The Concurrent Application of Competition Law and Regulation: The Case of Margin Squeeze Abuses in the Telecommunications Sector

Abstract:     
Margin squeeze in the telecommunications sector has become a central concern among national regulatory authorities, national competition authorities, national courts, and the European Commission. In recent months, competition law proceedings have been launched in several Member States, including Denmark, France, Italy, the Netherlands, and the United Kingdom. Most recently, on 16 November 2004, the Italian competition authority imposed a 152 million euros fine on Telecom Italia on the ground that it had engaged, inter alia, in a margin squeeze abuse. The need to prevent margin squeeze has also become a leitmotiv for NRAs in their capacity as regulators of wholesale and/or retail telecommunications prices. Thus, from an obscure issue that belonged to the realms of academic discussion, margin squeeze has become an intensely-debated practical issue in the area of telecommunications.

Margin squeeze cases are the product of increased competition in the post-liberalization telecommunications sector. They also represent an important and necessary tool in the commercial strategies of new entrants that seek to compete with incumbent operators. While new entrants have made significant inroads in several telecommunications markets, many still claim that their growth is constrained by exclusionary practices carried out by the incumbents. Margin squeeze allegations feature prominently in this regard.

Simply expressed, a margin squeeze amounts to a reduction by a dominant operator of the margin between wholesale and retail prices so as to make entry difficult or to encourage exit. This can be done by raising wholesale prices, lowering retail prices, or doing both. While margin squeeze has been frequently alleged in recent years, findings of abuse have thus far been rare. This may be partly due to the difficulty of demonstrating a margin squeeze abuse, but doubtless also reflects the fact that incumbents have dramatically reduced wholesale and retail prices in recent years, for entirely legitimate reasons.

This paper looks at two instruments that can be used to prevent and/or sanction abuses of market power in telecommunications: sector-specific regulation, which is usually based on national regulatory frameworks transposing EC legislation, and national and/or EC competition law. While each instrument has advantages and disadvantages, their interaction often raises fundamental issues, which we seek to address in this paper.

Keywords: antitrust, competition, abuse of dominance, margin squeeze, predatory pricing, cross-subsidies, regulation, telecommunications, excessive pricing, vertical integration, interconnection

JEL Classifications: D40, D60, K21, K23, L11, L12, L21, L22, L41, L43

Working Paper Series