Abstract
Third-party access is one of the key tools used by regulators to stimulate competition in network industries. However, in the postal sector, incumbent operators could refuse to provide access to their networks on competitive terms. As the experience from the electronic communications sectors shows, constructive refusals to deal, caused by unreasonable or onerous terms, are far more frequent than outright refusals. These could be implemented through a margin squeeze, where a dominant firm offers wholesale access at a price greater than the difference between its retail price and its wholesale cost. Such combination of retail and wholesale prices allows the dominant firm to leverage its upstream position and to make downstream competitors unprofitable. Only a vertically integrated company can engage in a price squeeze as it needs to be able to influence prices, or better the margin between the prices, in two related markets. Without a simultaneous presence in two vertically integrated markets, a company can still engage in predatory or excessive pricing, discrimination, or refusal to deal, but only in one market.
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Notes
- 1.
Constructive refusal to deal, in the Commission’s 2009 Enforcement Guidance on ex-Article 82 EC, means a proposal of access to a competitor at terms technically and economically so unacceptable to correspond to an effective refusal.
- 2.
Ofcom has actually investigated Royal Mail for discriminatory pricing, and not for margin squeeze, but even if it explicitly stated that the case at hand was not an example of margin squeeze, in Section 4 we discuss the arguments that led Ofcom to consider discriminatory pricing and not margin squeeze to be the more appropriate analytical framework in a relatively similar context.
- 3.
See, for example, Case C-280/08P, Deutsche Telekom v. Commission, ECLI:EU:C:2010:603; Case C-52/09, TeliaSonera, ECLI:EU:C:2011:83; Case C-295/12P, Telefónica and Telefónica de España v. Commission, ECLI:EU:C:2014:2062.
- 4.
This allegation is, in particular, grounded in the distinction that the Commission made in its Enforcement Priorities Guidance between situation where indispensability has to be proven or not. The Commission indicated that it is discharged from the burden of proving indispensability of the upstream input on the condition that at least one of the following is true: (i) there is a regulatory obligation to supply, and the balancing of incentives has already been carried out by the national regulator; and/or (ii) the upstream market position has been established under the protection of special or exclusive rights or has been financed by state resources.
- 5.
Verizon Communications v Law Offices of Curtis Trinko, LLP, 540 U.S. 398 (2004).
- 6.
In the telecoms sector, such kind of extensive bypass is economically impossible, which renders access necessary.
- 7.
Still, 20 countries decided to impose mandatory access, whereas only 7 are without (Austria, Denmark, France, Italy, Poland, Slovakia, and Sweden), ERGP (2017).
- 8.
Regulation (EC) No. 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop, O.J. [2000] L 336/4.
- 9.
The US Supreme Court, instead of focusing on the margin, analyzed separately the lawfulness of the upstream and downstream prices of AT&T. It then held that “if both the wholesale price and the retail price are independently lawful, there is no basis for imposing antitrust liability simply because a vertically integrated firm’s wholesale price happens to be greater than or equal to its retail prices.” Pacific Bell Tel. Co. v linkLine Comm’ns, Inc. (linkLine), 555 U.S. 438 (2009). For arguments against recognizing margin squeeze as an independent abuse, see Sidak (2008).
- 10.
With no downstream competition, margin squeeze could not take place, whereas in a perfectly competitive downstream market, it would no longer be feasible.
- 11.
The reason we see more rebates in posts but not telecoms can be explained by the different nature of the demand for postal and telecommunications services. As we explained earlier, the former tends to be highly concentrated as a rather small number of large users accounts for a significant share of total demand. In the latter, on the other hand, demand from residential consumers is more important. Only with concentrated demand fidelity rebates can have a significant economic appeal for a dominant company.
- 12.
Lack of reported margin squeeze cases in Copenhagen Economics’ study (2013) may also be due to the fact that it covers the period up to 2011, while the postal market was fully liberalized only in 2012. Most margin squeeze cases also in the telecoms sector took place after its full liberalization in 1998, when mandatory access facilitated downstream competition, which has to be present, as otherwise margin squeeze could not even take place.
- 13.
This significant difference in rebates existed even though the eligibility criteria to obtain different types of discounts laid down in Correos’ contracts with large customers and with competing operators appeared as formally equivalent.
- 14.
Tribunal Supremo (2018), STS 254/2018, ECLI:ES:TS:2018:254.
- 15.
Royal Mail aggregated together different areas on the basis of common characteristics concerning different delivery costs. Zonal prices were calculated by reference to NPP1, APP2, and ZPP3 prices. The “zonal tilt” refers to a set of percentage-based adjustments that were applied to the uniform APP2 prices to produce different prices for each of the four Royal Mail zones. Ofcom (2018:40, p. 3.60).
- 16.
Price differential refers to the difference in price introduced by the CCNs between APP2/ZPP3 and NPP1.
- 17.
- 18.
Ofcom acknowledged “that other changes introduced by the CCNs, which are not subject of this decision, would also have had an adverse impact on Whistl’s profitability” (Ofcom 2018), p. 7.159.
- 19.
Case C-52/09, TeliaSonera, Opinion of Advocate General Mazák, p. 11.
- 20.
However, instead of explaining with more precision and clarity when indispensability would be relevant, the Court mentioned in a rather convoluted manner that “the possibility cannot be ruled out that, by reason simply of the fact that the wholesale product is not indispensable for the supply of the retail product, a pricing practice which causes margin squeeze may not be able to produce any anticompetitive effect, even potentially”, p. 72.
- 21.
According to the ERG Common Remedies, margin squeeze can result from bundling/tying, price discrimination, cross-subsidization, and predatory pricing.
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Parcu, P.L., Pisarkiewicz, A.R. (2020). Ex Ante and Ex Post Access Regime in the Postal Sector: A Revival of Margin Squeeze?. In: Parcu, P.L., Brennan, T.J., Glass, V. (eds) The Changing Postal Environment. Topics in Regulatory Economics and Policy. Springer, Cham. https://doi.org/10.1007/978-3-030-34532-7_18
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