1. Concept

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Margin squeeze is a conduct by a firm that is vertically integrated (active on an upstream and a downstream market) and that has a dominant position on the upstream market. If the firm charges a price for the product on the upstream market which, compared to the price it charges on the downstream market, does not allow even an equally efficient competitor to trade profitable in the downstream market on a lasting basis, this conduct is called “margin-squeeze”.

2. The ‘equally efficient competitor’ test

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This test uses the dominant firm’s own costs as a benchmark, in order to establish whether or not it has unfairly constrained its competitors’ ability to compete in the downstream market. The benchmark on which the European Commission will generally rely on to determine the cost are the long-run average incremental cost (LRAIC) of the downstream division of the integrated dominant undertaking.

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Critics argue, the ‘equally efficient competitor’ test leads to false negative cases or in other words to an under-enforcement of competition rules. This is because, for a new entrant it is difficult to be as efficient as its main competitor as soon as it enters the markets. When fixed costs are important, when network externalities are significant, a new competitor cannot be as efficient as the dominant undertaking. Their cost structures will be obviously less favorable. However, the incumbent cannot be expected to know what its rivals’ costs are, and, hence, the ex post lawfulness of its activities can only be assessed on the basis of its own costs and revenues.

3. Example

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Margin squeeze can be observed e.g. in the telecommunication industry. The telecommunications network is normally owned by the former state monopoly telephone provider. The local loop is an (upstream) infrastructure that connects all households to the telecommunications network. On the downstream market for telecommunication services the former monopolists is competing with several other providers of telecommunication services. In order to be able to compete, all telecommunication service providers must have access to the local loop to provide services because it is uneconomical to invest in a parallel network. However, if the price for getting access to the local loop is set so high and the price for consumers for the telecommunication services is so low, a situation could occur in which not even a competitor with the same cost structure as the incumbent firm could operate profitably.

4. Anticompetitive effects

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The anticompetitive effects associated with margin squeeze are the risks of foreclosure of equally efficient competitors whose access to the market is eliminated or hampered. In the presence of a margin squeeze the competitors of the dominant undertaking cannot trade profitably in the downstream market on a sustainable basis. As a result the dominant firm could cash in both high wholesale prices and supracompetitive retail prices to the detriment of
consumers.

5. Commission decisions

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The European Commission has investigated margin squeeze allegations in a series of cases. In the following cases, the investigation lead to a formal decision:

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Commission Decision of 4 July 2007 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/38.784 – Wanadoo España V. Telefónica), OJ C 83, 2.4.2008 ("Telefónica").

6. Court judgments/ preliminary rulings

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The following cases led to judgements/ preliminary ruling of European Courts:

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