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Abstract:
This paper studies the impact of vertical restraints in the x86 processor industry, where a dominant upstream supplier (Intel) competes with a smaller contender, Advanced Micro Devices (AMD). During the studied period, Intel’s strategy included a controversial program, Intel Inside, through which it o¤ered downstream clients rebates and subsidies that were conditioned on the volume purchased from it and, sometimes, on the volume purchased from AMD. We document the manner by which such restraints interact with the dynamic process of downstream technology adoption. Our results indicate, first, that Intel’s restraints were binding: restrictions imposed on a downstream client reduced the rate of its AMD adoption. Nonetheless, we also find that the adoption of the AMD technology by a given downstream client was negatively affected by restrictions imposed on other clients. Furthermore, adoption was an increasing function of both the intensity of antitrust litigation against Intel, and AMD’s production capacity. These results highlight that a downstream client considers whether to adopt AMD’s technology, in part, based on its perception regarding this supplier is ability to expand its capacity and meet high levels of demand in the future. The client may therefore be discouraged from adopting the AMD technology as a consequence of vertical restrains imposed on other clients, if those imply that AMD.s cash flow and investment opportunities would be limited. The client may, analogously, be more likely to adopt if mounting litigation implies that Intel’s restraints may soon be removed. Taken together, our results suggest that competition authorities need to pay particular attention to market dynamics and to their implications for the channels via which vertical restraints affect competition.