DP9905 The Economics of Margin Squeeze

Author(s): Bruno Jullien, Patrick Rey, Claudia Saavedra
Publication Date: March 2014
Keyword(s): foreclosure, margin squeeze, predation, vertical integration
JEL(s): K21, K23, L4, L42, L43
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9905

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.