FACULTY OF LAW

Lund University

TUĞBA GÜLDEMİR

A COMPARATIVE & INVESTIGATIVE STUDY OF THE

NOTION ‘MARGIN SQUEEZE IN TELECOMMUNICATIONS’

UNDER EU COMPETITION

LAW IN COMPARISON WITH THE TURKISH COMPETITION

RULES

Master thesis 15 credits

Hans Henrik Lidgard Master´s Programme in European Business Law

Spring 2011

Contents

SUMMARY 1

PREFACE 3

ABBREVIATIONS 4

1 INTRODUCTION 6

1.1 Purpose 6

1.2 Method 6

1.3 Delimitation 7

1.4 Outline 7

2 BASIS OF MARGIN SQUEEZE AS AN ECONOMICAL AND LEGAL NOTION 9

2.1 Definition of Margin Sqeeze 9

2.2 Its Relation To Other Abuses 10

2.2.1 Refusal to supply & margin squeeze 11

2.2.2 Predotary pricing & margin squeeze 12

2.2.3 Excessive price & margin squeeze 14

2.3 Necessary Conditions For Existance of Margin Squeeze 16

2.4 Conclusion 21

3 APPLICATION OF MARGIN SQUEEZE IN TURKEY 22

3.1 General Competition Rules In Turkey 22

3.2 Telecommunications sector in Turkey 24

3.3 Case applications 26

3.4 Controversial Issues In Turkey 34

3.4.1 Clash of competence: the TCB v the ICTA 35

3.4.2 Lack of independence of ICTA 37

3.4.3 Unimplemented & missing legislation 38

3.5 Conclusion 39

4 APPLICATION OF THE MARGIN SQUEEZE IN THE EU & THE USA 41

4.1 Application In The European Union 41

4.1.1 Commission’s general policy on margin squeeze 41

4.1.1.1 Is it a seperate abuse? 41

4.1.1.2 EU: The calculation of margin 42

4.1.2 Telecommunications sector in the EU 45

4.1.3 EU case law 48

4.1.3.1 Old EU Cases in Unregulated Sectors 48

4.1.3.2 The More Recent EU Cases in Telecommunications 51

4.1.4 Conclusion 60

4.2 US Application 64

4.2.1 General approach on margin squeeze 64

4.2.2 US case law about margin squeeze 64

4.3 Main differences between the EU & the US approaches concerning margin squeeze 67

5 ANALYSIS OF TURKISH APPROACH 69

5.1 Are the TCB’s Decisions in line with the EU? 69

5.2 Some Suggestions To The Turkish Authorities 73

5.2.1 The necessity of collaboration between the ICTA and the TCA 73

5.2.2 Missing methodology should be implemented by the ICTA 74

5.2.2.1 Introduce the “Price Bottom Communiqué”; 74

5.2.2.2 Adjustment of interconnection prices with retail prices; 75

5.2.2.3 Ensurement of reasonable margin ratio; 75

5.2.2.4 Division of infrastructure-service; 76

6 CONCLUSION 77

TABLE OF CASES 82

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Summary

When hammering a nail, you will never hit your finger if you hold the hammer with both hands.

Leibowitz At the first sight, the famous quotation above may seem unrelated with the subject and aim of the thesis herein; however, at the end, it might probably be considered as a good description of the discussion going on in this paper. As one of the prominent characteristics of the current generation is the incredible spread in ’data’ traffic in the society, the telecommunications industry has a considerable importance as it enables individuals and institutions to communicate with each other. However, with the liberalization of the telecommunications sector, the number of infringements has also increased within the field of competition law. Most undertakings have faced anti-competitive pricing conducts of other operators. In this perspective, margin squeeze1 has become a central concern for the European Commission, national competition authorities and national regulatory authorities, as many incumbent operators have exercised this strategy in order to foreclose the market and hinder competition. Meanwhile, the notion, margin squeeze, was identified with the telecommunications sector, which by nature tends to be monopolistic.

In May 2003, the Commission penalized Deutsche Telecom2 for squeezing the margins of its competitors; Wanadoo Interactive3 decision followed it two months later. In 2007, it imposed fines of around EUR 151 875 000 on Telefónica4 for having engaged in a margin squeeze abuse in the Spanish broadband market. Most recently, with the preliminary ruling of the CJEU for a Swedish-Finnish company, TeliaSonera, the boundaries for the application of margin squeeze were broadened. The repercussions of margin squeeze infringements also affected national authorities and competition law proceedings were launched in several Member States. On Turkey’s way to become a member o European Union, Turkish Competition Board also imposed 12.394.781,16 TL (approximately 5 Million Euro) fine on Turkish Telecom5 with its subsidiary TTNet for having engaged in a margin squeeze abuse.

