a big new grand-jury investigation of the chip industry. One problem, though, is that no one can figure out what the beef is: Are chip prices too high or too low? Both conditions have prevailed lately in the volatile, commodity-like business of cranking out dynamic random access memory chips, the french fries of the computer economy. As someone quipped, if the companies are fixing prices, you'd think they'd do a better job of it.
Oh well, there will be plenty of time to find a crime later. Let's get the investigation rolling. Meanwhile, the FTC can't afford to let its cousin get all the headlines. It has inserted itself in what had been a purely private dispute between Rambus, a U.S. chip designer, and several of its customers, large overseas chipmakers who complain that Rambus patented technology they had developed jointly.
Just because a contract is unusual or exclusive doesn't mean it hampers competition. The important question is whether competition existed before the contract. The unusual terms may provide a way to avoid enforcement problems.
Consider Chicken Delight, a franchise operation that was the subject of a 1971 antitrust case. Instead of collecting a percentage of store revenue, Chicken Delight required franchisees to buy all supplies from the parent company. From a transaction-cost perspective, this was an elegant solution to a basic problem: in a cash business, it is easy to lie about sales.
Supplies made a good proxy. If business was good, a store would need more supplies, and it would be harder to cheat.
Some franchisees sued, and a federal appeals court ruled that Chicken Delight had engaged in an illegal so-called tie-in arrangement.
But, Professor Joskow notes, the franchisees didn't have to sign up with Chicken Delight in the first place. There was plenty of competition. He teaches the case as an example of bad antitrust policy.