Margin squeeze and duty to deal

Transcription

1 Draft--Preliminary work prodct 1 Margin sqeeze and dty to deal Comparison of US and EU approaches Presented by George Rozanski

2 Draft--Preliminary work prodct 2 Overview US agencies and corts less likely than their conterparts in the EU to define a margin sqeeze offense or impose a dty to deal Vertical mergers raise similar isses to margin sqeezes, bt there is more similarity in US and EU approaches to vertical mergers Antitrst intervention that imposes conditions on pricing even withot a dty to deal can be welfare enhancing Corts and agencies mst be mindfl of maintaining incentives for investment and achieving efficiencies from integration

3 Draft--Preliminary work prodct 3 Definition of margin sqeeze Integrated firm sells both pstream inpt and downstream final prodct; charges high price to n-integrated rivals Concern that downstream rivals that prchase pstream inpt are not able to compete against the integrated firm s downstream price, even if eqally efficient at transforming the inpt Downstream firm may be a less effective competitor or even exit as a reslt of the sqeeze Competition downstream may be harmed

4 Draft--Preliminary work prodct 4 Definition of margin sqeeze (cont d) Firm A pstream Integrated firm A MC P Downstream costs= MC + MC d Firm A downstream Firm B Downstream costs= P + MC d P A = MC + MC d + Margin A P B = P + MC d + Margin B Concern abot margin sqeeze arises when P A <P +MC d. In other words, meeting firm A s downstream price implies a negative margin for firm B (Margin B <0)

5 Draft--Preliminary work prodct 5 US approach General approach of US agencies and corts to pricing strategies has reflected concern to avoid deterring efficient condct For example, rebates in the first instance lead to lower prices the very otcome the antitrst laws are spposed to encorage and protect Enforcement against an alleged margin sqeeze cold redce incentives of integrated firm to invest to prodce the inpt by forcing it to spply competitors or by reglating pstream price to an inefficiently low level US Corts have been relctant to define a dty to deal or to make a margin sqeeze an actionable offense

6 Draft--Preliminary work prodct 6 Shold one prohibit a margin sqeeze withot a dty to deal? Areeda and Hovenkamp view Analytically, margin sqeeze not very different from refsal to deal Refsal to deal is jst a margin sqeeze with an infinitely high price It makes no sense to prohibit a predatory price sqeeze in circmstances where the integrated monopolist is free to refse to deal 1 Within lower corts, there has been disagreement over this view In recent decisions Spreme Cort has generally agreed that margin sqeeze is not actionable withot a dty to deal Explore whether this logic is complete 1 Phillip E. Areeda & Herbert Hovenkamp, Antitrst Law, 767c3 (2d ed. 2002)

7 Draft--Preliminary work prodct 7 US corts interpretations of margin sqeezes and dties to deal Trinko (2004, Spreme Cort): only a few exceptions to a general rle that antitrst does not reqire a dty to deal Aspen Ski case, which did define sch a dty to deal in context of previos dealing, is at or near the bondary of Section 2 liability Does this invalidate most or all price sqeeze claims as well? Lower corts sbseqently were divided on the isse Linkline (2007, 9 th Cir Cort of Appeals) verss Covad v. Bell Soth (11 Cir. 2004) and Covad v. Bell Atlantic (2005, DC Circit) Linkline (2009, Spreme Cort) Price sqeeze claim not viable post-trinko where antitrst law does not impose dty to deal, except nder traditional predatory pricing standard in downstream market In earlier notation, violation only if P A <MC +MC d

8 Draft--Preliminary work prodct 8 EU gidance Margin sqeeze can occr withot a reglatory obligation to deal Tripartite test otlined in EC Article 102 Gidance Paper Upstream good is objectively necessary to be able to compete effectively in downstream market Likely to lead to elimination of effective competition downstream Likely to lead to consmer harm Price test for margin sqeeze compares the integrated firm s downstream price to the costs of the n-integrated firm Using the earlier notation, test is whether P A <P +MC d More likely to find a violation compared to Brooke Grop test in US of P A <MC +MC d

