Essential Facility and Refusal to Essential Facility and Refusal to deal.deal.

Property Rights & AntitrustProperty Rights & Antitrust

Antonio NicitaAntonio Nicita

22

Essential facility DoctrineEssential facility Doctrine

Firm with monopoly power in one market Firm with monopoly power in one market has to deal fairly with competing firms in has to deal fairly with competing firms in adjacent markets who need essential adjacent markets who need essential facilities. facilities.

Antitrust activity have to show:Antitrust activity have to show: Control of facilities by a monopolistControl of facilities by a monopolist Competitor’s inability to duplicate the Competitor’s inability to duplicate the

essential facilityessential facility Denial of use Denial of use Feasibility of providing the facilityFeasibility of providing the facility

33

The debate/1The debate/1 The problem of mandatory access to an essential facility falls The problem of mandatory access to an essential facility falls

into the broad area of vertical relations and into the debate into the broad area of vertical relations and into the debate about whether antitrust law should intervene in order to about whether antitrust law should intervene in order to guarantee access, which in turn centers around the question of guarantee access, which in turn centers around the question of leveraging, that is the possibility that a monopolist “leverage” leveraging, that is the possibility that a monopolist “leverage” its monopoly power in one market in order to extend it into its monopoly power in one market in order to extend it into another market. another market.

It originally seemed obvious that this was so, a view held in It originally seemed obvious that this was so, a view held in particular by Joe Bain and the Harvard School of the 1950’s. particular by Joe Bain and the Harvard School of the 1950’s. Such a common understanding was forcefully put into question Such a common understanding was forcefully put into question by the so called Chicago Revolution of the 1980’s which proved by the so called Chicago Revolution of the 1980’s which proved that a firm that has monopoly power at one level can only that a firm that has monopoly power at one level can only transmit that same monopoly to another level, but not create transmit that same monopoly to another level, but not create more monopoly power than it already has. more monopoly power than it already has.

In this perspective vertical restrictions cannot aim at increasing In this perspective vertical restrictions cannot aim at increasing a “fixed sum” monopoly profit and therefore, as a matter of a “fixed sum” monopoly profit and therefore, as a matter of logic, should be explained by some other reasoning which it was logic, should be explained by some other reasoning which it was shown in many cases to be greater efficiency. shown in many cases to be greater efficiency.

44

The debate/2The debate/2 Suppose that a private monopolist owns the only possible Suppose that a private monopolist owns the only possible

bridge across a river and that a number of competing bridge across a river and that a number of competing railroad companies provide transport services along the railroad companies provide transport services along the bridge. bridge.

Suppose also that there are no restrictions in the pricing for Suppose also that there are no restrictions in the pricing for the use of the bridge, nor for transport service charges. In the use of the bridge, nor for transport service charges. In order for the owner of the bridge to gain monopoly profits, order for the owner of the bridge to gain monopoly profits, he has to charge all railroads a monopoly price to cross. he has to charge all railroads a monopoly price to cross.

The greater the competition downstream and the lower the The greater the competition downstream and the lower the profits downstream, the greater the profits the bridge profits downstream, the greater the profits the bridge owner would get. Suppose that the bridge owner also owns owner would get. Suppose that the bridge owner also owns a railroad company that is providing transport services a railroad company that is providing transport services across the bridge in competition with other railroad across the bridge in competition with other railroad companies. His behavior would not change since all the companies. His behavior would not change since all the profits that he could make still depend upon his bridge profits that he could make still depend upon his bridge monopoly: He would continue to charge a monopoly price monopoly: He would continue to charge a monopoly price to everybody. to everybody.

55

The debate/3The debate/3 How then would a refusal to grant access be explained? How then would a refusal to grant access be explained?

One possibility is that the owner of the bridge might not be able One possibility is that the owner of the bridge might not be able to capture all rents by simple linear pricing. He might have to to capture all rents by simple linear pricing. He might have to use some sort of a per train charge which would appear as a use some sort of a per train charge which would appear as a fixed cost for the railroad company. fixed cost for the railroad company.

