Tuesday, May 27, 2008
Posted by D. Daniel Sokol
Simon Genevaz (Conseil de la concurrence) provides some thoughts on Margin Squeeze After Deutsche Telekom.
ABSTRACT: Margin squeeze practices occur in industries where incumbent companies operate at two levels of trade, both selling an input at wholesale and acting as retail suppliers. In these situations, because the upstream input sold by the incumbent is used to make the downstream product, the incumbent’s customers at the upstream level are also its competitors at the downstream level. In instances where downstream rivals are unable to obtain viable alternatives to the incumbent’s wholesale products, the vertically integrated firm can “squeeze” its rivals’ profit margins by setting a high wholesale price and/or a low retail price.
In a series of cases involving these fact patterns, the European Commission and the Court of First Instance have considered that an insufficient spread between the price charged by a vertically integrated dominant firm for wholesale supplies of an input and that firm’s own retail price could impede downstream rivals’ ability to compete, and can therefore be considered abusive under Article 82 of the EC Treaty.
Yet the determination of the precise circumstances in which such conduct, known as “margin squeeze,” should give rise to antitrust liability raises two types of questions. The first type has to do with the definition of the applicable test. In essence, the competition authorities and courts ask when, exactly, does the spread become so small as to be considered exclusionary in the antitrust sense (i.e., to exclude competitors on some basis other than the dominant firm’s merits)? The second type of questions relate to the fact that landmark margin squeeze cases have taken place in regulated industries. In this circumstance, the competition authorities and courts ask whether the concurrent application of a specific regulatory scheme leaves room for antitrust liability. The purpose of this paper is to examine the lessons from Deutsche Telekom and the CFI’s responses to these two types of questions. Section I of this paper shows that tackling margin squeeze abuses has proven a powerful liberalization tool in European telecommunications and energy sectors. The importance of Deutsche Telekom-type analysis in proceedings brought since the Commission’s decision shows how significant an impact this case has made in European competition law enforcement. Section II examines the test established in Deutsche Telekom for assessing whether a margin squeeze is exclusionary and argues that recent critics of European enforcement mischaracterize the state of the law. In addition, section II argues that while the CFI’s judgment usefully confirmed important aspects of the case law, it also questionably relied on regulatory objectives in isolation from actual market conditions. Section III examines the test used by the CFI for determining whether the existence of price regulation under sector-specific rules precludes a margin squeeze claim under competition law. Section III explains that conservative approaches to antitrust enforcement understate the benefits of the parallel application of sector-specific regulation and competition law. Section IV concludes.