Margin Squeeze in a Regulatory Environment : An Application to Differentiated Product Markets

This paper analyses the effects of banning pricing policies that lead to margin squeezes when the upstream good is imperfectly regulated. The analysis relies on a modelling with a vertically integrated upstream monopolist that faces competition by an unintegrated downstream competitor. It shows that for differentiated goods in the downstream market, a margin squeeze can be observed as the competitive outcome rather than exclusionary conduct. If upstream market regulation is non-constraining, a margin squeeze ban induces the vertically integrated firm to increase its own downstream price (this is, a price umbrella), but also to review its upstream pricing behavior and reduce the upstream price charged to the retail competitor. This "decreasing rivals' costs effect" (DRC-effect) allows the integrated firm to maximise its profits given the constraint on the downstream price, and allows the downstream competitor to set a lower retail price. However, when constraining upstream regulation and a ban are implemented jointly, the DRC-effect vanishes and downstream prices may to rise, leading to a decrease of consumer surplus. This analysis tends to back up the American way of handling margin squeezes in a regulated environment