9 Draft--Preliminary work prodct 9 EU cort cases Detsche Telekom (2008, Eropean Cort of First Instance) Confirmed the validity of margin sqeeze theory of harm In order to assess whether there is a margin sqeeze, it is necessary to consider whether the dominant ndertaking, or an ndertaking that is eqally efficient, wold have been in a position to offer the derived prodct otherwise than at a loss if it had first been obliged to pay the charge for the raw material. In other words, violation if P A <P +MC d TeliaSonera (2011, Eropean Cort of Jstice) Spports approach of Detsche Telekom decision However, nlike Detsche Telekom, TeliaSonera had no reglatory obligation to spply Follows tripartite test of EC Gidance paper Bt finds that even if pstream prodct is not indispensible, there still might be anticompetitive effects

10 Draft--Preliminary work prodct 10 More convergence on vertical mergers, which raise similar isses Vertical mergers raise similar isses to margin sqeeze Central qestion is whether merged firm has an incentive to withhold a critical inpt or raise the price of the inpt after the merger US athorities more willing to intervene in sch a case compared to a case involving nilateral pricing by an already integrated firm Incentives to engage in post-merger refsal to deal sometimes calclated via vertical arithmetic Vertical arithmetic compares pstream sacrifice from refsing to sell inpts to competitors with downstream benefits of additional sales Post-merger withholding is profitable if additional profits gained from downstream sales exceed lost profits from pstream sales to competitor Depends on pstream and downstream margins and downstream crosselasticity of demand, or diversion ratio Versions of this arithmetic explored by US FCC and DOJ in NBC/Comcast This represents an extreme strategy and may be less profitable than a strategy of raising inpt prices short of complete withholding

11 Draft--Preliminary work prodct 11 Margin sqeeze from vertical merger Post-merger, merged firm may have nilateral incentive to raise price to downstream competitor becase it now internalizes impact on its downstream sales. Higher prices may not be enogh to drive downstream firm ot of bsiness, bt may still soften competition downstream and affect prices. Pre-merger, firm will set pstream price sch that d dp dq dp p mc q 0 Post-merger, gain from additional downstream sales diverted from rival d dp dq dp Becase the last term is positive, the first-order effect of the merger is to increase the merged firm s pstream price to its downstream competitor; firm faces opportnity cost from selling inpt (possible lost margin downstream) d p mc q ( p mc mc ) 0 dq dp d d

12 Draft--Preliminary work prodct 12 Implications for margin sqeeze analysis Even if integrated firm has no dty to deal, it may choose to deal at a higher price than it wold if it were not integrated Possible anticompetitive effects of vertical merger are not limited to withdrawal from pstream market Antitrst intervention cold reqire an pstream firm to charge a lower price for the inpt withot an explicit dty to deal I NI For instance, if integrated firm wold set p p, it cold be the case that p NI WH In other words, the firm wold prefer to deal bt at a higher price I p p Bt there cold also be a sch that p I The fact that there is no dty to deal therefore does not mean that limiting the inpt price wold be ftile p WH

13 Draft--Preliminary work prodct 13 Analogy to aftermarket analysis Possible concern if an eqipment manfactrer withholds spare parts from aftermarket competitors Raises similar isses to margin sqeeze or vertical merger In some cases, firm may want to provide spare parts to large cstomers the do self-service, bt not to aftermarket competitors A remedy sometimes soght in these cases is not to reqire the firm to deal, bt simply to prohibit the firm from discriminating (e.g., DOJ jdgment against GE, 1999) As in a margin sqeeze, this type of intervention, which limits price withot imposing a dty to deal, cold theoretically increase welfare The firm may find it more profitable to sell spare parts on a nondiscriminatory basis than to withdraw from the market altogether

14 Draft--Preliminary work prodct 14 In all cases, need to be mindfl of efficiencies EU gidance notes that the Commission starts from the position that any ndertaking, dominant or not, shold have the right to choose its trading partners and to dispose freely of its property Notes that imposing sch an obligation may redce incentives to invest and promote free-riding Similar concern for investment incentives and free riding in US Doble marginalization effect cases a vertically merged firm to charge itself a lower internal price than it charges to other firms. This efficiency can lead to lower prices downstream on net More generally, otside the merger context, there is a natral, non-strategic incentive for a firm to charge itself a lower price than a non-affiliated firm. This wold happen even if there were no downstream competition. Shold be carefl abot labeling this type of behavior a margin sqeeze or foreclosre.