Margin Squeeze in the Telecommunications Sector: An Economic Overview

Abstract

Margin squeeze is a strategic behaviour of vertically integrated dominant firms in liberalized markets, where they have incentives to discriminate against new entrants in the downstream market. The discrimination that they perform is either in the form of refusals to grant access to the essential facilities, excessive prices for essential inputs, or as margin squeezes. The telecommunications industry, in which neighbouring (liberalized) markets are vertically linked, meets the suitable economic conditions for the ex-State owned incumbents to squeeze their rivals in the downstream market, as they control the essential input (access to networks), and simultaneously have an important presence in the retail market.Detecting a margin squeeze requires the application of a complex imputation test, which may not be straightforward and which may determine the final decision on the alleged existence of this abusive practice.The general purpose of this study is to carry out an economic overview of margin squeeze in the telecommunications sector, focusing on the conditions for its existence, the regulatory constraints, and to establish the adequate economic test to determine the existence of a margin squeeze. This article has been shortlisted for the 1st World Competition Young Writer Award.