Margin Squeeze in a Regulatory Environment: An Application to Differentiated Product Markets

28 Pages Posted: 21 Mar 2013 Last revised: 1 Feb 2014

See all articles by Marc Petulowa

Marc Petulowa

Université Montpellier I, Department of Economics, Students; France Telecom Orange Group

Claudia Saavedra

Regulatory Affairs - Orange

Date Written: February 1, 2014

Abstract

This paper analyses the effects of banning pricing policies that lead to margin squeezes when the upstream good is imperfectly regulated. The analysis relies on a modelling with a vertically integrated upstream monopolist that faces competition by an unintegrated downstream competitor. It shows that for differentiated goods in the downstream market, a margin squeeze can be observed as the competitive outcome rather than exclusionary conduct. If upstream market regulation is non-constraining, a margin squeeze ban induces the vertically integrated firm to increase its own downstream price (this is, a price umbrella), but also to review its upstream pricing behavior and reduce the upstream price charged to the retail competitor. This "decreasing rivals' costs effect" (DRC-effect) allows the integrated firm to maximise its profits given the constraint on the downstream price, and allows the downstream competitor to set a lower retail price. However, when constraining upstream regulation and a ban are implemented jointly, the DRC-effect vanishes and downstream prices may to rise, leading to a decrease of consumer surplus. This analysis tends to back up the American way of handling margin squeezes in a regulated environment.

Keywords: Margin squeeze, Vertical relations, Regulated Industries, Antitrust Law, Competition

JEL Classification: L40, L51, K23

Suggested Citation

Petulowa, Marc and Saavedra Valenzuela, Claudia, Margin Squeeze in a Regulatory Environment: An Application to Differentiated Product Markets (February 1, 2014). Available at SSRN: https://ssrn.com/abstract=2236258 or http://dx.doi.org/10.2139/ssrn.2236258

Marc Petulowa (Contact Author)

Université Montpellier I, Department of Economics, Students ( email )

Avenue Raymond Dugrand, CS 79606
Montpellier Cedex 1, F-34000
France

France Telecom Orange Group ( email )

78 rue Olivier de Serres
Paris, Seine 75015
France

Claudia Saavedra Valenzuela

Regulatory Affairs - Orange ( email )

78 rue Olivier de Serres
Paris, 75015
France

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