Horizontal Foreclosure with Vertically Shared Large Value: Qualcomm's License Fee Contracts and Anti-Monopoly Decisions by Government in China's Smartphone Integrated Circuits Market, 2011-2014

In 2015, the Chinese competition authority announced a sanction against Qualcomm, a leading semiconductor manufacturer in the United States. 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 following were the results of the analysis; the cost of smartphone handsets with Qualcomm's chipset installed is lower than those of rival products. Meanwhile, Qualcomm's chip generates a higher willingness to pay (WTP) by engaging in transactions with increasing numbers of handset assemblers. Qualcomm did not commit vertical foreclosures since its products are not exclusive but the company expanded their customer bases and contributed to the improvement of their customers' ability to set higher WTP and higher prices for their products. However, the company committed horizontal foreclosures, as evident from the pricing of its licensing, where Qualcomm limits competition by raising the cost for rivals; this observation is consistent with the authority's determination. This form of anti-competitive conduct is most severe in the CDMA2000 market in China.