Abstract

Recent trends indicate that the business environment has become very competitive. Monopolistic firms in different industries have assumed anticompetitive tendencies in a bid to respond to the merging market demands. However, legal provisions have been instrumental in curbing this practice. This paper explores the concept of dominance and underscores how dominant firms abuse this position. This is done in light of the TeliaSonera1 case study and with special reference to the concept of margin squeeze. It begins by exploring the concept of dominance in abuse and how margin squeeze is affected. Then, it proceeds to analyzing the concept of exclusionary abuses in cases of dominance. Further, it goes ahead to analyze the concept of leveraging abuse. Its review of the recent cases reveals that the telecommunications sector has been the most affected by the malpractice. Finally, the paper affirms that there are indeed abuses of this important law in the European Union.
Key Words: Dominance, TeliaSonera case, exclusionary abuses, monopoly?..

Introduction

In the recent past, it cannot be disputed that the business environment has become very competitive. This is attributable to the external as well as internal dynamics that require the business persons and entities to develop new ways and utilize more rewarding approaches. This has further been compounded by the volatility that is caused by external as well as internal market shocks. Market shocks stem from the impacts of globalization and the relative economic integration. Thus a global change in the economy has the ability to affect the functioning of local, national and regional economies. In response to these changes, businesses have taken practical measures to cushion themselves against the negative impacts of the preceding market dynamics. In a bid to explore market niches that are economically rewarding, businesses have gone to great lengths. This has in return increased competitive practices that in some instances have negative implications on the holistic wellbeing of the consumer.
In this respect, the businesses strive to attain consumer patronage in order to sell their products. Ideally, they need to focus on maximizing consumer benefits and optimizing profits at the same time. However, it can be agreed that attaining this desirable status, in which all stakeholders benefit optimally, is relatively challenging. Coupled with increased pressure from the market to make profits, most business persons have opted for satisfying their needs at the expense of the consumer. Furthermore, individual business entities have gone to great lengths to attain and maintain a competitive edge in the markets that they explore. In essence, they take measures that are geared towards enhancing their performance and outperforming their counterparts. They have adopted malpractices such as collusive price fixing, predatory pricing, tie-up sale, discriminatory pricing and creating barriers to market entry amongst others. These trends have had adverse effects on both the consumers and other business persons in the market. To address these, regulatory policies have been put in place. Perhaps one that has been more effective in addressing the preceding concern is competition policy.

Competition policy constitutes a set of measures adopted by the government which direct the behavior of the businesses as well as the structure of the entire business industry. Their main aim is to maximize the welfare of the affected stakeholders and promote effective and efficient performance. They provide useful insights regarding how business entities and individuals can explore the market and enhance healthy competition. Further, they offer guidelines regarding how to prevent anti competitive practices that hurt the industry and undermine sustainable growth and development. At this point, it cannot be disputed that unfair competitive practices promote aggression that has detrimental effects on the performance of businesses. In essence, they undermine the ability of the business to realize profits. Also, such practices deny the consumer a chance to benefit fully from the options that are offered by other businesses. In the recent past, cases of unfair competition have been on the rise. A classic example of this includes the Telefonica v Commission case2.

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There have been established legal institutions that solely address matters pertaining to the anticompetitive practices that are exhibited by dominant firms. These offer guidelines that act as benchmarks upon which critical decision making is made. The legal provisions are enforced by distinct regulatory bodies at both the national and international level. This is particularly so because of the fact that market borders have expanded beyond national dimensions. Globalization trends have enlarged market dimensions to international levels. However, the approaches that are assumed by the legal institutions in enforcing important laws and regulations differ considerably. This can be used to explain why they in some instances reach at different conclusions when addressing cases containing similar facts. Intrinsic differences are attributable to various factors including varied perceptions, available evidence and implications of the outcomes to the entire business fraternity. Reconciliation of this is imperatively important and would go a long way in enhancing the credibility of legal decisions.

Methodology

Market dynamics tend to be intricate and augmenting. Markets have various facets which impact in different ways on the performance of different actors. In order to understand and appreciate the legal aspect of competition, it is important to have sufficient background information about the implications of previous incidences of unhealthy competitive practices. The study will utilize a host of academic and legal sources in a bid to understand the complexity of anticompetitive practices by dominant firms. To begin with, it will rely on the secondary sources that have documented legal cases regarding unhealthy competition and specifically, the role of margin squeeze in this. These will range from academic journals to books and various other legal sources.

More information will be collected from primary sources such as newspapers and published journal articles. This will further be informed by information from credible and authentic websites containing detailed relative cases. At this point, it is worth appreciating that the internet always has updated versions of the cases. This is imperative in ensuring that deductions made at different points are based on informed thought. In addition, credible websites offer useful insights regarding specific cases and legal implications of each. All this information will be evaluated, harmonized and presented in a coherent manner.

Purpose of the Paper

A market that embraces effective competition is benefiting to the consumer because his welfare is catered for accordingly. However, as aforementioned, a market that assumes unfair competition hurts both the business players and the consumer. In particular, monopoly has adverse impacts on both the industry and the consumer. In their research, Vaughan, Lee, Kennelly and Riches indicate that monopolists use their skills, knowledge, resource capacity and expertise to control markets3. In most cases, they focus on reducing volumes of products in the markets or increasing the prices of the respective products. From an economic point of view, this is termed ‘allocative inefficiency’ and culminates into ‘deadweight losses’. Such behavior is in most cases influenced by the fear to face vigorous rivalry from other market players. The minimal pressure imposed on the monopolist to increase the prices of the products augments its pursuit. As indicated earlier, the modern economy has developed specific provisions that address monopolistic behavior. These are provided for in the Sherman’s act of 18904. Particularly, these prohibit the abuse of dominance that is in most cases assumed by monopolists.

