South-Western College Publishing - Economics  
Price Fixing Among Computer Chip Makers is Not a Good Thing, According to Federal Trade Commission
Subject Tacit Collusion Among firms to Fix Pricing
Topic Market Failure, Regulation and Public Choice; Oligopoly
Key Words

Price Fixing; Price; Profit

News Story

The Federal Trade Commission (FTC) is looking into possible charges that computer chip makers, including Samsung Electronics, Hynix Semiconductor, Micron Technology, and Infineon Technologies, have conspired to raise prices of memory chips.

While these are the only firms who have disclosed that they are under investigation, they dominate the market for dynamic random access memory, or DRAM, chips. Because DRAM chips are not viewed to be as complex as the microprocessors made by firms like Intel, these chips have been subject to significant price changes over the last few years. Long-term prices have fallen, squeezing the profit margins of these firms, creating an incentive to conspire to fix prices.

The FTC is looking at emails between firms indicating the presence of collusion by the firms: "The consensus from all suppliers is that if Micron makes the move, all of them will do the same and make it stick," according to one email released by the FTC. Micron is expected to testify on behalf of the Justice Department in exchange for immunity from prosecution.

The investigation started after a sharp spike in chip prices--from about $1 per chip to about $4 per chip--occurred following a two-year decline in prices. Computer companies complained about the cartel-like behavior, and the Justice Department began investigating claims that the firms conspired to maintain a price of $3 per chip.


(Updated April, 2004)

Questions
1.

It was implied in the email exchange above that Micron Technologies was to be the first-mover in the collusion to set prices. Why would this put Micron at a competitive disadvantage relative to its competitors?

2. Collusion by firms to set prices is often referred to in the context of game theory as a Prisoner's Dilemma strategy. Explain how the Prisoner's Dilemma paradigm applies to such a situation.
3. If these firms are found guilty of collusion, would two of the firms have an incentive to merge together into one larger firm? Would that create an outcome similar to that caused by collusion? Consider the benefits of collusion, and whether a merger would accomplish the same goal.
Source John R. Wilke and Don Clark, "Prosecutors Could Seek Charges Against Chip Makers." The Wall Street Journal. 26 February 2004.

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