A "price squeeze," or "margin squeeze," is a theory of antitrust liability under section 2 of the Sherman Act that concerns a vertically integrated monopolist that sells its upstream bottleneck input to firms that compete with the monopolist's production of a downstream product sold to end users. At issue is the size of the margin between the monopolist's input price and its retail price.
Recent antitrust price-squeeze cases have split the U.S. Courts of Appeals. The D.C. Circuit has concluded that, because a vertically integrated monopolist may refuse to provide its upstream inputs to its downstream competitors, it may raise the price of its upstream inputs without incurring antitrust liability. On the other hand, the Ninth Circuit's 2007 linkLine decision rejected such reasoning, notwithstanding Trinko. Predicated on Judge Learned Hand's opinion in Alcoa, linkLine subordinates the protection of consumers to the protection of competitors. It requires access-pricing analysis that more resembles the work of a public utilities commission than that of a federal judge in an antitrust case.
The price-squeeze theory of liability is incompatible with contemporary antitrust jurisprudence and economic analysis. A price squeeze by a firm lacking market power cannot possibly rise to the level of an antitrust violation because it has no chance of reducing consumer welfare. Further, the antitrust laws are concerned with the competitive process, not its end results. The inability of a single firm to stay in business is irrelevant as a matter of antitrust law unless the behavior inducing that firm to exit the market also harms the competitive process. The Supreme Court should reverse linkLine and resolve the circuit split. It should revisit Alcoa and explain why alleging a price squeeze neither states a claim in American antitrust law nor justifies deviation from the principles announced in Brooke Group and Trinko.
The United States and Europe appear to be taking divergent approaches to new theories of liability for monopolization. Consumer harm is not always a prerequisite for liability under European law.1 Recognition of this divergence comes at an important moment for American antitrust jurisprudence. The Supreme Court of the United States would greatly help the lower courts correctly apply the law of monopolization to novel business practices, particularly business practices in network industries subject to rapid technological innovation, if the Court first were to revisit a hoary doctrine that currently divides the Courts of Appeals and obscures the proper role of consumer welfare in the law of monopolization.
A "price squeeze," or "margin squeeze," is a theory of antitrust liability that concerns the pricing practices of a vertically integrated monopolist that sells its upstream bottleneck input to firms that compete with the monopolist in the production of a downstream product sold to end users. At issue is the size of the margin between the input price and the price that the monopolist charges in the downstream market for the end product incorporating that particular input.
In the typical price-squeeze case, a competitor finds that the margin between the monopolist's wholesale price and retail price is too small to enable the competitor to achieve its desired level of profit. Sometimes the margin is even negative. The competitor then attacks the pricing policy under section 2 of the Sherman Act2 on the rationale that the monopolist is monopolizing the downstream market or, less often, on the rationale that the monopolist is using unlawful means to maintain its existing monopoly over the bottleneck input.
In a price-squeeze or margin-squeeze case, the vertically integrated monopolist is allegedly the sole source of the bottleneck input and may or may not have monopoly power in downstream markets. Analysis of a price-squeeze or margin-squeeze complaint under section 2 of the Sherman Act would require precise identification of the specific markets affected and the manner in which the alleged price or margin squeeze assists the integrated monopolist in obtaining or maintaining monopoly power in the markets allegedly monopolized. In cases in which a price squeeze is alleged, precise definitions of the relevant retail market and the relevant market for the bottleneck input are critical and may raise subtle and challenging antitrust policy questions not yet well recognized in the case law. If the defendant has retail rivals that are able but unwilling to provide the supposedly bottleneck input, is the one competitor who is willing to provide access voluntarily a "monopolist" for the "bottleneck" input because it is the only source from which the plaintiff can obtain that input? If the defendant is not providing access to the alleged "bottleneck" input, but is required by regulatory compulsion to provide access although its rivals (due to asymmetrical regulation) are not, should the legality of the defendant's wholesale price for the input be dictated by regulatory laws establishing a duty to deal or by antitrust laws that do not? Does a price-squeeze theory requiring analysis of both relevant markets and the relationships between them facilitate or complicate correct application of the law? Should antitrust law serve as a means to impose duties on the alleged "input monopolist" to deal on terms different from those required by its regulator or acceptable to it on voluntary terms?
Apart from such questions of market definition, the question arises whether the price-squeeze concept aids or hinders coherent analysis under section 2 of the Sherman Act. If the monopolist's retail price is predatory or if its wholesale price is so high as to constitute a refusal to deal in a situation in which the monopolist has a duty to do so, then the monopolist's conduct can be challenged under existing precedents governing either predatory pricing or refusals to deal. One issue addressed in this article is whether the combination of a nonpredatory retail price and a lawful wholesale price can be characterized as exclusionary conduct under section 2 based on analysis of the margin between the two prices. Stated differently, is such an analysis superfluous and unnecessary, or does it add value by extending section 2 condemnation to conduct that might otherwise escape condemnation under existing precedents relating to retail pricing and duties to deal? After the Supreme Court's 2004 decision in Trinko, it should go without saying that a "squeeze" that neither causes nor threatens the monopolization of an identifiable market cannot pass muster under section 2.3 In this regard, United States antitrust laws differ significantly from the laws of jurisdictions adopting "abuse of dominance" as a competition law violation.
