Today, Intel and AMD compete in the market for central processing units (CPUs), the microprocessors used in PCs. At the start of the computer revolution more than 30 years ago, however, Intel had a monopoly in the market for powerful (for the time!)

CPUs, and IBM was the largest company producing personal computers. IBM’s executives created a strict policy against single sourcing, buying an input from a firm that is the only producer, so IBM forced Intel to license the right to produce compatible CPUs to AMD. Over the years, nearly 20 other companies produced compatible CPUs, but they always lagged behind the power of Intel (and AMD) CPUs. Today, AMD is Intel’s only surviving competitor. AMD’s survival probably resulted, in large part, from the license Intel granted.

a. Why would IBM managers decide to use the firm’s market power to force Intel to license its technology to AMD?

b. How is IBM’s policy against single sourcing related to the holdup problem?