Price / Margin Squeeze

November 2016 Prof. Dr. H. Ercüment Erdem
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Introduction

Dominant undertakings have a unique responsibility to ensure that their conduct does not distort competition in a particular market for goods or services. However, in some cases, such undertakings may use their dominance to obstruct others and to restrict their options, such as cases of ‘price squeeze.’ The term of ‘price squeeze’ (also referred to as ‘margin squeeze’) corresponds to an anticompetitive practice that occurs when there is a narrow margin between an integrated provider’s price to sell essential inputs to a rival and its downstream price that the rival cannot survive or effectively compete[1] with.

Price squeeze cases before the competition authorities are relatively common. Many of the price squeeze cases particularly arise in the telecommunications sector, but also in other sectors, such as water, railways, postal services, pharmaceuticals, pay television and gasoline sectors, etc[2].

‘Price Squeeze’ as an Abuse of Dominant Position

Art. 6 of Act No. 4054 on the Protection of Competition (“Act No. 4054”) entitled ‘Abuse of Dominant Position’ covers a general prohibition of abuse of dominant position with a list of particular cases deemed as abusive. Although ‘price squeeze’ is not explicitly specified under this list, it is regulated as a form of abuse in the Guidelines on the Assessment of Exclusionary Abusive Conduct by Dominant Undertaking (“Guidelines”).

The definition of price squeeze in the Guidelines is based on the Competition Board’s (“Board”) decision dated 19.11.2008 and numbered 08-65/1055-411[3]. As per the Guidelines, price squeeze occurs “when an undertaking that is active in vertically related markets that is dominant in the upstream market sets the margin between the prices of the upstream and downstream products at a level, which does not allow even an equally efficient competitor in the downstream market to trade profitably on a lasting basis.” A vertically integrated undertaking with a dominant position in the upstream market may cause price squeeze by increasing the price for the upstream product, by decreasing the price for downstream products, or by doing both concurrently. In this respect, a dominant undertaking may restrict the competition in the relevant market via transferring its market power over the upstream products to the downstream market.

Conditions Sought for Price Squeeze

In order to establish that competition rules are infringed, certain economic and legal conditions regarding the structure of the market should simultaneously exist wherein a vertically integrated dominant undertaking and its competitors operate[4]. As specified in the Guidelines, the Board takes certain factors into account while determining the likelihood of conduct under examination leading to anticompetitive foreclosure by price squeeze. These factors are specified as follows: (i) the undertaking must be active in upstream and downstream markets that are connected to each other in a production chain, (ii) the upstream product must be indispensable for operating in the downstream market, (iii) the undertaking must hold a dominant position in the upstream market, (iv) the margin between the upstream and downstream products must be low enough to ensure that a competitor which is as efficient as the undertaking that is dominant in the upstream market would be unable to profit and operate in the downstream market on a lasting basis.

Prominent Decisions of the Court of Justice of the European Union on Price Squeeze

Below, some of the most prominent decisions of the Court of Justice of the European Union (“CJEU”) on price squeeze are succinctly briefed.

Judgment of the CJEU in Deutsche Telekom AG v. Commission[5]

The CJEU issued its judgment in the Deutsche Telekom AG v. Commission Case consisting of the dismissal of the appeal filed by Deutsche Telekom AG (“Deutsche Telekom”) against the judgment of the Court of First Instance (now the General Court) and the upholding of the €12.6 million fine imposed by the Commission on Deutsche Telekom for abuse of its dominant position in the fixed telephony markets in Germany. That abuse consisted of charging competitors prices for network access services (‘local loop access services’) that were higher than the retail prices, which Deutsche Telekom’s end-users were charged for access. Such pricing forced competitors to charge their end-users prices higher than those that Deutsche Telekom charged its own end-users. According to the CJEU, Deutsche Telekom strengthened its dominant position by squeezing the margins of its competitors, and consequently, caused damage to consumers by limiting the choices available to them[6].

Judgment of the CJEU in Telefónica S.A. and Telefónica de Espaha S:A:U: v. Commission[7]

The CJEU issued its judgment in Telefónica S.A. and Telefónica de Espaha S:A:U: v. Commission. Based on this judgment, the CJEU dismissed the appeal lodged by Telefónica and Telefónica de Espaha (“Telefónica”), the former state monopoly in telecommunications in Spain, concerning its abuse of a dominant position in the wholesale broadband markets. The CJEU decided that Telefónica abused its dominant position by imposing unfair prices on its competitors in the form of a margin squeeze between the prices for the retail broadband access market, and the prices on the regional and national wholesale broadband access markets[8]. Also, it is noteworthy that the fine of €152 million imposed by the Commission and upheld by the General Court remained unchanged.

Prominent Decisions of the Board on Price Squeezes

The Board frequently makes investigations with regard to price squeezes in the telecommunications sector due to numerous complaints raised in the market. Unsurprisingly, the Board’s first decision[9] with respect to price squeezing was in the telecommunications sector. Yet, the term of price squeezing was not examined elaborately in the said decision, and the complaint against Türk Telekomünikasyon A.Ş. (“Türk Telekom”) was rejected by the Board, since Türk Telekom’s relevant campaign was approved by the Information and Communication Technologies Authority.

