Essential Facility and Refusal to deal. Property Rights & Antitrust Antonio Nicita

2 Essential facility Doctrine Firm with monopoly power in one market has to deal fairly with competing firms in adjacent markets who need essential facilities. Firm with monopoly power in one market has to deal fairly with competing firms in adjacent markets who need essential facilities. Antitrust activity have to show: Antitrust activity have to show:  Control of facilities by a monopolist  Competitor’s inability to duplicate the essential facility  Denial of use  Feasibility of providing the facility

3 The debate/1 The problem of mandatory access to an essential facility falls into the broad area of vertical relations and into the debate about whether antitrust law should intervene in order to guarantee access, which in turn centers around the question of leveraging, that is the possibility that a monopolist “leverage” its monopoly power in one market in order to extend it into another market. The problem of mandatory access to an essential facility falls into the broad area of vertical relations and into the debate about whether antitrust law should intervene in order to guarantee access, which in turn centers around the question of leveraging, that is the possibility that a monopolist “leverage” its monopoly power in one market in order to extend it into another market. It originally seemed obvious that this was so, a view held in particular by Joe Bain and the Harvard School of the 1950’s. Such a common understanding was forcefully put into question by the so called Chicago Revolution of the 1980’s which proved that a firm that has monopoly power at one level can only transmit that same monopoly to another level, but not create more monopoly power than it already has. It originally seemed obvious that this was so, a view held in particular by Joe Bain and the Harvard School of the 1950’s. Such a common understanding was forcefully put into question by the so called Chicago Revolution of the 1980’s which proved that a firm that has monopoly power at one level can only transmit that same monopoly to another level, but not create more monopoly power than it already has. In this perspective vertical restrictions cannot aim at increasing a “fixed sum” monopoly profit and therefore, as a matter of logic, should be explained by some other reasoning which it was shown in many cases to be greater efficiency. In this perspective vertical restrictions cannot aim at increasing a “fixed sum” monopoly profit and therefore, as a matter of logic, should be explained by some other reasoning which it was shown in many cases to be greater efficiency.

4 The debate/2 Suppose that a private monopolist owns the only possible bridge across a river and that a number of competing railroad companies provide transport services along the bridge. Suppose that a private monopolist owns the only possible bridge across a river and that a number of competing railroad companies provide transport services along the bridge. Suppose also that there are no restrictions in the pricing for the use of the bridge, nor for transport service charges. In order for the owner of the bridge to gain monopoly profits, he has to charge all railroads a monopoly price to cross. Suppose also that there are no restrictions in the pricing for the use of the bridge, nor for transport service charges. In order for the owner of the bridge to gain monopoly profits, he has to charge all railroads a monopoly price to cross. The greater the competition downstream and the lower the profits downstream, the greater the profits the bridge owner would get. Suppose that the bridge owner also owns a railroad company that is providing transport services across the bridge in competition with other railroad companies. His behavior would not change since all the profits that he could make still depend upon his bridge monopoly: He would continue to charge a monopoly price to everybody. The greater the competition downstream and the lower the profits downstream, the greater the profits the bridge owner would get. Suppose that the bridge owner also owns a railroad company that is providing transport services across the bridge in competition with other railroad companies. His behavior would not change since all the profits that he could make still depend upon his bridge monopoly: He would continue to charge a monopoly price to everybody.

5 The 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 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 fixed cost for the railroad company. 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 use some sort of a per train charge which would appear as a fixed cost for the railroad company. If there is competition downstream and transport prices of different goods are equal to marginal costs, the railroad companies would not be able to recover such a fixed charge and would go bankrupt unless the bridge owner would reduce its fee. If there is competition downstream and transport prices of different goods are equal to marginal costs, the railroad companies would not be able to recover such a fixed charge and would go bankrupt unless the bridge owner would reduce its fee. In such circumstances the bridge monopolist may refuse to deal with competitors in order to remain the only railway company that crosses the bridge and be able to capture all the monopoly profits originating from the bridge. He might reach the same result by auctioning away the right to cross the bridge to the highest bidder. For the consumer it would not matter if the essential facility owner operates downstream or not. In both circumstances he would pay a monopoly charge for crossing the bridge. In such circumstances the bridge monopolist may refuse to deal with competitors in order to remain the only railway company that crosses the bridge and be able to capture all the monopoly profits originating from the bridge. He might reach the same result by auctioning away the right to cross the bridge to the highest bidder. For the consumer it would not matter if the essential facility owner operates downstream or not. In both circumstances he would pay a monopoly charge for crossing the bridge.

6 The debate/4 There has always been a debate on the “expropriating” role of a mandatory access regime. There has always been a debate on the “expropriating” role of a mandatory access regime. Indeed, if an essential facility owner is not allowed the possibility of excluding others from exploiting his facility (his invention in the case of an IPR based essential facility), all his profits would be reduced to zero (unless there are capacity constraints) Indeed, if an essential facility owner is not allowed the possibility of excluding others from exploiting his facility (his invention in the case of an IPR based essential facility), all his profits would be reduced to zero (unless there are capacity constraints) Nobody would pay for something everybody has. Indeed with an essential facility, profits arise from the rights to exclusively exploit a given invention. Nobody would pay for something everybody has. Indeed with an essential facility, profits arise from the rights to exclusively exploit a given invention. If the essential facility is given to everybody its value drops to zero! If the essential facility is given to everybody its value drops to zero!

7 The debate/5 The importance of Coase (1972) analysis for the essential facility doctrine is that exclusivities are necessary for the essential facility owner to gain all the profits associated with the use of the essential facility. The importance of Coase (1972) analysis for the essential facility doctrine is that exclusivities are necessary for the essential facility owner to gain all the profits associated with the use of the essential facility. Coase (1972) also shows that exclusivities are to the advantage of both the buyer of the essential facility services and the supplier. In fact by just eliminating the possibility of contractual exclusivities profits originating from the use of the essential facility may disappear. Coase (1972) also shows that exclusivities are to the advantage of both the buyer of the essential facility services and the supplier. In fact by just eliminating the possibility of contractual exclusivities profits originating from the use of the essential facility may disappear.

8 The 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

9 Essential Facility vs Refusal to deal Trinko decision Trinko decision When refusing to deal with competitors is allowed? When refusing to deal with competitors is allowed? Incentives to invest vs ex-post competition Incentives to invest vs ex-post competition Problems with Margin Squeeze test Problems with Margin Squeeze test

10 EU and Italian cases  Magill  Tiercé Ladbroke  ITT / Promedia  European Night Services (ENS)  Oscar Bronner –Advocate General Jacobs’ opinion –The judgement in Oscar Bronner  Telecom/Seat

11 A test