1Also known as “price squeeze” in the literature. 2Commission decision of 14 October 2003, 2003/707/EC, Deutsche Telekom. 3Commission decision of 16 July 2003,Case COMP/38.233,Wanadoo Interactive. 4Commission decision of 4 July 2007 Case COMP/38.784, Wanadoo España v Telefónica. 5Decision of Turkish Competition Board dated 19.11.2008 nr. 08-65/1055-411.

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The thesis herein is going to draw the boundaries of the margin squeeze notion in order to determine, through legislation and case law studies, under which conditions margin squeeze becomes an abuse in the context of competition law rules of the EU as well as the US. After having clarified the main differences between the EU and the US attitudes, a comparison will be made, this time, between the EU and Turkey, of several important perspectives and respective suggestions will be offered to the Turkish authorities to prevent margin squeeze in order to ensure an effective competition in Turkey.

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Preface

I dedicate this thesis; To my parents -for their self-denying support in every phase of my life

To my sister -for always being my second mum

and

To Ela, My little angel...

I also would like to express my special thanks and my deepest gratitude to Hans Henrik Lidgard for guiding me with his invaluable academic knowledge and for providing me encourage and self-confidence in the process of this thesis as well as in the competition law course. He is truly one of the best professors I have ever met who really cares about his students.

I also would like to thank to all my friends who did not deprive me of their patience and support during my studies, especially Kristina who was always next to me during the whole process. Special thanks to my two classmates for their contributions; Ieva for her great editing skill and Zlatan for his considerable comments to the thesis herein. And I also want to thank to the Telkoder for spending time to help me to provide information from another continent of the world.

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Abbreviations

ADSL Asymmetric Digital Subscriber Line

CJEU Court of Justice of European Union

The Court Court of Justice of European Union

EC European Community

ECTA European Competitive Telecommunications Association

EU European Union

EEC European Economic Community

GSM Global System for Mobile Communications

GC General Court

ICTA Information and Communications Technologies Association

ISPs Internet Service Providers

MS Member States

NCAs National Competition Authorities

NRAs National Regulatory Authorities

OECD Organisation for Economic Cooperation and Development

PSTN Public Switched Telephone Network

TCA Turkish Competition Authority

TCB Turkish Competition Board

TAPC Turkish Act on the Protection of Competition Nr. 4054

TISSAD Turkish Internet Service Providers Association

TFEU Treaty on the Functioning of the European Union

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TL Turkish Liras

SMP Significant Market Power

UMTH Long Distance Telephone Services

US United States

USA United States of America

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1 Introduction

In simple words, margin squeeze is said to occur when a vertically integrated undertaking, by its actions, reduces the margin between the price of an input it sells to its competitors (wholesale prices) and the price that it charges for the downstream product (retail prices), to make the market unprofitable for its competitors. The core reason which requires this strategy to be examined in the context of competition law is that via margin squeeze, the vertically integrated undertaking could control the downstream market through its market power in the upstream market, with its anticompetitive conducts such as foreclosing the market by excluding its rivals and preventing competition. In recent years, margin squeeze has frequently been subject to many investigations started by NCAs and related courts as to prevent the alleged undertaking from engaging in anti-competitive conduct. However, it could be said that most of the cases discussed were in the field of telecommunications where the sector-specific regulatory authorities were designed to control the said sector.

1.1 Purpose

The purpose of this thesis is to examine whether margin squeeze is an acceptable behaviour in the telecommunications sector within the context of competition rules. In this perspective, it is also aimed to whether and to what extent the Turkish application of margin squeeze in the telecommunications sector conforms with international practices, specifically with the European competition rules, and what could be reasonably suggested to the Turkish authorities with regard to the current situation concerning margin squeeze.

1.2 Method

In order to achieve this aim, I will rely on EU Treaty provisions, case law of the EU Institutions, as well as the Guidelines and Notices of the Commission and opinion of Advocate General, secondary legislation, and, lastly, legal doctrine; thereby, I am mainly using the traditional legal dogmatic method. Regarding relevant case law, mostly the judgements on the telecommunications industry will be assessed; nevertheless, some cases on unregulated areas will also be mentioned very briefly in order to highlight the development of margin squeeze.

