A price squeeze occurs where a vertically integrated company raises its wholesale prices to competitors in the downstream market, and lowers its own retail prices to customers, resulting in a squeeze of the profit margins of downstream competitors. European Union and United States courts, in a set of matching cases in telecommunications, take opposite views about whether the conduct breaches competition/antitrust law.
The recent decision of the European Court of Justice in Konkurrensverket v TeliaSonera Sverige AB (Case C-52/09) (17 February 2011) (TeleSonera) upholds a price squeeze as a separate category of offence under the European abuse of dominance prohibition (Article 102 TFEU). By contrast, the US Supreme Court in Pacific Bell Telephone Company, dba AT&T California v LinkLine Communications, Inc., 129 S.Ct. 1109 (2009) (LinkLine) held that a price squeeze is not unlawful absent evidence of unlawful predatory pricing (including an ability to recoup) in the downstream market.
The European Court of Justice (ECJ) held that a margin squeeze is a separate category of competition law infringement, not merely a form of refusal to supply. The decision broadened the scope of unilateral practices which may be considered margin squeezes. In effect, the ECJ has recognised a new sub-species of abuse of dominance law. For the full judgement, click here.
TeliaSonera Sverige AB (TeliaSonera) sold its retail broadband services (ADSL) to consumers, and voluntarily offered other operators wholesale broadband (ADSL) services (which have been subsequently regulated, although not relevant to this case). In 2004, Sweden's Competition Authority alleged that TeliaSonera had charged unfairly high prices for wholesale access to its network, preventing its downstream competitors from making sufficient profit on their retail offerings.
The Stockholm court referred a series of questions to the ECJ relating to the circumstances in which the spread between the wholesale prices and the retail prices may constitute an abuse by that undertaking of its dominant position.
In September 2010, Advocate-General Mazak issued an opinion stating that a margin squeeze is abusive only where the dominant supplier has a regulatory obligation to supply the upstream input or where the input is indispensable to the downstream competitor's business. TeliaSonera had no regulatory obligation to provide wholesale ADSL services, and therefore, the Advocate General considered that its conduct would not be unlawful. Notably, the Advocate-General's opinion is non-binding on the ECJ, but is often considered highly persuasive. However, the ECJ did not adopt the opinion here.
The ECJ held that conduct could constitute an abuse of dominance in breach of Article 102 TFEU even though TeliaSonera was not subject to a regulatory duty to deal with competitors in relation to the input.
'In the absence of any objective justification, the fact that a vertically integrated undertaking, enjoying a dominant position on the wholesale market for ADSL input services, applies a pricing practice of such a kind that the spread between the prices applied on that market and those applied in the retail market ... to end users is not sufficient to cover the specific costs which that undertaking must incur in order to gain access to that retail market may constitute an abuse within the meaning of Article 102 TFEU.'
Thus, the ECJ's decision departed from the opinion of Advocate-General Mazak by finding that a margin squeeze is abusive where it has an anticompetitive effect or potential affect. Additionally, whether the input is indispensable for retail business may be a strong indication of an anticompetitive effect, but it is not a necessary requirement to establish a violation.
In contrast, in LinkLine, the United States Supreme Court concluded that stand alone price squeeze claims may not be brought against alleged monopolists under Section 2 of the Sherman Act. For the full judgement, click here.
Pacific Bell Telephone Company, dba AT&T California (AT&T) owned infrastructure and facilities needed to provide digital subscriber line (DSL) service. The Federal Communications Commission required AT&T to provide wholesale DSL transport service to independent firms at a price no greater than the retail price of AT&T's DSL service. LinkLine Communications, Inc (LinkLine), an independent internet service provider competing with AT&T in the retail DSL market in California, did not own the facilities needed to supply DSL service, but rather acquired the wholesale DSL transport service from AT&T. LinkLine filed suit under Section 2 of the Sherman Act, asserting AT&T unlawfully "squeezed" its profit margins by setting a high price for the wholesale DSL transport service it sold and a low price for its own retail DSL service.
The Supreme Court decided that an upstream monopolist, with no duty to deal at the wholesale level, is free to charge whatever wholesale price it would like; antitrust law does not forbid lawfully obtained monopolies from charging monopoly prices.
'If a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous.' 1
Similarly, the Sherman Act encourages aggressive price competition at the retail level, as long as the prices being charged are not predatory. Plaintiffs alleging such a claim must demonstrate that the prices complained of are below an appropriate measure of the defendant's costs and there is a dangerous probability that the defendant will be able to recoup its investment in below-cost prices.2 The Supreme Court rejected that any claim could be based on an assertion that the defendant's retail prices were "too low", finding such a claim has no support in antitrust law.
Price squeezes under Australian law
In Australia, a price squeeze by a vertically integrated firm with a substantial degree of market power in a market could be a breach of s 46 of the Competition and Consumer Act 2010 (Cth) (CCA), if the conduct amounts to a taking advantage of that power in that or any other market for the purpose of:
- Eliminating or substantially damaging a competitor;
- Preventing a firm entering a market; or
- Deterring or preventing a person from engaging in competitive conducing that or any market.
In addition, the downstream aspect of a price squeeze may be subject to a predatory pricing analysis under s 46(1), or an analysis under 46(1AA) (Birdsville Amendment). Under s 46(1), with respect to pricing below a relevant measure of the corporation's costs, if that pricing is below cost for a sustained period, it is not necessary to establish any ability to recoup those losses.
Notably, in the telecommunications sector in Australia, a variant of s 46 applies in which the requirement to find an anti-competitive purpose is replaced by a requirement to find that the conduct has the effect or likely effect of substantially lessening competition in a telecommunications market.
The ACCC has issued record-keeping rules that require imputation testing of certain telcommunications retail offerings as a useful indicator to the ACCC whether the margin between retail and wholesale pricing could raise competition concerns. Such imputation testing is also now applied by the ACCC in other contexts– essentially a transfer pricing test using regulated wholesale prices, an approach that was resoundingly rejected by the US Supreme Court in LinkLine as "lack[ing] any grounding in our antitrust jurisprudence."