The purpose of this paper is to explore and determine how dominance is used by monopolists to leverage in other markets. It recognizes that abuse of dominance is a very challenging field of study especially considering that firms can attain a dominant position in the market legitimately. This can be attained in various ways including innovation, greater entrepreneurial effort, superior production and so forth. It is also worth noting that competitive practices are very complex and determining the extent of their effect from the face value is not easy. This is exemplified in the divergent decisions that were taken in the case of Microsoft. An exploration of how dominance is abuse would provide useful information that can help the relevant authorities to make informed decisions.

This goes a long way in preventing incidences of employment of the ‘chilling effect’ on both innovation and competition. This can culminate in the mistaken application of the relative provision and compromise economic growth and development.
This study explores the concept of market dominance in light of the TeliaSonera case and the new approach to Article 102TFEU. To enhance a harmonic consideration, it is divided in various sections in which in depth analyses regarding abuse and dominance are presented. The first part explores the role of dominance in abuse. The second section provides useful insights regarding the concept of exclusionary abuse and its position or influence on ordinary abuse. The third faction analyzes the concept of leveraging abuses. The fourth part underscores specific abuses that have been cited in the recent months. Finally, the fifth part explores the test of the effects and justifies the objective of the study. All this is done with reference to the TeliaSonera case that explicitly shows the extent that abuse of dominance can have on the consumer and the entire industry. To enhance coherence, the paper begins by outlining the legal provisions regarding abuse of dominance as they are underscored in Article 102TFEU.

Legal Basis

Article 102 TFEU
Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
In their research, Govaere, Quick and Bonckers indicate that Article 102 of the Treaty on the Functioning of the European Union seeks to prevent entities and persons holding dominant positions in the market from abusing the same5. In particular, it regulates monopolies that restrict competition and hurt both the industry and the consumers. The abuse according to the article is all encompassing and comprises of various malpractices. To begin with, imposition of unfair purchases, selling prices or other unfair business conditions either directly or indirectly amounts to an offence. Another malpractice pertains to limiting technical development, production or markets with an aim of prejudicing consumers. Also, applying dissimilar conditions to trade transactions while doing business with other parties; is illegal. This is because it puts the respective parties at a competitive disadvantage by limiting their ability to explore the available options accordingly.
Finally, the article contends that concluding contracts using conditions that are not initially bound by the respective contracts is also malpractice. To ensure credibility, it is vitally important to first determine whether the firm in quest is actually dominant. Determination of the ‘dominant’ status needs to be guided by distinct conditions in order to prevent incidences of labeling. This is particularly so because the legal implications for abusing this position are detrimental and can undermine the performance of the firm. Under the European Union, all firms that are dominant are responsible for ensuring that their behavior does not hurt or compromise the performance of other players in the market6.
With regard to the new approach to this article, it is legally contended that an abusive margin squeeze contravenes the provisions of this article. In this respect, it is worth acknowledging that the article prohibits dominant firms from using their position abusively. This is exemplified by the decision of the Court of Justice regarding the TeliaSonera case.

Role of Dominance in Abuse

TeliaSonera is a telephone network operator that has established business operations in Sweden. With reference to the case, the firm entirely owns and controls the local telecoms infrastructure, local loop. As such it offers broadband connection services to the consumer base directly. The firm offers access to this status to other operators through two main ways. First, in line with the provisions of regulation 2887/2000, the firm offers unbundled access to this loop to other operators. Secondly, it provides operators with the ADSL product that is solely intended for wholesalers, but it did so voluntarily, without regulatory obligation.With regard to the case under review, The Swedish Competition Authority believed that TeliaSonera abused this dominant position. This according to the former occurred between 2000 and 2003 when it applied a certain pricing policy that hurt the end users7. In particular, the Authority felt that the respective spread between ADSL sale price and relative services was insufficient to cover the entire costs that the company incurred during distribution of the services to the consumers. In this respect, the court believed that TeliaSonera abused the dominant position through margin-squeeze.
According to the Court of justice of the European Union, a margin squeeze does constitute abuse of dominance if a dominant firm pursues it. This is regardless of whether the dominant firm is not obliged to provide supplies to downstream competitors. In this regard, a margin squeeze may be established without showing that the efforts that are undertaken by the dominant company at the upstream level are indispensable to allow the downstream competitors to actively participate and benefit from the respective competition.
Advocate General Mazak advised that a margin squeeze could constitute an abuse either when the wholesale product was either essential or when its supply was mandated by regulation.8 The Court’s nevertheless ruled on the contrary. Essentially, a dominant company could be responsible for an unlawful margin squeeze even if the wholesale product was not “indispensable”, though the anticompetitive effects would be more likely substantiated.9

