Margin Squeeze after Deutsche Telekom

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Simon Genevaz, May 14, 2008

Margin squeeze practices occur in industries where incumbent companies operate at two levels of trade, both selling an input at wholesale and acting as retail suppliers. In these situations, because the upstream input sold by the incumbent is used to make the downstream product, the incumbent’s customers at the upstream level are also its competitors at the downstream level. In instances where downstream rivals are unable to obtain viable alternatives to the incumbent’s wholesale products, the vertically integrated firm can “squeeze” its rivals profit margins by setting a high wholesale price and/or a low retail price. In a series of cases involving these fact patterns, the European Commission and the Court of First Instance have considered that an insufficient spread between the price charged by a vertically integrated dominant firm for wholesale supplies of an input and that firm’s own retail price could impede downstream rivals ability to compete, and can therefore be considered abusive under Article 82 of the EC Treaty. Yet the determination of the precise circumstances in which such conduct, known as “margin squeeze,” should give rise to antitrust liability raises two types of questions. The first type has to do with the definition of the applicable test. In essence, the competition authorities and courts ask when, exactly, does the spread become so small as to be considered exclu…

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