Margin Squeeze under EC Competition Law with a special focus on the Telecommunications Sector
London, UK
10 December 2004
Hosted By: the Global Competition Law Centre in association with British Telecommunications plc
Dr. Mark Williams, Director of European Competition Policy at NERA, spoke at the conference on Margin Squeeze organized jointly by British Telecom and the Global Competition Law Centre in London on 10 December 2004. Other speakers at the Conference included Professor Richard Whish of King's College, London, and Damien Geradin, Professor at the University of Li#ge, and Director, Global Competition Law Centre. The conference discussed the analysis of margin squeeze in cases including Deutsche Telekom, Wanadoo, and BSkyB.
Margin squeeze cases can arise when a vertically integrated firm sets a wholesale or access price from its upstream division to an unintegrated downstream competitor that fails to allow the rival to make a positive profit margin. Margin squeeze can be thought of as an example of Vertical Foreclosure. (For more information on this subject, please see Competition Policy in Media: Vertical Issues).
Dr. Williams noted that margin squeeze cases often can be characterized as predation cases, for two reasons. First, although the abuse is in the setting of an excessive price to the unintegrated rival, it should be noted that this excessive price actually involves profit sacrifice compared to setting the "simple" monopoly price. In essence the upstream firm "overmonopolizes," because its downstream unit benefits from saddling the downstream rival with excessive costs. Second, one of the ways of testing for margin squeeze is to apply the access price to the downstream division of the integrated firm and then to ask if the price set by the downstream division at the retail level would be a predatory price against its rival. If the downstream division is predatory, the abuse can be characterized either as an excessive price by the upstream division or a predatory price by the downstream division.
However, if this approach is adopted, an issue then arises as to which predation test to apply. Specifically, should the predation test be based on the Average Variable Cost (AVC) price floor, or can predation be inferred at above AVC if there is evidence of exclusionary intent? Given this uncertainty, there can potentially be as many different theories of margin squeeze as there are theories of predation.
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