The Court argued that,

“However, taking into account the dominant position of the undertaking concerned in the wholesale market, the possibility cannot be ruled out that, by reason simply of the fact that the wholesale product is not indispensable for the supply of the retail product, a pricing practice which causes margin squeeze may not be able to produce any anticompetitive effect, even potentially. Accordingly, it is again for the referring court to satisfy itself that, even where the wholesale product is not indispensable, the practice may be capable of having anticompetitive effects on the markets concerned.”10

The Concept of Margin squeeze

In order to better understand and appreciate the contribution of margin squeeze to abuse of dominance, it is important to evaluate the concept of margin squeeze.
In his review, Monti conceives margin squeeze to arise when there is some negative or insufficient difference between the retail and wholesale prices11. The inherent insufficiency makes it difficult for the dominant firm to cover the costs that it incurs when supplying retail products or services to the consumers. From a legal point of view, the respective difference should not prevent the competitors, who in this respect are considered to be equally efficient, to effectively compete for the supply of the respective products to the consumers. Otherwise, the efficient competitors are unlikely to operate effectively in the market; they will either run at a loss or incur artificially reduced levels of profitability.
Margin squeeze has various implications on the functioning of the market and on the entire wellbeing of the dominant firm. Critics of this notion argue that margin squeeze prohibition leads to wealth transfer from the dominant firm to the downstream competitors. This in their perception does not benefit the consumer in any way. Rather, it has detrimental impacts on the ability of the firm to make investments and provide competition incentives. Possibly, the prohibition of margin squeeze can culminate in increased retail prices and ultimately the consumer incurs losses as opposed to benefiting12. From this point of view, margin squeeze has negative impacts on the competitiveness of the industry or market.
Also, margin squeeze limits the rival’s incentives to pursue any innovations in the market at the downstream level. This is because all the savings that the rivals make at this point would be transferred to the dominant firm through the squeeze. Notably, this has adverse impacts on the consumers as they shoulder all the costs. In return, this compromises their purchasing power and makes them liable to further market shocks. To a great extent, this limits performance in the downstream market environment. Reduced performance at this level has lasting implications on the performance of the entire industry. This is particularly so because the performance of the market is highly depended on the wellbeing of the consumer community.
In essence, the dominant firm uses this practice to eliminate rivals at the lower level. In this regard, limiting their financial performance and ultimately their ability to cope with the various changes in the market attains this. At this point, it is worth appreciating that sustainable growth and development of any business firm is highly depended on its resource capacity. Thus the respective firm tends to broaden the consumer base at the retail level. Nonetheless, this firm would incur losses in the long run because of the fact that very few profits would be realized at the wholesale level13. Moreover, it would lose important clients at this level and might find it difficult to run operations according to the market rules.
With reference to the Teliasonera case, the Court maintained that margin squeeze is a complex and all encompassing term whose infringement is not limited to the refusal of a dominant firm to supply products to the market accordingly. According to it, a margin squeeze occurs in instances when a firm uses a pricing strategy such that the spread between prices charged on wholesalers and retailers does not fully cover all the costs it incurs in its effort to gain access to its retail market. This court further affirmed that such a scenario occurs when the margin is negative as well as when it is positive. In the former case, the wholesale price tends to be higher when compared to the retail price.
The court with reference to this case also found out that with cases of margin squeeze, it does not matter whether the dominant firm has a regulatory or legal obligation to supply products to the competitor. In this respect, the court asserted that the absence of a regulatory obligation did not determine the abusiveness of the practice in any way; rather, the concept of margin squeeze is solely about that particular spread of prices that are offered by the dominant firm14. Further, it held that it was also irrelevant whether the supply being effected was directed at an existing or new client, whether the firm would be in position to recoup any relative losses or whether the respective markets are growing rapidly or being influenced in any way with technological advancements. Also worth mentioning is the court’s decision to use either the costs of the firm or those of the competitors as reference.
The General court’s decision in the recent Telefonica15 case had varied implications. It upheld the Commission decision in its entireness and dismissed the appeal.In this regard, it maintained that the existence of an ex ante regulation does not imply that ex post competition has been excluded. Relative rules according to this ruling can be enforced as long as the dominant firm engages in conduct that restricts, distorts or prevents competition. This is unlike in the past when ruling place emphasis on whether an incumbent firm’s pricing had been approved by any regulatory board.16
At this point, it is worth noting that the concept of margin squeeze is indeed complex and needs to be evaluated to detail when addressing any relative court. In particular, certain aspects need to be analyzed at length. The first factor that is considered primal in determining whether a case qualifies as a margin squeeze includes the pricing criteria that need to be based on the overall cost of the respective undertaking. Where this is impossible, the prices as well as costs of the competitors should be evaluated accordingly. In his review, Lopez-Tarruella cites that the second factor that aids in determining the credibility of a case with respect to margin squeeze includes the need to demonstrate that the respective practices have an anti competitive effect on retail markets17. Relative to this would be the need to show that the practice in question is neither economically viable nor legally justified.
The preceding legal findings have diverse implications on all industries in the market. Fundamentally, they provide a benchmark upon which decision-making should be based. This is instrumental in enhancing credibility as well as objectivity. Most importantly, it ensures that the decision made is based on informed thought. This is particularly vital considering that the legal implications have lasting detrimental impacts on the wellbeing of the affected firm. To a great extent, relative decisions are also vital in accrediting the worth of the legal institutions in the country. Of great importance however is the recognition that these insights aid in broadening the perceptions of the society about this issue. In this case, the court determined that the dominant firm indeed used its dominant position abusively and therefore contravened the provisions of Article 102TFEU that prohibits the practice18. Initially, it determined that the spread between the respective wholesale prices of the ADSL products and the prices charged at the retail level for connection of broadband services does not give competitors a chance to equally compete for providing respective products to the consumer base.

