Transcript Margin squeeze strategies in the Telecom sector : a

Margin squeeze strategies in the Telecom
sector : a comparative analysis of US and
European competition case-law
Frédéric MARTY
CNRS Fellow
Research Group on Law, Economics and Management
Innovation in Network Industries : accounting, economic and regulatory
implications
Innovation & Regulation Chair
Paris, March 16th, 2011.
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 According to the OECD, a “margin squeeze” is an
exclusionary abuse of dominance that arises when a
vertically-integrated monopolist sells an upstream
bottleneck input to rival firms that also compete in a
downstream market with the monopolist in the provision
of a downstream product.
 If the price of an essential input is higher than the retail
price, the dominant firm can squeeze its rivals.
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A model of margin squeeze (OECD, 2009)
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The margin squeeze according to the EU
competition case law
A margin squeeze is observed when the spread between price
at which a vertically integrated monopolist sells the
downstream product and the price at which it sells the
upstream bottleneck product to its rivals is not sufficient to
allow an efficient downstream rival to effectively compete
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A transatlantic divide in competition policy

Margin squeeze as an autonomous abuse of dominant
position (Europe)
 A rejected concept in US Antitrust Law
Sidak J.G., (2008), “Abolishing the Price Squeeze as a Theory of
Antitrust Liability”, Journal of Competition Law and Economics, 4(2),
pp.279-309.
European and US conflicting views
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The margin squeeze test (DT case, access to the
telecommunications local loop for Internet
providers)
“There is an abuse of a dominant position where the wholesale prices
that an integrated dominant undertaking charges for services
provided to its competitors on an upstream market and the prices
it itself charges end-users on a downstream market are in a
proportion such that competition on the wholesale or retail
market is restricted”
Case 2003/707/EC, May 21th 2003 – Deutsche Telekom, §106
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
In DT, the spread was negative in a first
period
(e.g.
upstream
price
>
downstream price) and “not sufficient” in
a second one (§102)
“A margin squeeze exists if the charges to
be paid to DT for wholesale access are so
expensive that competitors are forced to
charge their end-users prices higher than
the prices DT charges its own end-users
for similar services”
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
A margin squeeze could also arise since the spread
between upstream and downstream prices “does not allow a
competitor which is as efficient as the undertaking to
compete for the supply of those services to end user”.

Such insufficient spread could either mean that the
competitor could only operate at a loss on the retail
market, or “at reduced level of profitability”
Court of Justice, case 52-09, February 17th, 2011,
TeliaSonera, §32-33
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The European treatment of margin squeeze cases
sharply contrasts with the US one.
 According to Grimmes (2010), the Linkline decision of the US
Supreme Court (2009) constitutes, considering the European
competition authorities in DT, the higher point of divergence
between US and European competition policies.
 The same phenomenon as the Essential Facilities Doctrine : a
concept built from US case-law (resp. Terminal Railroad, 1912 and
Alcoa, 1945), finally extensively used in Europe and rejected by
US Antitrust (cf.Trinko, 2004)
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Linkline (2009) : a very similar case (ADSL), a very
opposite decision
 The Supreme Court rules “if there is no [antitrust] duty to deal at
the wholesale level and no predatory pricing at the retail level,
then a firm is not required to price both of these services in a
manner that preserves its rival’s profit margin” (§1120)
 According to the Supreme Court, the margin squeeze does not
have to be considered as a violation of the Section 2 of the
Sherman Act by itself.
 It is necessary to prove an excessive pricing at the wholesale level
(if a duty to deal arise from antitrust law) and a predatory pricing
at the retail one.
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Two issues to underline



Some economics about margin squeeze strategies

A theoretical explanation of such transatlantic divide : Chicago vs Freiburg
We do not consider in this presentation the issue of the interaction between sector
specific regulation and competition law, which has also a strong influence on the
transatlantic divergences
In a nutshell :
 If a sector specific regulation exists, no room for Antitrust law in the US case
 In Europe, even if the upstream price was approved by the regulator, the
dominant firm could infringe article 102 TFEU, as soon as the firm did not use
its room for manoeuvre to adjust its retail price in order to prevent the
squeeze
An economic analysis
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
The margin squeeze at the crossroad of different
abuses (Spector, 2008)
1.
2.
3.
4.

