The main challenge with anticompetitive conduct by online multisided platforms is finding a fitting theory of harm. The author argues here that one candidate theory has been overlooked: margin squeeze. Margin squeeze, occurs where a dominant undertaking charges a price for the product on the upstream market which, compared to the price it charges on the downstream market, does not allow an equally efficient competitor to trade profitably in the downstream market on a lasting basis. In other words, margin squeeze takes place when an upstream operator forces his downstream competitor—who is just as efficient—off the market by squeezing his profit margins. This class of abuse has for the most part been confined to the telecom sector, but its potential reaches beyond. Indeed, the tendency towards vertical integration and subsequent conduct of online platforms could renew the relevance of margin squeeze as an analytical tool.
The paper is structured as follows:
Section II outlines the fundamental elements of margin squeeze.
This section provides an analysis of the various European cases in which margin squeeze was developed. It maps out its evolution from an abuse based on squeezing price margins that lead to the market exclusion of a ‘reasonably-efficient-competitor’ to an abuse based on the exclusion of an ‘as efficient competitor’. The doctrine eventually crystallised in a series of judgments (Deutsche Telekom, TeliaSonera, and Telefonica) which arose in the context of the Commission-led liberalisation of the European telecom sector. These cases all sought to safeguard the access of (downstream) providers of telecom services to the (upstream) telecom network.
The author notes that the European approach to margin squeeze is not shared around the world. In its linkLine judgment, the US court refused to accept margin squeeze as a form of unlawful monopolization under section 2 of the Sherman Act, holding that ‘if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that the rivals find commercially advantageous’.
Safeguarding the market access of competitors is traditionally seen as a task for ex ante regulation rather than for ex post competition law. However, while margin squeeze intersects with telecommunications regulation, the Commission and the European courts have firmly grounded the theory in general competition law through reliance on two important principles. First, margin squeeze will only take place if the conduct is able to exclude as efficient competitors from the market, a legal standard central to a number if theories of harm under Article 102 TFEU (e.g. predatory pricing or rebates). Secondly, anti-competitive effects on the downstream market must be shown. This is in contrast with ex ante regulation, whose adoption assumes a lack of competition. Exclusionary effects are presumed when the wholesale price the undertaking charges to competitors is higher than the retail price it charges to end-users.
Section III discusses whether and how a margin squeeze assessment can be applied to online platforms, while section IV provides some practical examples.
The core function of online platforms is to offer a digital infrastructure for online activities, from e-commerce to social interaction. In doing so, most – if not all – online platforms solve a coordination problem and balance different user groups by maintaining a skewed price structure, while taking advantage of the network effects across those user groups. As platforms grow, they often enter new markets that are connected to the platform, with the result that they end up competing with the undertakings that use their platform.
In this process, the platform service can be considered the upstream input, and platforms vertically integrate when they start producing the downstream product. An app store integrates vertically when it starts producing its own apps, while a search engine integrates vertically when it starts producing its own output, i.e. the different web services that it helps people find. An e-commerce platform does the same when it produces its own goods and then distributes these through its platform.
The article then seeks to determine whether a number of vertically integrated platforms fulfil the essential constituents of margin squeeze theory, i.e. (i) dominance in the upstream market; (ii) the as-efficient-competitor test; and (iii) the requirement of anti-competitive effect. It is concluded, perhaps unsurprisingly, that margin squeeze theory, stripped down to its legal core, can be applied to online platforms.
