Essential facilities are resources or facilities that have the following properties:
- They are critical inputs to retail production. Essential facilities are located at the wholesale level of the production chain, and are essential inputs in the production or supply of the retail product or service,
- They are fully owned and controlled by vertically integrated incumbent firms. The owner of the facility participates in the retail as well as the wholesale stage of the market,
- They are a monopoly. Retail competitors can only acquire an essential facility from the incumbent firm that owns and controls it,
- It is not feasible, either economically or technologically, for retail competitors to duplicate the essential facility or develop a substitute for it.
At the wholesale level the incumbent supplies other firms with a critical input, and those firms are dependent on the incumbent for that input. At the retail level, the incumbent competes with those same firms (see Figure 1). The owner of an essential facility may seek to use its position to prevent or impede competition, by implementing a “price squeeze” or even refusing to supply the facility.
Figure 1
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Market Power
Barriers to Entry