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By comparing the approaches of the European Union and Turkey in the field of margin squeeze in the telecommunications sector, I will also benefit from the comparative legal method to find out the similarities and differences between these two legal systems. Therefore, I will also rely on the rules of the Turkish Competition Act, the decisions of the Turkish Competition Authority with some related directives and communiqués concerning the telecommunications industry. With respect to this, given the apparently opposite answers of the US courts when faced with similar questions, the US jurisprudence on the issue of margin squeeze will also be very briefly considered in conjunction with its difference from the EU approach.

In addition, as the concept of margin squeeze requires an assessment in which both law and economics are included, I will therefore benefit from a law and economics perspective in order to clarify the economic rationale behind the legal reasoning. In that regard, the focus will generally be on the evaluation of law; however, in the end of the thesis, the concept of margin squeeze will also be examined using a common sense in order to put forward necessary suggestions to Turkey.

1.3 Delimitation

While writing this thesis, I will not touch upon national decisions of the Member States concerning margin squeeze issue on telecommunications and will rather stay on the EU level. In addition, while comparing the legal systems of the EU and Turkey in terms of margin squeeze on telecommunications, in order to make a complete analysis, the clear points of the US approach and the cases concerning margin squeeze will be indicated very briefly; however, they will not be examined to such a large extent as the EU approach.

Furthermore, despite the fact that the secondary legislation on telecommunications will be assessed, it will not be prospected in a very detailed manner and will only be contended with the points in relation to the margin squeeze.

1.4 Outline

In relation to the aim of the thesis, I will start by explaining the definition of margin squeeze. Conditions necessary for the existence of margin squeeze will be examined, combining both the legal and the economical perspectives. In the same chapter, I will also distinguish margin squeeze from other similar abuses, i.e. refusal to supply and predatory pricing, in order to clarify what a margin squeeze is.

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This will be followed by a discussion of the Turkish application of the notion of margin squeeze in telecommunications sector. After providing a general introduction of relevant competition rules and the rules concerning the telecommunications industry in Turkey, relevant case law will be assessed. In this regard, I will also touch upon some controversial issues in the Turkish system, such as the competence conflict between authorities and unimplemented legislations; however, the solutions to that question will be found in Chapter 5.

In the fourth and the core chapter, I will make an assessment of the EU approach to the margin squeeze as an ‘abuse’ by discussing the judgements of Court of Justice of European Union as well as the decisions of the Commission itself both in regulated and unregulated areas. In this chapter, the rules and interpretation of margin squeeze in telecommunications within the context of the US anti-trust rules are going to be examined shortly. Concluding the chapter, the main differences from the EU approach will be distinguished.

The last chapter contains a brief analysis of the Turkish approach in order to see whether the approach of the Turkish Authorities in respect of margin squeeze in telecommunications is in harmony with the EU competition rules. With regard to this, I will try to put forward some suggestions that could be considered as necessary interventions in order to prevent margin squeeze as an abuse under the Turkish legal system.

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2 Basis of Margin Squeeze As An Economical And Legal Notion

2.1 Definition of Margin Sqeeze

The theoretical definition of margin squeeze is the behaviour of a vertically integrated dominant undertaking operating in a manufacture and/or service chain which uses its control over an input supplied to downstream rivals in order to prevent them from doing business on the downstream market in which the dominant undertaking is also active. It occurs when the undertaking makes some changes by squeezing the margin between the prices of input that it controls on the upstream market and the prices of the product which is produced from that input on the downstream market. Because of this narrow margin, it becomes impossible for the other present or potential rivals to compete with the undertaking profitably even if they are as effective as that undertaking in the downstream market.6 To illustrate it with a very basic example, we can assume a country which has many bakeries, however, in which flour could be obtained only from one bakery, X. If that unique bakery X sells the flour for a very high price to the others, but at the same time also sells its own-produced breads with a lower price to the end-consumers, other bakeries could not compete with X profitably as there will be other additional costs for them. Therefore, after a while, bakery will gain unique power on the relevant market, as the others will be driven out from the market. Apart from case law, the Commission states the margin squeeze abuse in its telecommunications Access Notice7 as follows:

‘A price squeeze could be demonstrated by showing that the dominant

company's own downstream operations could not trade profitably on the

basis of the upstream price charged to its competitors by the upstream

operating arm of the dominant company…. In appropriate circumstances, a

price squeeze could also be demonstrated by showing that the margin

6Bouckaret, J. and F. Verboren, “Price Squeezes in a Regulatory Environment”, Journal of

Regulatory Economics, 2004, Vol:26, No:3, p. 322. 7Commission’s Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications Sector, OJ 1998 C 265/2.