Margin Squeeze and Predatory Pricing

At this point, it cannot be disputed that margin squeeze and predatory pricing share certain common principles. Seemingly both strategies include the aspect of pricing and dominant firms employ them in a bid to compel their competitors to leave the market. According to Crocioni and Cento, predatory pricing constitutes a commercial strategy employed by a dominant firm19. In this, the dominant firm begins by lowering the price of its product to a level that would eventually force the rivals to leave the market. The main aim for this is for the firm to have complete control over the market. Although losses are incurred in the short term, the long term goal is ultimately achieved.
Notably, the practice of margin squeeze is also based on the same principle. In essence, the dominant firm retails its products at a very low price to the extent that competitors cannot realize profits while working in the same market environment. Unlike in a margin squeeze case, predatory pricing does not require the dominant company to be present in both the downstream and upstream market. Further, in predatory pricing, the dominant firm experiences losses with respect to that particular product20. Nonetheless, this is recovered through the profits that it gets form other products offered to the market. Also worth noting is the recognition that in predatory pricing, the incumbent firm has the capacity to sustain the relative losses for a certain period of time. Within this time, it is able to force its competitors to leave the market. This is unlike in margin squeeze where the dominant firm does not incur any form of losses. This is because the wholesale charges that are in its upstream market cater for all the profits that it intends to make.21

Concept of Exclusionary Abuse in Cases of Ordinary Dominance

With regard to exclusionary abuse, Karnik believes that the practice is pursued by firms that assume a dominant position in the market22. In particular, the conduct of a dominant firm is characterized by exclusionary abuse when it is anticompetitive and can potentially culminate in foreclosure of the firms’ rivals. In other words, it practically disables the operations of the competitor firms. In this regard, it is worth noting that consumers seek for quality and as such, suppliers place great emphasis on providing products that meet consumer expectations. Under normal circumstances or effective competition, competitors seek to ensure that they deliver optimally with respect to pricing of their products, choosing the right packages and products, ensuring high quality and incorporating creativity in a bid to maintain a competitive edge.
Ideally, those that do not offer the preceding attributes leave the market because they are unlikely to realize their primary goals. Naturally, this is appropriate and considered a consequence of ideal competition. It is acceptable and demonstrates incompetence on the part of the affected competitor. Thus most firms in the market aim at ensuring all the consumer needs are catered for accordingly. Essentially, this helps them to not only survive in the competitive market, but to also thrive too. However, anti competitive tendencies have adverse effects on the existing firms in the market. They are external forces that literarily compel the competitor firms to leave the market and seek for other options. Competitor firms that leave the market in this respect are forced to by the conduct of the dominant firm rather than by their individual inefficiencies. According to Lopatka and Page, these are exemplified when the dominant firm’s conduct compromises the ability of either potential or actual competitor firms to effectively access any supplies as well as markets23. The rivals in this regard can be the emergent or already established competitors.
Anticompetitive practices are wide and varied and to ensure credibility, they need to be measured accordingly as well as compared against established standards. In order to effectively assess whether the conduct of the dominant firm is actually anticompetitive, Jones and Sufrin underscore seven important factors24. According to them, these can be used as benchmarks to determine the behavior or conduct of a dominant firm with respect to anti competitive tendencies. These factors include; the market conditions that can in most instances influence instances of foreclosure, the position of the undertaking of the dominant firm, the competitive importance that is attached to the foreclosed competitors, the extent of the abusive conduct that has been alleged, the competitive importance of affected clients as well as or input suppliers, evidence of any form of exclusionary strategy and evidence of actual foreclosure. Evaluation of all these factors is fundamental in determining or proving presence of anti competitive foreclosure. It is widely agreed that these are useful screening tools that can play an important role in eliminating anticompetitive practices in the market too.
A dominant firm also exemplifies anticompetitive practices when the respective conduct raises obstacles to any competition and creates certain inefficiencies. In this regard, the inherent anti-competiveness is not outright; rather it can be inferred from the relative conduct that is assumed by the dominant firm25. Classic examples of conduct falling in this category includes prevention of clients by the dominant firm to test or buy the products of the competitors and or the dominant firm paying the client or distributor in order to delay introducing competitor products in the market. In the former example, the dominant firm achieves this by making the testing conditional prior to sale or offering of its products.
Further, the practice of the dominant firm needs to have adverse implications on the welfare of the consumer for it to qualify as exclusionary abuse. This occurs in different forms that range from high prices that limit the purchasing power of the consumers to limitation of product quality that affects the standard of the consumer and reduction of the choices of the consumer. In this regard, it is worth appreciating that consumers derive immense benefits from diversified products that are offered in the market. Limiting diversification of products offered by rival groups or competitors is typical of monopolistic and abusive tendencies.
The aspect of exclusionary abuse was also evaluated in the last one in a line of cases that concerned the abuse of margin squeeze, theTelefonica case. The court found out that these were aimed at producing efficiencies that would ultimately benefit the client. However, it maintained that the practice of the firm with respect to anticompetitive practices was undesirable and largely illegal26. In this respect, the wholesale price employed by the firm was indispensable and greatly compromised the ability of efficient competitors to make profits at the retail level. For this reason, the competitors suffered and could probably be forced out of the market.
Relative to this was the level of market dominance of this firm. In this regard, the court indicated that the level of market dominance has a direct effect on the conduct of the firm as opposed to whether there is the existence of any form of abuse. Put differently, the dominance status of the firm influences the conduct of the dominant firm but it does not have direct impacts on the abusive aspect. Thus it is independent of the decisions that the firm makes with regard to whether to pursue abusive tendencies or not. In this respect, the aspect of level of dominance cannot be employed in determining whether the respective margin squeeze can be considered an abuse.
In its decision at this point, the court also acknowledged that Article 102 of the Treaty on the Functioning of the European Union asserts that there is a close relationship between abusive conduct and the degree of dominance of the company27. With respect to this, it maintained that this particular provision of the article can only be applied in instances where the conduct of the firm affects a market that is not dominated. Hence it concluded that dominance pursuits in the wholesale market do not necessarily have a direct impact on dominance in the retail market. For this reason, the issue of margin squeeze can be evaluated independently of the concept of dominance.
Generally, exclusionary abuse entails the creation of artificial barriers to any form of entry in the market. It also involves establishment of certain conditions that make it impossible for competition to be in the market28. Ultimately, the effect of this would be the entire exclusion of any form of competition in the respective market. This is usually the main objective of dominant firms that further this practice. From their point of view, exclusion of competition makes it easier for them to explore and manage the market without the fear of the efforts of other firms. The respective exclusion is usually potential or actual. In this respect, Alexiadis and Shortall indicate that it is enough to just demonstrate that a firm’s conduct has the potential to hinder any form of competition in the market29. However, this preposition has been compounded by various controversies in the recent years. The courts believe that it is more objective to demonstrate the existence of an actual as opposed to potential anticompetitive conduct. In other words, it is not easy to determine and measure an implied conduct. An actual conduct on the other hand is easier to measure because the effects are visible.
The Post Danmark ruling also provides useful insights regarding the concept of anti competitive foreclosure. In this, the court maintained that dominant firms have the ability to compete on respective merits regardless of the fact that this compels the rivals out of the market. In this, it recognizes that usually, not all foreclosures are illegal or unlawful. It insists that in this regard, anticompetitive foreclosure is the only one that is unlawful as underscored by Article 102TFEU. From this point of view, anti competitive practices on their own are not illegal; only when they lead to foreclosure can they be considered unlawful. The aspect of legitimacy in this regard greatly influences the decisions made by legal institutions.
Also worth noting at this point is the effect based approach that the court considered in the post Danmark ruling30. This consists of a cost or price test in a bid to determine whether the commercial practices of an incumbent firm are abusive. This test indicated that the practices of the dominant firm were not abusive because Forbruger-Kontakt was able to maintain its vital distribution network. Despite losing the huge volume belonging to three important clients, it has managed since 2007 to win back Spar group and coop’s custom. In this regard, post Danmark’s behavior did not entirely exclude Forbruger-kontakt from the market. This constituted the evidence that its conduct was not liable to culminate in foreclosure of is competitor. Thus the pricing practices of the dominant firm did not have an exclusionary effect and were not competitive.

