Comparative Approaches to Price Squeezes and Abuse of Dominance

This practice note compares the approaches that courts in the European Union (EU), the United States, and New Zealand have taken to allegations of price squeezes and abuse of dominance.  Price squeeze cases involving telecommunications operators have arisen in each of these jurisdictions.  Comparing the approaches taken by the courts in these jurisdictions to price squeezing illustrates the different conceptions of the relationship between price squeezing and the abuse of dominance and different viewpoints on what constitutes “anti-competitive” behaviour.

Background to the price squeeze cases

The EU case involves a 2003 finding[1] by the European Commission that Deutsche Telekom (DT) abused its dominant position by committing a price squeeze, contrary to Article 82 of the European Commission Treaty.  DT offered local access services at the retail level to end-users and at the wholesale level on an unbundled basis to competitors.  DT was thus active in both upstream and downstream markets.  The Commission found that DT charged new entrants higher fees for wholesale access to the local loop than what DT charged its retail subscribers for fixed line subscriptions.  Beginning in 1998, DT had been legally obligated to provide competitors with wholesale access to its local loops. Yet, by 2003, competitors had been unable to develop a significant market share.  In 2003, DT enjoyed a 95% market share and was well-entrenched as the dominant service provider.[2]

Article 82, European Commission Treaty
Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common 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 the United States, a group of independent Internet service providers initiated legal proceedings against Pacific Bell Telephone (hereinafter AT&T) under the Sherman Antitrust Act (the “Sherman Act”), the American anti-trust (competition) legislation.  The Internet service providers compete with AT&T in the retail DSL market in California.  These service providers lease wholesale DSL transport services from AT&T in order to provide retail DSL services since they do not own all the facilities necessary to supply DSL services on their own.  AT&T thus competes in both the upstream and downstream DSL markets.  The Internet service providers argued that AT&T unlawfully squeezed their profit margins by charging them a high price for wholesale DSL services while charging their own end-user customers a low price for retail DSL services.  The Internet service providers argued that AT&T’s price squeeze practices violated §2 of the Sherman Act (see text box below). 

§2 Sherman Act, 15 U.S.C.
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

In New Zealand, the Commerce Commission (the Commission) brought an action against Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited (collectively, Telecom) in the High Court of New Zealand. The Commission alleged that Telecom used its dominant position in the telecommunications industry to achieve an unlawful and unfair advantage over other firms engaged in data transmission.  Specifically, the Commission alleged that over a period beginning on 1 December 1998 until late 2004, the wholesale price charged by Telecom to other telecommunications service providers (TSPs) for access to data tails was so high, relative to Telecom’s retail price, as to cause a price squeeze.  The Commission thus argued that Telecom's action violated the Commerce Act (the NZ Act) since Telecom used its dominant position in the wholesale market for data tails to set wholesale prices and other terms and conditions at a level that would prevent or deter TSPs from competing in the relevant retail market and deter those TSPs from competing in the wholesale market for ‘backbone’ transmission services.[3]

Box 1: The New Zealand Commerce Act
The Commission alleged that Telecom had violated s. 36 of the Commerce Act.  During the period in question (December 1, 1998 – late 2004), s. 36 was amended.  From December 1, 1998 until May 25, 2001, s. 36 read as follows:

36. Use of dominant position in a market – (1) No person who has a dominant position in the market shall use that position for the purpose of –
(a) restricting the entry of any person into that or any other market; or
(b) preventing or deterring any person from engaging in competitive conduct in that or any other market; or
(c) eliminating any person from that or any other market.

From May 27, 2001 onward, s. 36 provides as follows:
36. Taking advantage of market power

(2) A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of –
(a) restricting the entry of a person into that or any other market; or
(b) preventing or deterring a person from engaging in competitive conduct in that or any other market; or
(c) eliminating a person from that or any other market.

The analyses of the price squeezing practices

The tests applied by the courts in each of the three jurisdictions differ in their focus and in how the link between price squeezing practices and the abuse of dominance is conceptualized.

In the DT case, the European Commission focused on a comparison of the rates charged by DT for wholesale access and retail access to the local loop. Given that wholesale access prices were higher than the weighted average of the corresponding retail prices charged to end-users, the Commission determined that the price margin was insufficient for new entrants to compete with DT.  The Commission concluded that DT’s pricing practices constituted a price squeeze.  The Commission further concluded that DT’s pricing for local access services deterred new competitors from entering the local access market and reduced the choice of telecommunications service providers for consumers and suppressed price competition.  Accordingly, the Commission found that DT violated Article 82 of the European Commission Treaty.