If there is competition downstream and transport prices of If there is competition downstream and transport prices of different goods are equal to marginal costs, the railroad different goods are equal to marginal costs, the railroad companies would not be able to recover such a fixed charge and companies would not be able to recover such a fixed charge and would go bankrupt unless the bridge owner would reduce its fee. would go bankrupt unless the bridge owner would reduce its fee.

In such circumstances the bridge monopolist may refuse to deal In such circumstances the bridge monopolist may refuse to deal with competitors in order to remain the only railway company with competitors in order to remain the only railway company that crosses the bridge and be able to capture all the monopoly that crosses the bridge and be able to capture all the monopoly profits originating from the bridge. He might reach the same profits originating from the bridge. He might reach the same result by auctioning away the right to cross the bridge to the result by auctioning away the right to cross the bridge to the highest bidder. For the consumer it would not matter if the highest bidder. For the consumer it would not matter if the essential facility owner operates downstream or not. In both essential facility owner operates downstream or not. In both circumstances he would pay a monopoly charge for crossing the circumstances he would pay a monopoly charge for crossing the bridge. bridge.

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The debate/4The debate/4

There has always been a debate on the “expropriating” role There has always been a debate on the “expropriating” role of a mandatory access regime. of a mandatory access regime.

Indeed, if an essential facility owner is not allowed the Indeed, if an essential facility owner is not allowed the possibility of excluding others from exploiting his facility possibility of excluding others from exploiting his facility (his invention in the case of an IPR based essential facility), (his invention in the case of an IPR based essential facility), all his profits would be reduced to zero (unless there are all his profits would be reduced to zero (unless there are capacity constraints)capacity constraints)

Nobody would pay for something everybody has. Indeed Nobody would pay for something everybody has. Indeed with an essential facility, profits arise from the rights to with an essential facility, profits arise from the rights to exclusively exploit a given invention. exclusively exploit a given invention.

If the essential facility is given to everybody its value drops If the essential facility is given to everybody its value drops to zero! to zero!

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The debate/5The debate/5 The importance of Coase (1972) analysis for the essential The importance of Coase (1972) analysis for the essential

facility doctrine is that exclusivities are necessary for the facility doctrine is that exclusivities are necessary for the essential facility owner to gain all the profits associated essential facility owner to gain all the profits associated with the use of the essential facility. with the use of the essential facility.

Coase (1972) also shows that exclusivities are to the Coase (1972) also shows that exclusivities are to the advantage of both the buyer of the essential facility advantage of both the buyer of the essential facility services and the supplier. In fact by just eliminating the services and the supplier. In fact by just eliminating the possibility of contractual exclusivities profits originating possibility of contractual exclusivities profits originating from the use of the essential facility may disappear. from the use of the essential facility may disappear.

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The ECPRThe ECPR (Baumol and Willig) Efficient Component

Pricing Rule Original version: margin rule a = P – C=> equal to opportunity cost of incumbent

Revised version by Mark Armstrong, optimal with differentiated goods and fixed P:

a = q(P – C – t), with q ≤1

Notion of retail minus pricing, avoidable costs

Problems: price squeeze

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Essential Facility vs Refusal to Essential Facility vs Refusal to dealdeal Trinko decisionTrinko decision

When refusing to deal with When refusing to deal with competitors is allowed?competitors is allowed?

Incentives to invest vs ex-post Incentives to invest vs ex-post competitioncompetition

Problems with Margin Squeeze testProblems with Margin Squeeze test

1010

EU and Italian casesEU and Italian cases

MagillMagill Tiercé LadbrokeTiercé Ladbroke ITT / PromediaITT / Promedia European Night Services (ENS)European Night Services (ENS) Oscar BronnerOscar Bronner

– Advocate General Jacobs’ opinionAdvocate General Jacobs’ opinion– The judgement in The judgement in Oscar BronnerOscar Bronner

Telecom/SeatTelecom/Seat

1111

A testA test

Refusal to deal

Is ther an upstream dominant position?

stop

Test for EF

stop

Has the asset been sold in the past?

MARKET

MARKET

Yes

No

Does the refusal generates a harm

Is there an economic reason for

refusing to deal?

no

Is the asset

an EF?

yes

yes

no

no

yes

stop

Share condition

EF

ANTITRUST

yes

no

stop

REGULATION

essentiality no

yes

substitutability

no

yes

ABUSE