Essential Facility and Refusal to deal. Property Rights

1
Essential Facility and Refusal to deal.Property
Rights Antitrust
Lecture 3

• Antonio Nicita
• Siena Doctorate in LE

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Essential facility Doctrine

• Firm with monopoly power in one market has to
  deal fairly with competing firms in adjacent
  markets who need essential facilities.
• Antitrust activity have to show
• Control of facilities by a monopolist
• Competitors inability to duplicate the essential
  facility
• Denial of use
• Feasibility of providing the facility

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The debate/1

• The problem of mandatory access to an essential
  facility falls into the broad area of vertical
  relations and into the debate about whether
  antitrust law should intervene in order to
  guarantee access, which in turn centers around
  the question of leveraging, that is the
  possibility that a monopolist leverage its
  monopoly power in one market in order to extend
  it into another market.
• It originally seemed obvious that this was so, a
  view held in particular by Joe Bain and the
  Harvard School of the 1950s. Such a common
  understanding was forcefully put into question by
  the so called Chicago Revolution of the 1980s
  which proved that a firm that has monopoly power
  at one level can only transmit that same monopoly
  to another level, but not create more monopoly
  power than it already has.
• In this perspective vertical restrictions cannot
  aim at increasing a fixed sum monopoly profit
  and therefore, as a matter of logic, should be
  explained by some other reasoning which it was
  shown in many cases to be greater efficiency.

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The debate/2

• Suppose that a private monopolist owns the only
  possible bridge across a river and that a number
  of competing railroad companies provide transport
  services along the bridge.
• Suppose also that there are no restrictions in
  the pricing for the use of the bridge, nor for
  transport service charges. In order for the owner
  of the bridge to gain monopoly profits, he has to
  charge all railroads a monopoly price to cross.
• The greater the competition downstream and the
  lower the profits downstream, the greater the
  profits the bridge owner would get. Suppose that
  the bridge owner also owns a railroad company
  that is providing transport services across the
  bridge in competition with other railroad
  companies. His behavior would not change since
  all the profits that he could make still depend
  upon his bridge monopoly He would continue to
  charge a monopoly price to everybody.

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The debate/3

• How then would a refusal to grant access be
  explained?
• One possibility is that the owner of the bridge
  might not be able to capture all rents by simple
  linear pricing. He might have to use some sort of
  a per train charge which would appear as a fixed
  cost for the railroad company.
• If there is competition downstream and transport
  prices of different goods are equal to marginal
  costs, the railroad companies would not be able
  to recover such a fixed charge and would go
  bankrupt unless the bridge owner would reduce its
  fee.
• In such circumstances the bridge monopolist may
  refuse to deal with competitors in order to
  remain the only railway company that crosses the
  bridge and be able to capture all the monopoly
  profits originating from the bridge. He might
  reach the same result by auctioning away the
  right to cross the bridge to the highest bidder.
  For the consumer it would not matter if the
  essential facility owner operates downstream or
  not. In both circumstances he would pay a
  monopoly charge for crossing the bridge.

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The debate/4

• There has always been a debate on the
  expropriating role of a mandatory access
  regime.
• Indeed, if an essential facility owner is not
  allowed the possibility of excluding others from
  exploiting his facility (his invention in the
  case of an IPR based essential facility), all his
  profits would be reduced to zero (unless there
  are capacity constraints)
• Nobody would pay for something everybody has.
  Indeed with an essential facility, profits arise
  from the rights to exclusively exploit a given
  invention.
• If the essential facility is given to everybody
  its value drops to zero!

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The debate/5

• The importance of Coase (1972) analysis for the
  essential facility doctrine is that exclusivities
  are necessary for the essential facility owner to
  gain all the profits associated with the use of
  the essential facility.
• Coase (1972) also shows that exclusivities are to
  the advantage of both the buyer of the essential
  facility services and the supplier. In fact by
  just eliminating the possibility of contractual
  exclusivities profits originating from the use of
  the essential facility may disappear.

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The ECPR

• (Baumol and Willig) Efficient Component Pricing
  Rule
• Original version margin rule a P C
• gt equal to opportunity cost of incumbent
• Revised version by Mark Armstrong, optimal with
  differentiated goods and fixed P
• a q(P C t), with q 1
• Notion of retail minus pricing, avoidable costs
• Problems price squeeze

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Essential Facility vs Refusal to deal

• Trinko decision
• When refusing to deal with competitors is
  allowed?
• Incentives to invest vs ex-post competition
• Problems with Margin Squeeze test

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EU and Italian cases

• Magill
• Tiercé Ladbroke
• ITT / Promedia
• European Night Services (ENS)
• Oscar Bronner
• Advocate General Jacobs opinion
• The judgement in Oscar Bronner
• Telecom/Seat

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A test