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between the price charged to competitors on the downstream market

(including the dominant company's own downstream operations, if any) for

access and the price which the network operator charges in the downstream

market is insufficient to allow a reasonably efficient service provider in the

downstream market to obtain a normal profit (unless the dominant company

can show that its downstream operation is exceptionally efficient)’ According to the Access Notice; the Commission sets out two possibilities to find out a margin squeeze. First, it can be shown by comparing the wholesale and retail prices on the upstream and downstream markets, respectively, and seeing whether the leading undertaking’s own downstream concern could operate competitively with a similar margin. Moreover, it could also be examined as to whether a reasonably efficient provider could obtain a normal profit.

2.2 Its Relation To Other Abuses

According to the literature and relevant case law, margin squeeze can occur in several ways:

• Firstly, the dominant undertaking could raise the upstream input price to levels at which its competitors could no longer sustain a profit;

• Secondly, the dominant undertaking could sell below-cost downstream prices as it will be still making a profit in the sale of the upstream products.

• Finally, the dominant undertaking could raise the price of the upstream input and lower the price of the downstream retail product to create a margin between them at which competitors could not be profitable.

As clearly seen above, a dominant undertaking could create margin squeeze by either increasing the upstream input price or decreasing the downstream price or alternatively doing both of them. However, because of the common characteristics of margin squeeze with the other anti-competitive pricing abuses, most of the time it has been confused with them. The main key to distinguishing margin squeeze from other pricing practices should be the focus on the difference between the upstream and downstream price, but not on whether the prices are excessive, discriminatory or predatory. In other words, the focus is not on the intrinsic fairness of one particular price (i.e. upstream or downstream), but rather on the effect of the combination of these two prices in retail and wholesale markets.

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The assessment of margin squeeze might be very difficult sometimes as it also bears common characteristics with the other pricing abuses such as refusal to supply, predatory pricing and excessive pricing. Therefore, before mentioning the necessary conditions to constitute a margin squeeze abuse, it will be more appropriate to differentiate it from these three main abuses first.

2.2.1 Refusal to supply & margin squeeze

Margin squeeze has traditionally been evaluated as an example of a ‘constructive refusal to supply’.8 At the first sight, one would therefore assume that the same legal conditions for a refusal to supply should also apply for a margin squeeze to be considered as an abuse. However, in its Guidelines9, the Commission analyzed refusal to supply and margin squeeze under the same umbrella by recognizing that three conditions defined by the Court in Bronner10 case have to be met for these practices to be prohibited under Article 102 TFEU.11

The close relationship between two abuses especially occurs when the dominant undertaking offers the price of the input so high that its competitors could not incur their costs, which will lead to the foreclosure of competition in downstream market. In the legal doctrine, academicians are generally on the view that margin squeeze should be assessed in the same way with refusal to deal. According to Crandall and Singer12, margin squeeze is a kind of refusal to supply, where Areeda and Hovenkamp13 mention that as soon as there is no duty to deal; margin squeeze must not be regarded as a violation under the anti-trust rules. O’Donoghue and Padilla14 also approach the issue in the same sense but with different legal reasoning by 8It is called as “constructive” because, while access to the input is not formally refused, the price at which the input is sold does not allow vertically integrated undertakings’ downstream competitors to operate profitably. 9Guidance on the Commission’s enforcement priorities in applying Article 102 of TFEU to abusive exclusionary conduct by dominant undertakings issued in December 2008, [2009] OJ C45/7, para. 80. 10Case C-7/97, Oscar Bronner v. Mediaprint, [1998] ECR I-7791-, the CJEU listed the conditions for a refusal to supply to be abusive as: (i) access to the wholesale product is objectively necessary to compete effectively on a downstream market; (ii) refusal to supply is likely to lead to the elimination of effective competition on the downstream market; and (iii) the refusal is likely to lead to consumer harm. adopts a noticeably more restrictive approach to margin squeeze that that evinced in the case law. 11Geradin Damien, “Refusal to supply and margin squeeze: A discussion of why the ‘Telefonica exceptions’ are wrong”,Electronic copy available at: http://ssrn.com/abstract=1750226, 12Crandal, R. W. and Singer H. J. ,“Are Vertically Integrated DSL Providers Unaffiliated ISP’s (and Should We Care)”. Electronic copy available at: http://ssrn.com/abstract=710601, 2005, p.1 13Areeda, P. E. and Hovenkamp H., Antitrust Law, Second Ed. Aspen Law&Business, Vol:4, New York, 2002, p.128. 14O’Donoghue, R. and Padilla A. J. “The Law and Economics of Article 82 EC”, Hart Publishing, Oxford, 2006, p.325.

