A price squeeze has a similar effect to a refusal to supply an essential facility. In the extreme, the firm might demand a price for the essential input that is higher than the full retail price of the service.
Box 2.3: Margin Squeeze in Spain
The EU Commission fined Telefónica €151.9 million in July 2007 for a margin squeeze between its retail prices and the prices for wholesale broadband access at both the national and regional levels between September 2001 to December 2006. It was a large fine because Telefónica’s 2001 business plan knew it would be engaging in a margin squeeze.
Wholesale access at national level allows alternative operators to offer retail broadband services throughout the Spanish territory by connecting to a single, "national" access point. Wholesale access at the regional level requires that alternative operators roll out a costly network reaching up to 109 "regional" access points.
Although Telefónica provides unbundled access to its local loops, this was not considered a substitute for the other two wholesale products because its investment intensity.
Lower and fairer wholesale prices putting an end to the margin squeeze were introduced at the end of December 2006 when, following a market analysis, the Spanish regulator reduced Telefónica's wholesale prices by between 22% and 61%.
Sources: Antitrust: Commission decision against Telefónica - frequently asked questions, MEMO/07/274 July 2007 http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/274&format=HTML&aged=0&language=EN&guiLanguage=en
European Commission (staff analysis), Margin squeeze in the Spanish broadband market: a rational and profitable strategy, Jean-Christian Le Meur, Iratxe Gurpegui and Katja Viertio http://ec.europa.eu/competition/publications/cpn/2007_3_22.pdf
International approaches to price squeeze differ:
· In the EU, the existence of price squeezing by a dominant operator is sufficient to find an abuse of dominance; price squeezing is treated as an illegitimate use of market dominance in and of itself.
· In the United States, price squeezing is not linked to dominance and is not considered to be inherently anti-competitive. Price squeezing only attracts liability if it is predatory or if the firm concerned is obligated to provide the goods or services; on its own, however, price squeezing is merely part of a robustly competitive market.
· In New Zealand, a causal link has to be established between the impugned conduct and dominance. This is done by applying a counterfactual test whether the prices charged are no greater than the prices found in a hypothetical competitive market. If not, then the dominant firm would not have “used” its market powers. The basis for this test is the "Efficient Component Pricing Rule" (ECPR), which is discussed below.
A number of remedies for this price squeezing exist, including:
· Resale Obligations or
· Price floors, or
· Structural remedies
A price floor sets a minimum retail price for the incumbent’s retail service, with reference to wholesale prices. A price floor should ensure that competitors that as efficient as the vertically integrated firm are able to cover their costs. The rule for setting a price floor, or "imputation rule" can be stated in a number of ways:
The retail price must be no less than the wholesale price plus the direct incremental cost of the vertically integrated firm’s pure retailing functions.
Pr > Pa + Cr
Equivalently, the retail price must be no less than the vertically integrated firm’s direct incremental cost to supply the product, plus the profit margin it could earn from selling the essential input to its competitors.
Pr > Ca + (Pr – Pa – Cr)
Or, the profit margin on the vertically integrated firm's price for the retail product must be no less than the profit margin it earns from selling the essential input to its competitors.
(Pr – Ca – Cr) > (Pa – Ca)
All the above imputation rules are equivalent, but provide different insights into the conditions that must hold for a vertical price squeeze to be impossible.
Box 2.4: Price Squeeze in Germany
In 2003, Deutsche Telekom (DT) was found to have abused its dominant position by committing a price squeeze. From 1998, DT has been legally obligated to provide competitors with wholesale access to its local loops. The European Commission found that from 1998 to the end of 2001, DT charged new entrants higher fees for wholesale access to the local loop than what DT charged its retail subscribers for fixed line (analogue, ISDN, and ADSL) subscriptions – so the margin was negative (Pa > Pr) even before allowing for a competitors own retail costs. From 2002, there was a margin (Pa<Pr) but it was not big enough to cover retail costs (Cr).
DT argued that its wholesale prices were regulated and it had to meet competition in the retail market. But the Commission argued that DT had the freedom to terminate the squeeze itself. In fact, DT increased retail prices (but not enough) in 2002.
To remedy the competition concern, DT terminated the margin squeeze mainly by lowering its wholesale access fees.
Source: European Commission (Staff Analysis): Two Commission decisions on price abuse in the telecommunications sector, Competition Policy Newsletter, Autumn 2003
These measures may achieve the objective of preventing a price squeeze, but they can have substantial costs. In particular, under structural separation the firm would lose any efficiencies or cost savings from vertical integration. This loss would ultimately fall on customers, through higher prices.