DT appealed the Commission’s decision to the European Court of First Instance (the CFI).  In 2008, the European CFI upheld the European Commission’s 2003 decision in its entirety and rejected all pleas advanced by DT.[4]  The Court upheld the method used by the European Commission to determine that a price squeeze existed.  The Court noted that the Commission correctly relied on the fact that there was an insufficient spread between retail and wholesale prices for local access to establish that DT’s pricing policy was an abuse of dominance; it was not necessary under the circumstances to demonstrate that the retail prices, being lower than wholesale prices, were predatory and abusive. 

The United States Supreme Court (the USSC) ultimately heard the case brought by independent Internet service providers against AT&T.  In the USSC decision[5], the Court focused on the question of whether price squeezing practices could constitute a violation of §2 of the Sherman Act if there was no existing duty to provide services to competitors.  The Court noted that, as a general rule, businesses have the economic freedom to choose the parties with whom they will deal and the prices, terms, and conditions for any such dealings. 

The USSC outlined two situations in which this economic freedom is limited such that a dominant firm may incur anti-trust liability for engaging in price squeezing.  First, firms may not charge predatory prices, which the Court defined as “below-cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses”.[6]  Thus, where the retail prices involved in allegations of price squeezing are predatory in nature, a dominant firm may incur anti-trust liability.  Second, a price squeeze claim can give rise to liability where the dominant firm has an obligation to provide the services at wholesale to its competitors.  The Court concluded that where there is no duty to deal at the wholesale level and no predatory pricing at the retail level, a firm is not required to adopt rates at the wholesale and retail levels that preserve its competitors’ profit margins.  Since AT&T was not required to provide wholesale services to the competitive Internet service providers and since the Internet service providers had failed to raise the issue of predatory pricing in its pleadings, the USSC determined that AT&T’s pricing did not violate §2 of the Sherman Act.

In the EU case, the existence of price squeezing practices by a dominant operator was sufficient to ground the finding of an abuse of dominance.  As the European CFI held, it is not necessary to establish that such price squeezing practices are abusive or an instance of predatory pricing.  Thus, price squeezing is treated as an illegitimate use of market dominance in and of itself.  By contrast, in the United States, price squeezing is not considered to be inherently anti-competitive.  Price squeezing only attracts liability if it is predatory or if the firm engaging in the price squeezing practices has a duty to provide the goods or services in question.  On its own, however, price squeezing is merely part of a robustly competitive market.  The USSC noted that cutting prices to increase business is a core part of competition.  Imposing anti-trust liability for charging prices that are too low risks having a chilling effect on the very conduct that anti-trust legislation is intended to protect, namely, vigorous price competition.  Thus, whereas the EU jurisprudence views a direct link between price squeezing and an abuse of dominance, the American jurisprudence does not.

The approach taken to price squeezing by the High Court of New Zealand (HCNZ) in the Telecom case involves a different analysis than the analyses employed by the European and American courts.  The HCNZ analysis focused on two issues: whether Telecom used its position of dominance and, if so, whether its position of dominance was used for one or more of the prohibited purposes outlined in the Act. 

To determine whether Telecom "used" its position of dominance, a causal link had to be established between the impugned conduct and the dominance or market power. The NZHC applied a counterfactual test to determine if this causal link existed.  The counterfactual test required considering whether the prices charged by Telecom were no greater than the prices it would have charged if it was not-dominant and active in a hypothetical competitive market.  If this counterfactual test suggested that Telecom would have charged the same prices, then Telecom would not have “used” its market powers. 

The Court applied an economic analysis in this counterfactual test that used the "Efficient Component Pricing Rule" (ECPR).  The ECPR model identifies pricing that permits efficient entry by competitors.  In this case, the Court found multiple violations of the ECPR.  The Court then applied the counterfactual test and considered whether a non-dominant firm that was otherwise in the same position as Telecom would have offered data tails to rivals at above ECPR prices.  Based on this counterfactual test, the NZHC was satisfied that Telecom had, in fact, used its dominant position.

After establishing that Telecom did “use” its dominant position, the NZHC considered whether Telecom used its dominant position for the purpose of achieving a proscribed purpose under the Act. The Court noted that “purpose” can be established in two ways.  First, it can be inferred from the effects of the use of a dominant position since a person can be assumed to intend to cause the direct effects of his or her actions.  Second, purpose can be established by direct evidence of what the conduct was intended to achieve.  Thus, Telecom would have used its dominant position for the purpose of achieving a proscribed purpose under the Act if there was either evidence that the conduct had actually produced anti-competitive effects or direct evidence that the impugned acts were intended to produce anti-competitive effects.

