39 Pages Posted: 14 Jul 2008 Last revised: 30 Oct 2015
Date Written: March 25, 2009
A price squeeze occurs when a vertically integrated firm "squeezes' a rival's margins between a high wholesale price for an essential input sold to the rival, and a low output price to consumers for whom the two firms compete. Price squeezes have been a recognized but controversial antitrust violation for two-thirds of a century. We examine the law and economics of the price squeeze, beginning with Judge Hand's famous discussion in the Alcoa case in 1945. While Alcoa has been widely portrayed as creating a "fairness" or "fair profit" test for unlawful price squeezes, Judge Hand actually adopted a cost-based test, although a somewhat different one than most courts and scholars would adopt today. We conclude that strictly cost-based predatory pricing tests such as the one the Supreme Court developed in its 1993 Brooke Group decision are not appropriate to the concerns being raised in a price squeeze. We also consider several efficiency explanations, the importance of joint costs, situations in which the dominant firm uses a squeeze to appropriate the fixed cost portion of the rival's investment, as well as those where the shared input is a fixed rather than variable cost for the rival. Ultimately, we find little room for antitrust liability except in one circumstance: where a squeeze is used to restrain the rival's vertical integration into the monopolized market.
Keywords: Antitrust, Monopoly, Sherman Act, Price Squeeze, Predatory Pricing, Linkline
JEL Classification: K0, K2, K21, L40, L41
Suggested Citation: Suggested Citation
Hovenkamp, Herbert J. and Hovenkamp, Erik, The Viability of Antitrust Price Squeeze Claims (March 25, 2009). U Iowa Legal Studies Research Paper No. 08-33; Arizona Law Review, Vol. 50, p. 967, 2008. Available at SSRN: https://ssrn.com/abstract=1156974 or http://dx.doi.org/10.2139/ssrn.1156974