“Ruining a perfectly good oligopoly”
In the world of controller microprocessors for PCs, there are only two real players. Intel has roughly four-fifths of the market, while rival Advanced Micro Devices (AMD) has around one fifth. And over the past year, AMD’s share has risen by several percentage points and Intel’s has declined correspondingly. (Note that in the larger segment, semiconductors in general, teher is far more competition.)
Up until now, Intel has been able to charge a little more for its chips, thanks to brand recgnition and peceived quality) , while AMD has had to charge less. Perceived differnces in technology have faded over the past few years, and AMD has staretd winning performance comparisons..
Until now, Intel has suffered AMD ‘s presence as an unpleasant necessity, a way of avoiding antitrust challenges. Both companies made money (AMD less so) and they competed with discretion. But Intel, with sagging results and loss of market share, has decided to challenge AMD pricing with cuts of its own. The result has been a downward spiral, as noted by an article (“Chipping Away at Tech Prices”, 7/16/06) in US News & World Report.
The article notes:
In an attempt to stem a slow loss of market share, Intel has deeply discounted what computer manufacturers pay for many of its existing processors. AMD has been forced to cut prices as well. And further cuts could be coming, analysts say. That means consumers in the market for a new computer could soon get even bigger bargains.
Price cuts are lower by 17% to 53% compared to prices earlier this year. Some price sparring is common in this market, but most commentators think that these cuts are extraordinary and damaging to both firms.
The price war its hurting both companies’ bottom lines, much to the delight of the PC manufacturers (Dell, HP, and the rest) who buy from these two. In addition, both companies are already overloaded with excess inventory, further hurting prices. One major factor is that newer advances in speed and technology are less and less critical to end users. Yes, servers or high-end game boxes need even more speed, but the average home or office user can live without the latest fastest chip.
The question is whether Intel’s new dual-chip technology, replaing the Pentium line, will make a difference. It may not have a real impact until Microsoft (finally!) introduces its new Vista operating system sometime in 2007, presumably one that wlll consume even more processing cycles even for simple jobs. But AMD isn't standing still, either.
The article quotes Charlie Glavin . managing director of Needham & Co., as saying that “he doesn't quite understand why ‘Intel and AMD are content to spoil a perfectly good oligopoly’ with this price war.
Both AMD and Intel seem intent on racing to the bottom, and their share prices are taking a beating. The great advantage of an oligopoly is the ability to have an unspoken "genrtleman’s agreement” about price levels, with no desperate wild card small player being able to disrupt the equilibrium.
In this case, Intel is the disruptor, and both companies have the prospect of losing millions of rthe sake of a few percenatge points of makrte share. Intel’s gamble is that AMD, with less of a financial cushion and narrow margins, will be hurt more by the price war, and may be forced to retreat on the R&D front, where AMD has been outpacing Intel.
6:47:20 PM 
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