The Concept of Leveraging Abuses

Most companies have taken legal measures to address the cases and counter the allegations that are made against them by the complainants. In some cases, the incumbent firms have been successful in countering all these. In these instances, they have employed objective justifications to explain their decisions to the satisfaction of the relevant authorities as well as courts. In addition, such cases have been employed as references for subsequent cases and have been influential in decision making. The tendencies have been apparent in most of the legal cases related to abuses. Perhaps the most explicit pertains to the exceptions that the Telefonica case was accorded. The decision in this respect has spurred a host of arguments as well as controversies because of various reasons. Most of the affected complainants believe that the implications have adverse effects on future decision-making.
In Telefonica, the Court ruled that the firm had indeed infringed on the rights of its competitors. In response, they argued that the respective commission should justify that its DSl network that was also the upstream input is actually indispensable for downstream service provision. They insisted that the conditions that had initially been established by Bronner31 had not been met accordingly32. These conditions mirror those by the Commission in its Guidance Paper on Article 102 TFEU establishing three conditions that in its view must normally be satisfied before a “refusal to deal”33 or “margin squeeze” may be considered contrary to Article 102 TFEU. Notably, these conditions were important and acted as a benchmark upon which critical decision-making was made. Put differently, the conditions were employed as reference points for this case. In particular, Telefonica indicated that its efficient competitors indeed had both a national and regional access to alternative services that are offered by the company.
Further, the firm argued that the respective services that were availed on a national and regional scale could be replicated. Also, it maintained that its behavior and practice would unlikely eliminate competition downstream. From this point of view, it was justified to pursue the practice to its advantage. Most importantly, the firm cited that it had no obligation under Article 102 of the TFEU to grant any access to its network by any party. It therefore considered the decision to be illogical especially considering that it had the sole responsibility of determining the profits. However, the court that maintained that the firm had a legal obligation to supply its services to the market downstream and ensure that they reach the consumer base countered this. At the same time, the court believed that it had the responsibility of providing incentives to its competitors and providing the right and supportive environment for them to pursue innovation and invention with ease.
Further, the court established that the firm was enjoying exclusionary benefits that shielded it from competition already. With this, the profits that it was making were sufficient to enable it further investment. In essence, the profits were sustainable and could enable it enhance economic sustainability. Also, the court held that the firm had the ability to attain economic development even if it was accorded the duty to supply products accordingly. From this point of view, the evaluation of the case was superficial. It was considered a shortcut and did not approach the contentious issue comprehensively. The court in this regard would have indicated that the decision made was in line with the Bronner provisions. It could then have proceeded to detail how these are applicable to the case accordingly. This could have been used as a credible basement for critical decision making in future. It could have been particularly important because of the fact that it is a landmark case with respect to margin squeeze34.