The price-squeeze theory of antitrust liability should be abolished in American antitrust law. The theory is incompatible with contemporary antitrust jurisprudence, and on economic grounds the threat of such liability discourages investment, retail price competition, and the voluntary provision of inputs on negotiated terms by vertically integrated monopolists to current and potential rivals otherwise unable to obtain or self-provide them. If a vertically integrated monopolist willing to provide inputs to rivals at a negotiated price exposes itself to a potential price-squeeze claim when it lowers its retail prices, it faces a strong disincentive to deal at all.
The correct economic framework for analyzing price squeezes exists in the voluminous literature on access pricing in regulated network industries. However, the complexity of such access-pricing proceedings underscores why it would be extremely difficult for a court-rather than an industry-specific regulatory agency, like the Federal Communications Commission (FCC) or a state public utilities commission (PUC)-to tackle a pricing problem that has challenged regulators and academic economists and generated thousands of pages of regulatory rulings and years of administrative and appellate litigation.
When the duty to deal arises from regulatory compulsion, rather than from a prior course of voluntary dealing, and when a regulator has authority to consider downstream competition in regulating prices charged by a regulated monopolist for access to a bottleneck input, there is no occasion for a court to consider further the relationship between the input price and retail prices. Alternatively, when a regulator has no authority to consider downstream competition in regulating prices charged by a regulated monopolist for access to the bottleneck input, has no authority over the prices charged by the monopolist for access to the bottleneck input, or has no regulatory authority over the monopolist at all, an antitrust court may consider only whether there is an antitrust duty-as distinguished from a regulatory duty- to deal and whether the price charged for the input constitutes a constructive refusal to deal in accordance with the antitrust duty. In either case, a court may consider whether an unregulated retail price itself is predatory in light of the state of competition in the retail market.
In general, when a rival complains that a regulated bottleneck provider's pricing is "squeezing" its margins, the real complaint is either that an unregulated downstream retail price is too low (that is, predatory) or that the regulator has erred by permitting an access price for the bottleneck input that is too high. By using the term "squeeze," the complaining rival thus seeks to restrain retail price competition between itself and the provider of the bottleneck input (fixing or stabilizing the regulated monopolist's retail prices) or, in the alternative, to second-guess, collaterally attack, and nullify the decisions of the legislators and regulators responsible for establishing the regulatory regime.
When a rival complains that a bottleneck provider's unregulated price for access to the bottleneck input and its retail prices "squeeze" the rival's margins, the legality of each price can be tested separately in accordance with the rules applicable to that price. If the result is that the bottleneck input price is lawful and that the retail price is nonpredatory, then predicating antitrust liability under section 2 under a price-squeeze or marginsqueeze theory would violate the principles of either Brooke Group,5 Trinko, or both. Accordingly, the existence of price-squeeze or margin-squeeze cases before the Supreme Court issued these controlling decisions should have no bearing on the current viability of "squeeze" theory. The same should be true of references in post-Trinko cases to "squeeze" theory based on cases decided before Trinko.
The fountainhead of antitrust's pre-Trinko price-squeeze jurisprudence is Judge Learned Hand's 1945 opinion in Alcoa.6 Under Alcoa, a vertically integrated monopolist must charge downstream competitors not more than a "fair price" for its bottleneck input, and it must charge end users a retail price for its downstream product that is high enough to ensure that its competitors can match that price and still make a "living profit."7 Put differently, Alcoa imposed two pricing constraints on the vertically integrated monopolist: a price ceiling for its input and a price floor for its output.
However, Judge Hand's key concept-that a competitor is entitled to receive a "living profit"-is irreconcilable with the consumer-welfare objective of antitrust law that the Supreme Court and the antitrust enforcement agencies have emphasized for at least three decades. The irreconcilable logic of Alcoa is more than a matter of academic speculation. Mandating access to the bottleneck input or facilities or intellectual property of a vertically integrated firm at an administratively or judicially determined "fair price" is arguably the most enticing remedy sought in monopolization litigation today. A new generation of antitrust price-squeeze cases in the telecommunications industry has divided the U.S. Court of Appeals, with some circuits producing rulings in conflict with recent Supreme Court decisions on monopolization and the D.C. Circuit producing the analytically correct rule. In January 2008, the Supreme Court invited the Solicitor General to file an amicus brief on whether the Court should grant a writ of certiorari in one such case.8 It is timely for the Supreme Court to revisit Alcoa and to explain why alleging a price squeeze neither states a claim in American antitrust law nor justifies deviation from the principles announced in Brooke Group and Trinko.
J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.
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