The Economics of Margin Squeeze
Bruno Jullien, Patrick Rey, and Claudia Saavedra
n. 23, October 2013, revised March 2014
Bruno Jullien, Patrick Rey, and Claudia Saavedra, “The Economics of Margin Squeeze”, Rapport IDEI, n. 23, October 2013, revised March 2014.
The paper discusses economic theories of harm for anti-competitive margin squeeze by unregulated and regulated vertically integrated firms. We review both predation and foreclosure theories, as well as the mere exploitation of upstream market power. We show that foreclosure provides an appropriate framework in the case of an unregulated firm, whereas a firm under tight wholesale regulation should be evaluated under the predation paradigm, with an adequate test that we characterize. Finally, although non-exclusionary exploitation of upstream market power may also induce a margin squeeze, banning such a squeeze has ambiguous effects on the competitive outcome; hence, alternative measures, such as a cap on the access price, may provide a better policy.