- The first example is the Apple Store. Apple is active in the upstream market for apps by providing the necessary infrastructure for their distribution, namely the App Store. Apple also operates in the downstream market for apps, where its Apple Music service competes with several other music-streaming apps, including Spotify. However, given the 30% cut Spotify owes Apple on every subscription it sells through the App Store, Spotify is forced to offer its service at EUR 13 per month—a competitive disadvantage vis-a-vis Apple’s EUR 10 service. Apple’s App Store could be said to be dominant in the market of ‘app stores for iOS’. The pivotal question is whether Spotify is an ‘as efficient competitor’ as Apple Music. In other words, could Apple offer its retail services to end-users profitably if it had to pay its own wholesale prices (i.e. would Apple Music would Apple Music’s EUR 10 subscription model be profitable if it had to hand over 30 per cent of that sum)? A problem here is that Spotify itself is not profitable at the moment, and Apple Music is unlikely to be either. Thus, testing whether Apple would turn a profit after a 30 per cent cut does not provide meaningful results. If we are unable to rely only on the costs and prices of the dominant undertaking, the two competitors would actually have to be compared by reference to their losses. If Spotify is as efficient as Apple, the question is then whether the Apple Store monopoly and charging practices have anticompetitive effects. In particular, such effect can consist in a competitor’s ‘delayed prospect of becoming profitable’.
- A second example is the Google Shopping case. Google was recently fined for abusing its dominant position in the market for general online search by systematically favouring its own comparison shopping service in its search results. While detailing how this is harmful to consumers and businesses, however, the Commission did not fit Google’s conduct into one of the traditional theories of abuse. A coterie academic industry has sprung trying to identify which theory of harm is applicable, to which this article should be added. However, when the suitability of margin squeeze as a theory of abuse surfaced in discussions of the Google Search case, the Commission concluded swiftly that ‘there is neither an upstream nor a downstream price, so there can be no margin squeeze’. However, one may question this fixation with price in an economy where free services are ubiquitous. Applying the as-efficient-competitor to free services would mean asking the following question: could Google offer its comparison-shopping to end-users profitably if it had to pay its own wholesale prices? Since these websites are found through Google for free, there is only a wholesale price if these websites pay Google to be featured on top of the search results, alongside Google’s own comparison shopping service. Hence, the author suggest that the closest one may get to a workable test would be to ask: would Google Shopping be profitable if it had to pay Google Search to be listed in its current position, i.e. on top of the search results?
- A last example is Amazon. Amazon is both a platform operator and a retailer which is thoroughly vertically integrated. When Amazon starts offering a product, its shipping fee generally becomes zero, while third-party sellers’ shipping fees are, on average, significantly higher. Empirical research suggests that this shipping advantage results in increased sales of Amazon’s products, while discouraging third-party sellers from continuing to offer their competing products. Whether this amounts to margin squeeze would depend on the answer to the question of whether Amazon would be able to offer its products to end-users profitably if it had first been obliged to pay its own wholesale prices.
Section V considers how margin squeeze relates to neutrality, and whether its underlying concerns can be addressed through other regulatory intervention mechanisms.
The theory of abuse underlying margin squeeze can be viewed as imposing an obligation of neutrality, which is implicitly connected with the characterization of the upstream operator as an utility provider. The European liberalization of the telecom sector was carried out not only by obliging incumbents to grant competitors access to their network for a fee, but additionally by imposing neutrality obligations on them both via ex ante regulation and ex post competition enforcement. Ex ante regulation has also been imposed as regards the internet: met neutrality requires Internet providers to treat all data equally, i.e. they cannot block or slow down specific applications or services. Inasmuch as neutrality obligations relate to the upstream provider being a utility, one may question whether online platforms should be considered utilities. This idea is gaining traction with both the public and policymakers. The remedies imposed in the Google Search case show that platform neutrality (or more specifically: search neutrality) can be imposed ex post through competition law. And, in effect, applying the margin squeeze framework in online markets may thus offer an alternative to (calls for) more heavy-handed regulation.
This is an interesting and ambitious piece on how to frame potential abusive conducts by online platforms. It succeeds in explaining how margin squeeze would apply to such businesses, and it conducts a serious analysis of the implications of adopting such a theory of harm.
To me, however, this analysis made me think that the changes required to apply margin squeeze to online platforms are such as to make the doctrine unrecognisable. To ask whether the margin is to low when services are provided for free can be challenging enough; however, the real difficulty is that a focus on neutrality does not equate with anticompetitive effects, and particularly with market foreclosure or exclusion. Until that circle is squared, the quest to justify recent enforcement trends in purely competition terms is likely to continue. Which is the topic of the article below.