Ultimately, the Court did find that Telecom had used its dominant position for the purpose of achieving a proscribed purpose under the Act.  The Court pointed to the foreseeable effects of charging high prices for wholesale tail circuits, as well as the manner in which Carrier Data Pricing (CDP, the wholesale pricing used for the data tail circuits) was implemented as the basis for its conclusion.  The Court held:

"In our view, the readily foreseeable effects of pricing two-tail circuits to TSPs above ECPR and, in many cases, above retail prices, is sufficient to support an inference that Telecom used its dominance for the pleaded purposes. The way in which Streamline [retail pricing for data carriage] and CDP were introduced and the statements of those responsible for their introduction are consistent with a strategy on the part of Telecom to deny rival TSPs access to data tails at prices that would permit them to utilise and develop their own networks for the purpose of data transmission."[7]

The NZHC analysis focused on the issues of the use of dominance and the purpose for which the dominance was used.  By contrast, the European CFI did not enquire about whether DT had used its dominance or not, nor did it analyze the purpose associated with DT’s actions.  The fact that DT employed price squeeze practices satisfied the question of whether DT had abused its dominance. 

The difference between the approaches of the HCNZ and the European Commission and the European CFI stems in large part from the statutes in question.  Article 82 of the European Commission Treaty provides that abuse of dominance may consist of “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions”, for example.  Thus, pursuant to Article 82, if it can be established that a firm imposed unfair purchase or selling pricings or other unfair trading conditions, then there has been an abuse of dominance.  There is a direct link between the unfair actions and the abuse of dominance.  By contrast, the terms of s. 36 of the NZ Act graft the necessity of establishing the purpose of the impugned conduct onto the analysis of whether such conduct constitutes an abuse of dominance.  Section 36 provides in part: “A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of – …(b) preventing or deterring a person from engaging in competitive conduct in that or any other market…”.  The fact that a price squeeze exists is, on its own, not sufficient to establish an abuse of dominance.  The NZ Act requires that the price squeeze be the result of an exercise of market dominance and that the dominance has been used to create a price squeeze for the purposes of restricting or deterring competition. 

Ultimately, the European approach and the New Zealand approach converge at a similar point:  in both cases, the fact that a price squeeze existed established that there had been abuse of dominance.  However, the paths taken by the European CFI and the NZHC to this point differ.  The European Commission and the European CFI gave careful consideration to whether a price squeeze actually existed by examining and comparing wholesale and retail pricing.  The NZHC’s analysis focused more on analyzing whether Telecom had used its dominance and whether it had used its dominance to achieve purposes proscribed by the NZ Act.  Telecom’s price squeezing practices were relevant only in so far as they were evidence of the use of Telecom’s dominance and of the purpose for which Telecom used its dominance.  Thus, like American case, the mere fact that there was evidence of price squeezing was not sufficient in and of itself to establish an abuse of dominance in the New Zealand case.

Notwithstanding the aforementioned similarity between the approaches taken by the courts of the United States and New Zealand, these approaches differ in other important respects.  The USSC viewed price squeezing practices as part of normal competition in the market and held that they only attract liability for anti-competitive behaviour in certain cases.  The NZHC did treat price squeezing as evidence of a purpose to deter or restrict competition, but its analysis of the basis of liability focused on factors quite different from that of the USSC.  Thus, while evidence that Telecom had engaged in price squeezing practices did not automatically attract liability in Telecom’s case, the NZHC did not view price squeezing as a regular component of competitive market behaviour.  Price squeezing was associated with an anti-competitive purpose.

In sum, the European CFI and the NZHC regarded price squeezing as being either directly or indirectly related to an abuse of dominance.  By contrast, the USSC regarded price squeezing as normal market activity unless the price squeezing amounted to predatory pricing or the firm engaging in price squeezing practices has a duty to provide wholesale services. 

End Notes

[1] See Commission Decision of 21 May 2003 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-1/37.451, 37.578, 37.579 Deutsche Telekom AG) [2003] OJ L 263/9, para. 108 [“Deutsche Telekom 2003’].

[2] Deutsche Telekom 2003 at para. 208.

[3] See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at paras. 3-4 [“NZ Telecom  2009”]

[4] See Deutsche Telekom AG v. Commission of European Communities, [2008] European Court of First Instance, Case T-271/03.

[5] Pacific Bell Telephone Co.  v. Linkline Communications. Inc. [2009] USSC, Case No. 07–512 [Pacific Bell Telephone v. Linkline Communications]

[6] Pacific Bell Telephone v. Linkline Communications, at 8 per Roberts C.J.U.S.

[7] See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at para. 151.

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