Are Vertically Integrated DSL Providers Squeezing Unaffiliated ISPs (and Should We Care)?

Abstract:     
Vertically integrated DSL providers have been accused of engaging in a price squeeze to foreclose unaffiliated Internet service providers (ISPs). A price squeeze is a special case of a refusal to deal, in which the access price is set so high as to prevent the downstream provider from covering its incremental costs, thereby foreclosing downstream competition. In this paper, we assess the merits of a generic price squeeze allegation made against a vertically integrated telecommunications company - namely, a DSL provider. We review the role of regulation in promoting competition by facilitating entry into broadband services by unintegrated ISPs. Next, we discuss the earlier generation of ISPs' contribution to consumer value, and ask whether they can continue to do so in a broadband world. We conclude that the social cost associated with the elimination of ISPs (and the incremental competition they inject at the retail level of broadband service) is negligible. Finally, we review the price squeeze allegations. Using a traditional antitrust paradigm, we identify the conditions under which such a price squeeze would harm consumer welfare. We conclude that while the price squeeze test yields information about the welfare of an equally efficient retailer, it yields little information about consumer welfare. We end by discussing the relationship between price squeeze and cross-subsidies.

Keywords: price squeeze, Internet, DSL, broadband, ISPs

JEL Classifications: K21, L12, L41, L42, L50, L82, L96, K23

Working Paper Series