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stating that margin squeeze occurs when the dominant undertaking made a deal with its competitors but applies them an unreasonable upstream price in comparison with their downstream prices. Therefore, the unreasonable price means the same as refusal to supply which equals to margin squeeze behaviour at the end. However, they all support that; the assessment should be made in the framework of ‘essential facility doctrine’15. However, this has been criticized a lot in the regulated areas where the regulatory authorities oblige the incumbent undertaking to supply its input to its competitors. This rebuts the claim that margin squeeze is a kind of refusal to supply abuse leading to the conclusion that the undertaking might still squeeze its competitors margin where there is no duty to deal.

However, in its recent judgement on margin squeeze, TeliaSonera16, the CJEU decided that in order to determine an abusive margin squeeze, not all the strict conditions of refusal to supply were satisfied as it confirms that margin squeeze is a stand-alone abuse. This is consistent with the Commisson’s decision in Telefónica.

2.2.2 Predotary pricing & margin squeeze

Predatory pricing is a commercial strategy by which a dominant undertaking first lowers its prices to a level in order to force its rivals driven out of the market; then once having gained the market power, it will raise the prices again. The incentive here is the sacrifice of short-term losses for an overall control of the market in the long run. In the US anti-trust rules, generally the average variable costs17 are taken into account while calculating what price would be predatory18 whereas it is based on the proven intent of the dominant undertaking in the European Courts.19

When the dominant undertaking starts selling at below-cost downstream prices, another notion comes to one’s mind, namely ‘predatory pricing’, which is also a pricing abuse under the Article 102 TFEU. However, in Industrie des PoudresSpheriques20, the Court did not treat margin squeeze as a separate abuse, but rather concluded that it occurs as a result of predatory pricing by clearly stating

15‘The essential facilities doctrine’ is a legal concept which refers to a type of anti-competitive in which a firm with market power uses a bottleneck in a market to deny competitors entry into the market. In the Bronner case (see supra 10), a refusal to deal is considered an abuse of dominant position when a facility is indispensable to compete on a downstream market and a refusal is not objectively justified. It could be said that under Bronner the essential facilities doctrine has a more restrictive scope of application than under earlier case law. 16Case C-52/09 17 February 2011, Konkurrensverket v TeliaSonera AB, paras. 55-56. 17They are the costs which vary depending on the quantities produced. 18The test is known as the ‘Areeda&Turner test’, which was devised by Prof. Areeda and Prof. Turner. See Areeda & Turner: “Predatory Pricing and related practices under section 2 of the Sherman Act,” Harvard Law Review, 1975. 19Case C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359, paras. 71-72. 20Case T- 5/97 Industrie des Poudres Spheriquev Commission [2000], ECR II-3755.

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that in order to succeed in its (margin squeeze) claim, IPS should have proved either excessive prices or predation. Areeda and Hovenkamp also support this as to their views demonstrating that margin squeeze could be considered as an abuse only if the predatory pricing conditions are satisfied.21

It is a fact that margin squeeze and predatory pricing have many common points, i.e. excessive low prices on downstream market and the existence of sufficient market power to engage in exclusionary conducts as well as the exclusionary effects on competitors; however, there are also many significant differences between these two pricing practices.

The most perceptible difference between margin squeeze and predatory pricing can be concluded as, in predatory pricing, the price of the requested input is below downstream prices cost, whereas it is below the prices than those selling to its competitors in margin squeeze cases.22

As will be mentioned in the following section, to constitute a margin squeeze, the undertaking must be vertically integrated, while it is not necessary for predatory pricing. In addition, in predatory pricing cases, the undertaking should have a dominant position on the market where it applies its abusive prices23; however, it is not a mandatory legal requirement for the undertaking to be dominant in the retail market in margin squeeze cases.