Specific Abuses

In new markets that are relatively dynamic, margin squeeze related cases are very difficulties to determine by courts as well as competition authorities. This is because the measures that are employed in determining the respective incidences are unclear and relatively subjective. Also, determining whether the conduct assumed by the incumbent firms and companies is abusive is relatively difficult. For this reason, there are incidences that have been concluded abusive mistakenly35. Certainly, this is risky and has various economic as well as legal implications for the affected companies. In this respect, it does not only affect their reputation and image, but it also negatively affects their profit making ability as well as their chance to attain sustainable growth and development.
The complicated nature of the relative cases also makes it difficult for some genuine cases to be completed conclusively. This has adverse effects on the entire wellbeing of the efficient competitors. In this regard, they are either compelled to leave the market or to remain marginalized in the market. In such a case, they do not realize optimal outcomes and are unlikely to attain an upward growth. In this regard, it is worth appreciating that positive growth in the market is fundamental for attaining economic stability. This is essential for effective functioning as well as sustainable growth. The dominant firm on the other hand continues to reap optimal and excessive profits especially considering that markets are rapidly growing36. Undoubtedly, the preceding complexities pose significant challenges to the courts and decision-making authorities.
In the recent past, trends ascertain that contravention of Article 102 has been on the rise. To a great extent, this is attributable to the increasing competition and effects of globalization that are increasingly compelling the firms and business entities to assume the practice. Globalization trends require firms and companies to be aggressive in order to compete favorably. Aggression enables them to explore existent or emergent opportunities to their advantage. The characteristic profitability is vital and it enhances sustainable growth and development. Comparative studies show that the telecommunications sector has been the most affected by the violations. This is attributable to the inherent dynamism that characterizes the sector. Most companies violate the legal provisions in a bid to secure their dominant position in the market and continue functioning competitively. Relative to this have been cases related to the predatory pricing. In this respect, it is worth noting that the two principles are grounded on similar concepts and therefore contravening one has direct implications on the other.
In 2003 for instance, Deutsche Telekom37 was reportedly found to have violated the EU competition law and committed abuse through margin squeeze38. In this, it was found to have had an insufficient spread between its wholesale charges for the local-loop services and the relative retail charges for consumer access services. In this, the Court asserted that generally, Article 102 tends to be applicable in markets that are regulated. Nonetheless, the article is not applicable in instances where the respective regulation compromises the ability of the firm or company to exercise autonomy in an effective manner. Notably, this also seeks to determine the competitive behavior of the particular company.
In this case, the court also indicated that during the determination of a margin squeeze, it was essential to prove the fact that in the firm’s upstream market, the wholesale price is excessive. Alternatively, one can also prove that in the downstream market, the price that is imposed by the firm is predatory. The preceding two circumstances undoubtedly prove that the respective margin is insufficient for the affected competitor who is equally efficient to compete profitably. In this case, the court also held that margin squeeze in itself does not constitute abuse; rather, there needs to be the anticompetitive effect in the pricing practices of the incumbent firm. This is elemental in defining the respective margin squeeze as being abusive.
The TeliaSonera case had significant legal implications on subsequent ruling. This was initially handled by the Swedish court that then referred it to the European Court of Justice. In this, the Swedish competition authority made a request that TeliaSonera be fined 15 million Euros for a price squeeze. As stated before, in this case, the incumbent firm was alleged to have imposed prices that led to foreclose of its competitors. The ECJ refused that a mere refusal to supply products does not constitute an abusive margin squeeze. It reaffirmed that margin squeeze is all encompassing and comprises of all the aspects aforementioned in this study.
In Kingdom of Spain v European Commission,Telefonica39 was fined a significant 151.8 million Euros for a similar abuse40. As aforementioned, the company abused its dominant position that it assumed in the Spanish broadband market. In particular, it imposed unfair prices on its products through the principle of margin squeeze. This had adverse effects on its competitors as they found it difficult to profitably compete with it at the retail level. In this case, the court held that it is important for any legal proceeding to investigate the practices of the incumbent firm in order to determine if these have the potential to remove the buyer from the market or restrict their choice of supply sources. Further, it would be imperative to determine whether relative activities bar the competitors from accessing the market or simply discriminate trading parties too. Lastly, the court indicated that it would be important to establish whether respective practices are geared towards strengthening the dominant position of this incumbent firm.
Although these two cases are the most pronounced and offer the most authoritative insights, trends indicate that margin squeeze cases have been a recurring theme in the European courts in the recent past. To begin with, there has been a case relating to Rheinisch-Westf?lisches Elektrizit?tswerk (RWE), a German gas company41. In this, the court held that there was indeed a margin squeeze whose effects were anticompetitive. This according to the court was apparent in its tariffs from gas transmission as well in its gas supply tariffs in the downstream market. The court further established that the company charged high prices for network tariffs, which affected the accessibility by end users42. Nonetheless, a breach was not found in the case at the time of its closure. Regardless of this position, this case is an ideal exemplification of occurrence of margin squeeze instance in a market that is regulated.
Also worth mentioning is the Microsoft’s case43 that has raised various concerns. In this US Department of Justice alleges that Microsoft has abusively used its dominant position as well as exclusionary practices to force Netscape Corporation web browser out of the market44. This is in a bid to protect and maintain its monopolistic position in computer operating systems. To achieve this, it has reportedly bundled the Internet explorer browser with windows operating systems. In addition, it has proceeded to entering into restrictive contracts with various Internet firms. All these were pursued unlawfully and the company had its own selfish interests.
This practice had adverse effects on the wellbeing and ultimately, on the performance Netscape browser. In particular, it prevented its evolution and its ability to compete favorably with windows. This case raised certain concerns regarding the antitrust enforcement roles in technology-based markets. Notably, this had direct impacts on markets that particularly deal with or specialize in networks. Other critical concerns that this case raised pertain to the issues surrounding monopolization, exclusive dealing and tying. Notably, Microsoft has adopted this strategy over time in a bid to keep its competitors at bay and continue enjoying the profits that accrue from the exploration of its market.
Another noteworthy case in the US pertains to the linkLine45 scenario. This involved a monopolistic firm dealing with unbundled local loops. It provides the local loops to a host of downstream Internet service providers that then use them to offer the required high-speed DSL Internet services to the clients occupying their individual downstream markets. Pacific Bell made significant efforts to offer similar services to the client base. From their point of view, the plaintiffs indicated that pacific Bell was contravening the provisions of Section 2 of Sherman Act. This was through setting of high wholesale prices for its DSL transport and relatively low retail prices for its DSL Internet46. In this case, the European Court indicated that pacific Bell had an antitrust duty of dealing with its competitors. However, it did not establish any evidence that showed that the firm’s retail pricing was predatory in nature. As such, the company was not found liable for any form of monopolization as provided for under section 2.
As it has come out from this section, it is clear that the violations related to margin squeeze have largely been experienced in the telecommunications sector. Besides the respective firms being aggressive, this trend is also attributable to the dynamic nature of technological advancements. In this respect, it cannot be disputed that relative inventions and innovations are significant to the affected company and for it to reap optimal outcomes form it, they need to be protected accordingly. This can be used to explain why the respective firms go to great lengths to ensure that they solely remain competitive in the market47.

