The ‘effects’ described in this section result from one or more standard competition problems as discussed in the previous section. The causal relations between effects and competition problems are depicted in figure 1 at the end of this section.
First mover advantage: The term first mover advantage refers to the economic advantage the company which is first in a market has over other companies which enter this market at a later point in time. First mover advantages can pertain to the supply side (the cost function) as well as to the demand side. Supply side first mover advantages include network externalities and learning by making cost reductions, whereas demand side advantages primarily result from customer lock-in effects. A first mover advantage thus can be said to raise rivals’ costs (relative to the first mover) or restrict competitors’ sales. A first mover advantage only is a problem if it is artificially achieved, e.g. by delaying tactics on the wholesale market. If first mover advantages are strong, they can lead to foreclosure of the retail market.
Margin squeeze: A margin squeeze, sometimes also referred to as price squeeze, occurs when:
a dominant provider supplies an ‘upstream’ product A which is itself (or is closely related to) a component of a ‘downstream’ product A+B (product B is supplied by the dominant provider only to itself: those who compete against A+B will supply their own alternative to B).
the implicit charge by the dominant provider to itself for B (i.e. the differencebetween the prices at which it supplies A+B and A only) is so low that a reasonably efficient competitor cannot profitably compete against A+B.56
A margin squeeze can be effected in three ways:57 (i) The SMP undertaking can
charge a price above costs for the wholesale product to its competitors but (implicitly) a lower price to its own retail arm; (ii) it can charge a cost-based price to all retail
undertakings but may set a predatory price on the retail market; finally (iii) it might charge a price above costs on the wholesale market, and at the same time charge a predatory price on the retail market. This behaviour may also result in
cross-subsidisation.
Although the dominant undertaking may set a margin between its downstream retail price and upstream wholesale charge (paid by downstream competitors) that is insufficient to cover its downstream costs, on an ‘end-to-end’ basis, i.e. aggregating across the firm’s upstream and downstream activities, the firm may be profitable (in contrast to the case of predatory pricing where the firm suffers short-term losses). An equally (or more efficient) downstream competitor could be unable to compete, because, in effect, it is being charged a higher price for the upstream input than its competitor, the vertically integrated firm’s own downstream arm.
56 In the event that the price paid for A is not transparent, accounting separation might be needed to establish the price paid by the incumbent’s retail arm.
57 See Canoy, et al (2002, pp. 26-31).
Exposed to a margin squeeze, a retail competitor in general will not be able to cover its costs and will be driven out of the market. If the competitor has some market power on the retail market (for example because of product differentiation) or if it is sufficiently more efficient than the dominant undertaking, a margin squeeze might result in partial foreclosure (losses of market share and/or profits) only.
Although margin squeeze also has a behavioural aspect it is classified as an effect here, as it can be the result of different behaviours of the dominant undertaking. When designing remedies it might be important to be aware of the particular behaviour leading to a margin squeeze (i.e., in particular, price discrimination upstream and/or predatory pricing downstream).
Raising rivals’ costs is a quite general expression for all practices, which – in one form or another – negatively influence competitors’ and potential competitors’ cost functions.
As can be seen from figure 1, most anti-competitive behaviour will increase rivals’
costs.
Restriction of competitors’ sales is defined here as the result of any behaviour of the dominant undertaking, which does not (or not only) negatively impact the cost function of its rivals, but their demand function. As depicted in figure 1, there are several ways in which an SMP undertaking can restrict its competitors’ sales.
Foreclosure is any behaviour of a dominant firm, which aims at excluding competitors from the market. Foreclosure can be ‘complete’, in which case competitors are driven out of the market or do not enter the market, or ‘partial’, whereby competitors do survive, but suffer losses of market share or profits. An undertaking will exert
foreclosure only if it can – in the short or in the long run – increase its profits by doing so. As foreclosure reduces or eliminates competition and creates market power in potentially competitive markets, it is usually also detrimental to overall welfare.
Behaviour leading to foreclosure is frequently referred to as ‘anti-competitive behaviour’
throughout this document.
Negative welfare effects here denotes the result of a certain behaviour which does not lead to foreclosure and/or leveraging, i.e., is not targeted towards competitors, but still has a negative impact on total welfare. Two cases can be distinguished here: allocative inefficiency, which leads to deadweight welfare losses (i.e. consumer and total welfare could be increased by increasing total output), and productive inefficiency, where the dominant undertaking falls short of producing a given output with the minimum of inputs. Allocative inefficiency results from excessive pricing and may also result from price discrimination; productive inefficiency may become manifest in excessive costs, low quality or lack of investment. As discussed above, price discrimination may not always be detrimental to welfare and thus should be subject to analysis on a case-by-case basis.
Figure 1 finally depicts each of the identified competition problems together with the strategic variable(s) it is based on, as well as with the anti-competitive and welfare effects it may entail. Therefore, the effects-side has been divided into two stages: The
‘immediate effects’ (first mover advantage, margin squeeze, raising rivals’ costs, and restriction of competitors’ sales) and the ‘ultimate effect’, which is ‘foreclosure’ in many cases.
Figure 1a: Overview of standard competition problems, cases 1 and 2
Case 1: Vertical leveraging 1.1. refusal to deal / denial of access
contractual partner (wholesale) refusal to deal / denial of access raising rivals' costs foreclosure retail
1.2. non-price issues
information (wholesale) discriminatory use or withholding of information
time (wholesale) delaying tactics 1st mover advantage
margin squeeze
contract terms undue requirements
raising rivals' costs
quality (wholesale) quality discrimination
product characteristics
(wholesale) strategic design of product restriction of competitors'
sales
information (retail) undue use of information about competitors
1.3. pricing issues
cross-subsidization raising rivals' costs
predatory pricing restriction of competitors'
sales margin squeeze components offered together or
inidividually (wholesale) bundling / tying
foreclosure retail
wholesale price
foreclosure retail
retail price
price discrimination
Case 2: Horizontal leveraging
foreclosure price in market 1
price in market 2 cross-subsidization
components offered together or
inidividually bundling / tying raising rivals' costs
restriction of competitors' sales
behaviour (standard competition problem) strategic variables of the
undertaking possible effects
Figure 1b: Overview of standard competition problems, cases 3 and 4
Case 4: Termination
tacit collusion
foreclosure contractual partner (wholesale) refusal to deal / denial to
interconnect
restriction of competitors' sales
raising rivals' costs negative welfare effects:
allocative inefficiencies termination charge
price discrimination excessive pricing behaviour (standard competition problem) strategic variables of the
undertaking possible effects
Case 3: Single market dominance 3.1. entry deterrence
product characteristics (retail or wholesale)
strategic design of product to raise consumers' switching costs
contract terms contract terms to raise
consumers' switching costs raising rivals' costs
foreclosure
contractual partner exclusive dealing
investment overinvestment restriction of competitors'
sales
price predatory pricing
3.2. exploitative behaviour
excessive pricing price discrimination
3.3. productive inefficiencies
investment lack of investment
costs excessive costs / inefficiency
quality low quality
price negative welfare effects:
allocative inefficiencies
negative welfare effects:
productive inefficiencies