Board Decision on Türk Telekom and TTNet [10]

A remarkable decision of the Board concerning price squeezing was rendered against Türk Telekom and TTNet A.Ş. (“TTNet”), which is a subsidiary of Türk Telekom. The Board imposed an administrative monetary fine of TRY 12.4 million upon Türk Telekom and TTNet, since this economic integration violated Art. 6 of Act No. 4054 by means of abusing its dominant position in the wholesale broadband internet access services by squeezing the margins in the retail broadband internet access services. With regard to this decision, it is crucial that the Board clarified three factors in relation to price squeezing. The first of these factors is related to the means to calculate the insufficient margin in price squeezing. Secondly, price squeezing is different from predatory pricing, and retail prices do not need to be predatory. Even if a predatory price cannot be determined, the determination of a price squeeze can be realized. Thirdly, the duration of the conduct should be taken into account in order to determine the price squeeze infringement. Additionally, as it was found related to the case in question, the Board referred to recent -relatively, as per the date of the said case- Telefónica and Deutsche Telekom decisions concluded by the Commission and the Court of First Instance, respectively.

Board Decision on Turkcell Corporate Tariffs[11]

Another significant decision of the Board regarding price squeezing is the Turkcell Corporate Tariffs pre-investigation decision. In this decision, the Board examined whether the input price by Turkcell İletişim Hizmetleri A.Ş. (“Turkcell”), which is the undertaking with the dominant position in the upstream market, applied to the other undertakings operating in the downstream retail market, is higher than its own retail price in the downstream market, or not. Additionally, the Board evaluated whether an ‘efficient operator’ could operate with a ‘normal profit’ under such circumstances in the downstream market. The Board eventually concluded that the margin between Turkcell’s average retail prices in the downstream market, and the costs of an efficient operator was sufficient to operate in the market. In conclusion, no price squeeze conduct of Turkcell was found, and the relevant complaint was rejected by the Board.

Conclusion

Price squeezing is one of the forms of abuse under competition law. As specified above, a vertically integrated undertaking with a dominant position in the upstream market may cause price squeezing by increasing the price for the upstream product, by decreasing the price for the downstream product, or by doing both, concurrently. In this respect, a dominant undertaking may restrict the competition in the relevant market via transferring its market power over the upstream product to the downstream market. Apart from the telecommunications sector, there are other investigations conducted in relation to price squeezing allegations in other sectors. Lastly, in order to prevent any anticompetitive conducts of price squeezing, and to provide and protect effective competition in the relevant markets, attention should be paid to the conduct of undertakings active in upstream and downstream markets that are connected to each other in a production chain, and which hold dominant positions in the upstream market.

[1] OECD DAF/COMP(2009)36, Policy Roundtable on Margin Squeeze, available at: http://www.oecd.org/regreform/sectors/46048803.pdf (Accessed on: 07.12.2016).

[2] OECD DAF/COMP(2009)36, Policy Roundtable on Margin Squeeze, p. 8.

[3]Board decision dated 19.11.2008 and numbered 08-65/1055-411, available at: http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fGerek%25c3%25a7eli%2bKurul%2bKarar%25c4%25b1%2fkarar2899.pdf (Accessed on: 07.12.2016).

[4] OECD DAF/COMP(2009)36, Policy Roundtable on Margin Squeeze, p. 218.

[5] Case C-280/08 P - Deutsche Telekom AG v. Commission, Judgment of 14.10.2010, ECLI: EU:C:2010:603.

[6] Court of Justice of the European Union, Press Release No 104/10, Luxembourg, 14.10.2010, available at: http://europa.eu/rapid/press-release_CJE-10-104_en.pdf (Accessed on: 07.12.2016).

[7] Case C-295/12 P - Telefónica and Telefónica de España v Commission, Judgement of 10.07.2014, ECLI:EtJ:C:2014:2062.

[8] Court of Justice of the European Union, Press Release No 95/14, Luxembourg, 10.07.2014, available at: http://curia.europa.eu/jcms/upload/docs/application/pdf/2014-07/cp140095en.pdf (Accessed on: 07.12.2016).

[9] Board decision dated 08.09.2005 and numbered 05-55/833-226, available at: http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fGerek%25c3%25a7eli%2bKurul%2bKarar%25c4%25b1%2fkarar1321.pdf (Accessed on: 07.12.2016).

[10] Board Decision dated 19.11.2008 and numbered 08-65/1055-411, available at: http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fGerek%25c3%25a7eli%2bKurul%2bKarar%25c4%25b1%2fkarar2899.pdf (Accessed on: 07.12.2016).

[11] Board Decision dated 04.07.2007 and numbered 07-56/634-216, available at: http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fGerek%25c3%25a7eli%2bKurul%2bKarar%25c4%25b1%2fkarar2070.pdf (Accessed on: 07.12.2016).

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