Test of Effect and Objective Justification

This faction of the paper seeks to determine whether there is any objective justification for abusive margin squeeze practice. In this, it would also be imperative to determine whether in the long run, the relative conduct is beneficial to the consumer base. This argument is based on the provisions of Article 102 of the TFEU. Usually, the burden of proof with respect to whether the practice is beneficial largely lies on the incumbent firm. Put differently, the incumbent firm in this regard has the responsibility of justifying that the respective practice is rational and is aimed at benefiting the consumer base. For example, the firm needs to show that the practice of lowering prices and introducing new services is solely aimed at enhancing the wellbeing of the consumers. Further, the dominant firm should show that the practice is not aimed at eliminating competition in its downstream market. Certainly, the respective proof is highly depended on the nature and specifics of that particular case. Usually, the relative cases have varied scenarios and the underlying intentions of the firms differ considerably48.
In most margin squeeze related cases, an aspect of negative intention tends to be apparent. For this reason, effective justification needs to be both objective and reasonable. This is further informed by the recognition that relative legal implications have lasting negative effects on the wellbeing of the incumbent as well as the affected firms. To begin with, the incumbent firm needs to show that it aimed at enhancing greater effectiveness in the market. This can be determined through an in depth review of its conduct as well as intention. In this respect, the firm should demonstrate that the contentious practice would enable it to optimize its outcomes and enhance its growth and sustenance.
Then, it needs to justify that the respective conduct was essential for attaining greater efficiency. In this regard, it is worth appreciating that inconsistencies compromise the performance of firms in different ways. Certain negative tendencies limit effective functioning and make it difficult for a firm to achieve its primary goals and objectives. Such practices need to be eliminated because they affect not only the consumer, but also the ‘efficient competitors’ and the incumbent firm49.
Further, the firm needs to justify that the respective practices and inherent efficiency would greatly benefit the consumer. Since the consumers do not have direct influence on the production and distribution process, they tend to be vulnerable and susceptible to the negative implications of the decisions that are undertaken by the firms. This can be used to explain why the consumer law solely seeks to protect their welfare. In this regard, the incumbent firm needs to demonstrate that the practices and decisions that are made at different stages are aimed at benefiting the consumer50.
Also, the firm needs to justify that the practices do not eliminate competition from the market. Basically, competition and particularly effective competition is typical of healthy markets. It does not only encourage and promote creativity and innovation, but it also leads to the enhancement of quality production. Notably, this greatly benefits the consumer base as it can benefit optimally from the positive changes. Furthermore, healthy competition leads to diversification of products. Likewise, this is beneficial because it opens up new business opportunities and provides more market niches for exploration51.
The abovementioned factors play an instrumental role in accrediting the decisions and practices that the incumbent firms assume in different scenarios. For the practices to be considered objective and worthwhile, they need to justify all the preceding factors. These entrench in to the respective practice an aspect of objectivity. Relevant authorities need to base their decisions on these factors too. Practices that do not satisfy all these are deemed to be illegal and the relative firms should be punished accordingly. Current trends ascertain that courts have used this procedure to make vital decisions. Companies that have been legally implicated have failed to satisfy these conditions.
Apparently, there are marked differences in the approach to margin squeeze in EU and the US competition law. As in Teliasonera, the court of justice considers margin squeeze to be an independent abuse as provided for under Article 102TFEU. Accordingly, its violation is solely based on evaluation of prices and costs. This decision does broaden potential liability for possible margin squeeze in EU’s non-regulated industries. The US on the other hand considers margin squeeze to stem from a refusal as well as liability to deal. In their research, Anderson and Ezrach propose that the EU adopts the US’s Trinko case provisions regarding the diminished purpose for antitrust in industries that are regulated52. In this, the court posits that the presence of state as well as federal statutory access in the telecommunications sector significantly diminishes any likelihood of possible major antitrust harm. For this reason, it is unnecessary to impose the judicial doctrine regarding forced access as provided for under section two of the Sherman’s act. In this regard, the court indicated that antitrust evaluations need to be attuned to a distinct structure as well as circumstances of the industry under review. Relative provisions and conditions should be all encompassing including the aspect of knowledge of the role of regulation.
Nevertheless, it should be acknowledged that neither of the two institutions is wrong in its approach to the issue of anti competitive practices and specifically margin squeeze. Differences in the decisions of these two important institutions only demonstrate that a unilateral conduct can be perceived from varied points of views. Notably, the decisions are informed by different factors ranging from the available evidence to the implications of the respective rulings. To a great extent, this has varied implications on the credibility of the law jurisdictions in addressing matters of international importance. The inherent disparities imply that there are unnoticeable differences in the manner in which these two legal institutions approach identical legal concerns. To enhance coherence, relative differences need to be identified and harmonized accordingly.

