Horizontal Foreclosure With Vertically Shared Large Value: Qualcomm’s License Fee Contracts and Anti-Monopoly Decisions of Competition in the Smartphone Integrated Circuits Market of China, 2011–2014

Abstract

The Chinese competition authority's sanction against Qualcomm, a leading semiconductor manufacturer in the United States, drew the world's attention. This study investigates whether Qualcomm's pricing strategy limited competition with its rivals. The study estimated two demand functions for handsets and integrated circuit (IC) chips, as well as the marginal cost of smartphones. It then factored in the price of IC chips. Based on the estimated prices of chips and demand parameters, the study identified the competitive relationship regarding the IC chips at the product level. The study found following nature; the cost of smartphone handset that installed Qualcomm's chipset is lower than that installed its rivals' products due to a license fee. Meanwhile, Qualcomm's chip generates a higher willingness to pay via transactions with increasing numbers of handset assemblers. Qualcomm did not commit vertical foreclosures since its product is not exclusive, instead, it increased number of customers and WTP and higher prices of their products. However, it committed horizontal foreclosures, as evident from the pricing of the license fee, where Qualcomm limits competition by raising the cost for rivals; this observation is also consistent with the authority's judgment. This anti-competition conduct is most severe in the CDMA2000 market in China. A counterfactual simulation shows that the reduction of the license fee by 35 percent will reduce the cost difference and expand the market substantially, both Qualcomm and rivals increase supplies. Handset assembler who integrated chip design installed Qualcomm's product presumably to reduce payment for license fee.