Regarding the costs; while in predatory pricing cases, the competition authority has to look at all the relevant costs of the dominant company, in margin squeeze cases, it only has to assess the costs on the downstream market, including the upstream price.24

They also differ regarding the issue of sacrifice of profits and recoupment. In margin squeeze cases, the dominant company does not necessarily lose money, as it is still able to make profit through its upstream market; in contrast, in predatory pricing cases, the undertaking has to lose profit at least for a short time as it is deliberately sacrificing short-term profits for long term reasons.25 In this

21Areeda, P. E. and Hovenkamp H., Antitrust Law, Second Ed. Aspen Law&Business, Vol:4, New York, 2002, p. 767c 128. 22King, S. P. and Maddock R.“Imputation Rules and a Vertical Price Squeeze”, Australian Business Law Review, Vol:30, No:1, 2002, p.48. 23Geradin D. and O’Donoghue R. “The Concurrent Application of Competition Law and Regulation: the Case of Margin Squeeze Abuses in the Telecommunications Sector”, Journal of Competition Law and Economics, Vol:1, Nr:2, 2005, p. 369. 24Geradin D.and O'Donoghue R.“The Concurrent Application of Competition Law and Regulation: The case of Margin Squeeze Abuses in the Telecommunication Sector”, Working Paper, Global Competition Law Centre, College of Europe, 2004, p. 14. 25See King and Maddock, supra 22, p. 45.

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perspective, some discuss that, in margin squeeze cases, the question of future recoupment does not necessarily arise, as it often does in predatory pricing cases, because, in margin squeeze cases, the dominant undertaking remains profitable upstream and can make a simultaneous recoupment.26

The incentives to engage in exclusionary behaviour differ between margin squeeze and predatory pricing cases. In predatory pricing cases, there is usually no need to consider whether the alleged predator would benefit from successfully excluding rivals – it always will, to some extent. On the contrary, in margin squeeze cases, a vertically integrated company’s incentives to exclude rivals from a downstream market are considerably reduced, since the competitor will also be an upstream customer. A vertically integrated dominant company might lose more by losing upstream customers than it could gain as a result of their withdrawal from the downstream market. One should therefore include, in analytical tests for margin squeeze, an analysis of whether market conditions are such that a company has any incentive to exclude its competitors. Without such incentives, any failure to pass a price–cost test is more likely to be the result of a reasonable and temporary business strategy than a deliberate attempt to exclude.27

As mentioned above, although predatory pricing and margin squeeze have similarities on their legal and economical bases, sometimes the same treatment might result to the overlook of the anticompetitive conducts of the undertaking concerned. Therefore, even if the conditions for predatory pricing are not fulfilled, there is still a possibility for margin squeeze to occur, which also supports its independence as a separate abuse.

2.2.3 Excessive price & margin squeeze

A dominant undertaking can abuse its position by setting significantly and persistently unfair prices, which are assessed as ‘excessive’ under EU competition law, Article 102(a) TFEU. Prima facie, they look similar at the first sight; but margin squeeze abuses differ from excessive pricing abuses in many respects. While in the legendary United Brands decision28, excessive price was assessed under Article 86 EEC [Article 102(a) TFEU] prohibiting the dominant undertaking from directly or indirectly imposing ‘unfair prices’, the decisions of the Commission in Deutsche Telecom29 (as well as the judgement of the CJEU) and

26See Industrie des Poudres Spherique v. Commission supra 20. 27Palmigiano P.: ”Abuse of Margin Squeeze under Article 82 of the EC Treaty and Its Application to New and Emerging Market”, Regulatory Policy Institute Conference: Competition Policy in Regulated Sectors, 2007, p. 20. 28Case United Brands Company v Commission 27/76, 1978, ECR 207, para. 250. 29See Commisson decision of Deutsche Telekom supra 2, para. 199.

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Telefónica both demonstrated that the undertakings in question had abused their dominant position by margin squeeze within the context of Article 102(a) TFEU, requiring to make a distinction between .these two pricing behaviours.

Firstly, the legal basis of the abuses should be discussed. One could put forward a strong claim that an excessive price is an ‘exploitative’ abuse whereas a margin squeeze must be considered as an ‘exclusionary’ abuse. In the legal doctrine, it is also claimed that the Article 102(a) TFEU does not directly refer to exclusionary conduct but rather implies exploitative behaviour of dominant undertakings, which is detrimental to the consumers’ benefit. It is stated that it could give rise to some difficulties in finding an infringement under Article 102 TFEU if margin squeeze is considered as exploitative rather than exclusionary.30 However, in the Deutsche Telecom judgement, the CJEU put an end to that discussion by ruling that margin squeeze will be capable of affecting trade between member states through its exclusionary effect on the competitors if the undertaking concerned carries the purpose of driving its competitors from the market.31

Secondly, the legal tests for identifying an excessive price under Article 102 TFEU are different to those for establishing a margin squeeze abuse. In the assessment of excessive pricing as an abuse, the EU Institutions have used many tests to calculate a ‘fair’ price. In United Brands32, the Court suggested four possible tests to determine if a price is abusive:

i) a price comparison between competitors ii) a comparison of the dominant undertaking’s price with prices in competitive markets iii) the ‘economic value’ of the product service iv) a price comparison in different geographic areas.