Conclusion

As globalization trends continue to grow complex and intricate, firms are increasingly being compelled to adopt approaches and practices that can enable them to attain and maintain a competitive edge in the market. This has prompted them to in some instances adopt practices that have harmful effects on their competitors as well to the consumer base. Monopolistic firms have particularly been affected the most because of their influence in the market. Coupled with their ability to make critical decisions regarding the products and services that they provide, the inherent power has made them to make decisions that have negative effects on their respective industries. Legal provisions have been established on a national, regional and international scale to guide their behavior in this regard. This ensures that the decisions that they make do not affect the functioning of the market and the general wellbeing of the market.
Competition law has particularly been imperative in ensuring that this behavior or that their practices are economically viable. One of the tendencies that have been noted in the market pertains to violation of the competition law through margin squeeze. In this, dominant firms have used this position to disadvantage other firms in the downstream markets and illegally compel them out of the market. As it has come out from the study, various firms have contravened the provisions of Article 102TFEU. This is well exemplified in the Telefonica v Commission case as well as the TeliaSonera case. Such practices have been triggered by the need by the dominant firms to assume and maintain competitive advantage in the market. Notably, the concept is complex and thus, its effective application has not been attained. However, distinct standards have been established to act as the basement upon which relative decision making is made. The new approach to Article 102 of the TFEU implies that relative legal provisions have been given a broader meaning. From the study, it is certain that most firms have developed counter arguments that aim at justifying their behavior and practices. However, it cannot be disputed that the law has been effective in guiding the behavior of monopolistic firms accordingly
Although it has been suggested that the EU adopts the US approach, the viability of this proposition is compounded by certain complexities. In particular, it is agreed that although credible, the idea cannot be easily transferred in the institutional as well as historical context of the European Union. Traditionally, the US’s utility assets have reportedly been owned privately. The concept of bottleneck inputs in industries that are vertically integrated is closely related to exclusive regulation. Notably, the EU has undergone modernization changes only recently and likewise, its adoption of the relative policy regulations has been slow. In this respect, its laws are more effective at a localized level of member states. At this point, researchers argue that efforts pertaining to harmonization of its law with liberalization framework can be compromised if national rather than communal interests are put on the forefront. Regardless of the preceding challenges, it is worth appreciating that harmonization of national laws with EU regulations are at the core of the EU margin squeeze policies and decisions. The main aim of these is to offer viable solutions that would help curb anticompetitive practices that are pursued by dominant firms. Ultimately, this goes a long way in protecting the varied yet vital needs of the consumers.

Bibliography

Cases
C-7/97, Oscar Bronner v. Mediaprint, [1998] ECR I-779
C-209/10, Post Danmark
Microsoft Corp. v Commission of the European Communities
Pacific Bell Telephone v. Linkline Communications
Literature
Paper
Working Party No 2. On Competition and Regulation-Margin squeeze. European Commissions (2009)
Electronic Sources
Akman Pinar. (2012) The General Court’s judgment in Telef?nica: has the Atlantic Ocean just got wider? Retrieved 3rd May, 2012 from http://competitionpolicy.wordpress.com/2012/04/17/the-general-courts-judgment-in-telefonica-has-the-atlantic-ocean-just-got-wider/
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