Incumbent firms often control access to facilities that are essential inputs in the supply of services at the retail level. Competing retailers depend on the incumbent for access to the essential facility.
In the telecommunications sector, for example, the local loop connecting end customers to the network is often regarded as an essential facility.
Incumbent firms may attempt to prevent competitors from entering the market by refusing to provide access to an essential facility (see Figure 1). To encourage competition, many jurisdictions require firms with control over essential facilities to provide access to retail competitors. Rules may also determine the way in which access prices will be agreed, and procedures for resolving any disputes.
Figure 1: Refusal to Supply an Essential Facility
The figure shows a vertically integrated incumbent firm (red) and a downstream entrant (blue). The incumbent firm controls an essential input, on which the downstream entrant depends in order to provide services to its customers. The incumbent also competes with the downstream entrant at the retail level. By refusing to supply the essential input, the incumbent can prevent the downstream entrant from competing.
RELATED INFORMATION
Essential Facilities
Remedies for Refusal to Supply and Price Squeezes