However, it is not possible to use the test above in margin squeeze cases, because the excessiveness/unfairness of margin squeeze does not stem from the dominant undertaking’s own costs of supplying the relevant product or service compared to similar products in the same market or other related markets, but rather results from the relevant price and profit margin on the downstream market. In other words, an exploitative excessive price is abusive because of its relation to the relevant costs of supplying a single product, whereas an exclusionary margin squeeze is concerned with the excess of the price relative to prices on another related. Therefore, even if the prices in question are prove no abuse using all the benchmark tests above, they

30Kallaugher J.:“The Margin Squeeze under Article 82.: Searching for Limiting Principles”, GCLC conference “Margin Squeeze under EC Competition Law with a Special Focus on the Telecommunication Sector”, 10.12.2004, London 2004, p. 18. 31See Deutsche Telecom, supra 42, para. 253. 32See United Brands, supra 24.

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could be still regarded as abusive under Article 102 TFEU as to the downstream market price or vice versa.33

2.3 Necessary Conditions For Existance of Margin Squeeze

Although the theoretical explanation of margin squeeze is quite straightforward, one might face some problems and uncertainties when it comes to the assessment that includes both law and economics. Due to the fact that margin squeeze is an area where the economical and legal conditions are integrated with each other to such a large extent; the requirements will be handled as a whole in the discussion below, not separating the legal and economical aspects. 1) Vertically Integrated Undertaking In Both Markets

Firstly, to constitute a margin squeeze abuse, there should be a vertically integrated undertaking that engages in activities in both downstream and upstream markets of the same production chain. Without a simultaneous presence on both markets, no firm could engage in such an anti-competitive practice. This is so because, in the absence of that presence in both markets, the dominant undertaking could only engage in predatory pricing or in a refusal to deal; however, without having control on the prices charged to final consumers, no margin squeeze could take place.

Indeed, vertically integrated undertakings generally bring beneficial efficiencies of scale and scope to the undertaking’s operations. Microeconomic theory presumes that economic operators vertically integrate in circumstances where this is the most efficient way to organize their businesses, resulting in maximizing consumer welfare as a whole. Thus, vertical integration is not an a priori problem itself. From a competition law perspective, a benefit of vertical integration is that it prevents double marginalization, that is, the integrated undertaking can earn monopoly profit at only one level of the supply chain. By contrast, where there is a vertically separated market structure, monopoly profits can be made at each level of the supply chain, and consumer welfare as a whole is diminished.34

33O’Donoghue R. and Padilla A. J., “The Law and Economics of Article 82 EC”, Hart Publishing, Oxford, 2006, p 322. 34DunneNiamh, ”Margin Squeeze: Theory, Practice, Policy”, 2011, p.2, see also Coase R.H.: “The Nature of the Firm”, 1937, p. 386-405.

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2) Dominance on Upstream Market

For a margin squeeze to occur, the vertically integrated undertaking must have dominance on the upstream market under the EU competition rules.35 In case of lack of dominance on upstream market, the integrated undertaking would not have enough market power as to condition its competitor's cost and pricing strategies.36 In this context, according to Crocioni, as the input is essential for the production on the downstream market, the market power of the undertaking should go beyond mere dominance; even ‘super dominance’ might be required.37

The real question is whether the dominant undertaking should also have dominance on the downstream market. In previous cases, the CJEU has held that conduct that affects a market other than the dominant market can be categorized as abusive, provided that the dominant and non-dominant markets are closely associated. However, in both TeliaSonera38 and Telefónica39cases, in relation to whether a pricing practice introduced by a vertically integrated dominant undertaking in the wholesale market resulting in the margin squeeze of competitors of that undertaking in the retail market is abusive, the CJEU rejected that double wholesale and retail dominance is not a requirement for an abuse.