Excessive pricing at the upstream level
Predatory pricing at the downstream one
Price discrimination
An abuse on its own (by the interplay of the two prices)
The economic appraisal of margin squeeze
1.
2.
3.
4.
The no economic sense test
The as efficient competitor test
The consumer welfare test
The sacrifice test
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The no-economic sense test
o
According to the Chicago argument, the upstream
monopolist has no incentive to evict its downstream
rivals (single profit theorem)
o
The post Chicago synthesis and the squeeze rationality
1. Raising rival cost strategies
2. Protecting upstream monopoly power by leveraging
a) Preventing downstream competitors entry into upstream one
b) Depriving potential competitors on the upstream market from
outlet on the downstream one
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The “as efficient” competitor test
o
o
to protect competition not competitors
to consider dominant firm costs (legal certainty)
o
An inflection in the European decisional practice from DT (October
2010) to TeliaSonera (February 2011)
“Where an undertaking introduces a pricing policy intended to drive from the
market competitors who are perhaps as efficient as that dominant undertaking
but who, because of their smaller financial resources, are incapable of
withstanding the competition waged against them, that undertaking is,
accordingly, abusing its dominant position” (TeliaSonera, §40)
When incumbent cost level is “specifically attributable to the competitively
advantageous situation in which its dominant position places it” ( TeliaSonera,
§45)
A notion of potential comparable efficiency (cf. the new product criterion in
EFD ?)
 Even a less efficient competitor could deprive a monopolist from its quite life ?
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The consumer welfare test
Is the squeeze profitable for consumer (efficiency defense)?
Taking into account some purpose as consumer choice
diversity or liberty to access the market
o The special responsibility of the dominant firm vis-à-vis an
effective competition market structure
o
o
o “a system of undistorted competition can be guaranteed only if
equality of opportunity is secured as between the various economic
operators” (DT, §230)
o A dominant firm would not “impose on all its equally efficient
competitors a competitive disadvantage such as to prevent or restrict
their access to that market or the growth of their activities on it” (DT,
§234)
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The profit sacrifice test

According to US jurisprudence, a price strategy violates the
Section 2 if:
◦ An excessive price is imposed at the upstream level
 such price must violate an antitrust duty to deal
 if not applicable, a dominant firm is free to charge the price it chooses and to
contract with whom it decides
◦ A predatory price at the downstream level
 The plaintiff must demonstrate
◦ The dominant firm prices below its costs…
◦ … and enjoys a significant chance to recoup its losses.

On the contrary in EU case law
◦ Recoupment is not necessary to characterize predatory prices
◦ A predation does not mandatorily imply that the dominant firm prices
below its costs
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What economic test to implement ?
United States
European Union
Excessive upstream prices ?
A special responsibility of the
dominant firm
“an upstream monopolist with no duty to deal is free
to charge whatever wholesale price it would like :
antitrust law does not forbid lawfully obtained
monopolies from charging monopoly prices” (Linkline,
§14)
Predatory downstream prices?
Brooke (1993)
Pricing below its cost
A strong probability to recoup its losses at the second
stage
Price discrimination as an abuse of
dominant position
The spread between prices
constitutes a self-standing abuse
US and European economic tests
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Protecting an effective competition market
structure?

A dominant firm could not impair by its conduct (actively or by
omission) the durability of a structure of effective competition

“The practice in question, adopted by a dominant undertaking,
constitutes an abuse within the meaning of Article 102 TFEU,
where, given its effect of excluding competitors who are at least
as efficient as itself by squeezing their margins, it is capable of
making more difficult, or impossible, the entry of those
competitors onto the market concerned” (TeliaSonera, §63)
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The economic test built by the ECJ in TeliaSonera
If the wholesale product is indispensable to downstream
competitors, a squeeze is probable as soon as competitors
are unable to operate other than at loss or with a reduced
profitability
2. If the wholesale product is not indispensable :
1.
1. If the margin between downstream and upstream price is
negative, the squeeze is probable
2. If the margin is positive, an exclusionary strategy has to be
demonstrated
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
ECJ decisions strongly reflects an ordo-liberal influence
◦ A dominant firm abuses from its position as soon as its strategy has
the effect of hindering the maintenance of the degree of
competition still existing in the market or the growth of that
competition (DT, §174)
◦ Protecting the competition process itself and not its result
(consumer welfare)
◦ Preventing dominant firms to use their coercive powers
(exploitative or exclusionary abuses)
◦ Promoting liberty to access the market and consumer freedom of
choice
Conclusion
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 US
Supreme Court is more influenced by Chicago
School economics
◦ Judge Learned Hand recognized margin squeeze in Alcoa… in
1945
 Alcoa violated Section 2 by depriving its competitors of a living profit
 Alcoa had to charge a fair price
◦ In Linkline, a footnote on Alcoa :
 “Given developments in economic theory and antitrust jurisprudence
since Alcoa, we find our recent decisions in Trinko and Brooke Group
more pertinent to the question before us” (§1120)
Conclusion
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The purpose of Antitrust is focalized on consumer welfare
maximization
 The Great Fear of false positives

◦ theoretical explanation
 “The limits of antitrust” according to Easterbrook
 No matter of false negatives as soon as markets are self regulating
 The economic cost of false positives in terms of incentives
◦ Institutional explanation
 Restricting the scope of Section 2 liability while suits for damages are
increasing
 Court based antitrust vs an administrative based competition policy,
which aims at constructing competitive markets and at regulating
national regulators?
Conclusion
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