Price Squeezes as an Exploitative Abuse

Abstract

Price squeezes have been commonly viewed as an exclusionary abuse under the argument of "constructive refusal to deal", however, such an argument has been challenged by the courts and legal scholars. This paper proposes an exploitative rationale for price squeezes. A vertically integrated dominant firm can exploit efficiency gains from a downstream competitor and price squeezing is a necessary condition for such exploitation. Price squeezing forces the competitor to produce at a lower marginal cost than the dominant firm so that the dominant firm can earn more than the monopoly profit by extracting part of efficiency gains from the rival. Exploitation through price squeezing reduces the rival's profit unfairly and distorts the production efficiency without benefiting consumers. Prohibiting price squeezes benefits the competitor and improves production efficiency without harming consumers. This paper lays a solid economic foundation for treating price squeeze cases and contributes to reconciling the diverging approach adopted by the courts in the United States and the European Union in recent price squeeze cases.