3) Controlling an Essential Input The second condition for margin squeeze is; the input provided to downstream competitors by the dominant undertaking must be essential. If the downstream competitors can rely on alternative technologies and/or they are not dependent on the input, then they will be less likely to be destructed by any margin squeeze attempts.The concept, essentiality, can be considered in two ways:

i) The input must be essential for the competition in downstream market;

There should not be any input, which can be considered as a close substitute for the downstream competitors to compete with.

ii) The input must be essential for the production on the downstream market; 35In the US, the dominance on upstream market is interpreted as “monopoly” according to Sherman Act Section 2: “Every person who shall monopolize, or attempt to monopolize... shall be deemed guilty of a felony...shall be punished by fine not exceeding ... in the discretion of the court.” 36Margarita Fernandez Alvarez-Labrado:“Margin Squeeze in the Telecommunications Sector: An Economic Overview”, 2006. 37Crocioni P. and Veljanovski C.,“Price Squeezes, Foreclosure and Competition Law, Principles and Guidelines”, Journal of Network Industries, Vol:4, No:1,2003, p.39. 38See TeliaSonera, supra 16. In para. 89, CJEU decided that marginsqueeze might constitute an abuse of a dominant position irrespective of both (i)the degree of dominance in the wholesale market and (ii)the existence of a dominant position on the associated retail market. 39See Telefonica, supra 4, para. 243.

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It means that it does not have to be an essential facility but must be at least a ‘strict complement’ for other inputs and/or used in ‘fixed proportions’40 in the production of the input that the downstream competitor cannot easily or economically rationally reproduce or substitute.

Therefore, we can conclude that, where there is no alternative source of supply for the input available to the downstream competitor, the integrated undertaking may have the ability to manipulate, or ‘squeeze’, the relationship between the competitor’s costs and even revenues in order to reduce its profit margin to such a low (or negative) level as to force the competitor from the market.41

However, in both Deutsche Telekom42 and Telefónica cases, the Court emphasized that as it was not possible to construct an alternative infrastructure, in the near future, the competitors had get supply of from the dominant undertaking in order to engage in market activities. In relation to this condition, it is noteworthy to state that, according to the recent decision of the CJEU in TeliaSonera43, the requirement for the input to be essential seems to start losing its strictness, which will be examined in detail under Section 4.1.3.2 of this thesis.

Some writers have discussed that this essentiality should be considered as ‘the essential facilities doctrine’ within the context of competition rules, which is a legal concept referring to a type of anti-competitive in which a undertaking with market power uses a ‘bottleneck’ in a market to deny its competitors entry into the market.44

40In fixed proportions production, as there is no substitutability between the inputs, it is impossible to replace the input with another one, so they have to be manufactured in proportional to the same amounts with the numbers of the inputs. 41Dunne Niamh, ”Margin Squeeze: Theory, Practice, Policy”,2011, p.3, figure 1. 42Case C-280/08 P, 14 October 2010, Deutsche Telekom AG v Commission. 43See TeliaSonera, supra 16, para. 72. 44Garzaniti L. and Liberatore F.:”Recent Developments in the European Commission’s Practice in the Communications Sector”, E.C.L.R., Nr:3, 2004, p.175.

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4) Market Entry Barriers There should be barriers to entry in both downstream and upstream markets. The entry barrier in the downstream market prevents new entries after excluding the competitors out of the market while the barriers in upstream market still make the dominant company profitable even if the extra input price induces the downstream competitors to upstream market in a form of vertical integration, as it is not possible to achieve it for them.45 5) Unprofitable Downstream Margin Because of margin squeeze, the input supplied by the dominant undertaking must constitute a relatively high, fixed proportion of the downstream costs. Therefore, the margin between the prices in both markets must preclude the undertaking’s competitors, which are as efficient as the undertaking itself, from trading profitably. In case it represents a small proportion of overall costs or is used in variable proportions by different downstream competitors, there would be severe practical problems in inferring that downstream rivals’ apparent lack of profitability was caused by the dominant undertaking’s input pricing.46

45O’Donoughne, R. and Padilla A. J., “The Law and Economics of Article 82 EC”, Hart Publishing, Oxford, 2006 p. 307. 46SeeGeradin D.and O'Donoghue R., supra 24, p.7.

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6) Restriction of Competition on Downstream Market

Even if the above-mentioned conditions are satisfied, one still needs to consider whether the dominant undertaking’s conduct has had, or is likely to have, a material impact on competition so that the conduct in issue has some exclusionary effects to drive the rivals out of the market. According to the Commission decision in Telefónica47, Telefónica's conduct was likely to delay the entry and growth of competitors; so the margin squeeze conducted by the undertaking restricted competition by imposing unsustainable losses on equally efficient competitors that they were either ultimately forced to exit or in any event constrained in their ability to invest and to grow.

In this perspective, another issue that should be assessed is whether the harm to rivals also leads to harm to consumers in the form of higher prices or reduced choice. This will be examined in Section 4 of this thesis in the light of case law. 7) Persistence In order to be regarded as an abuse, margin squeeze must be carried out for a sufficient period of time and have exclusionary effects in the market. Otherwise, the temporary impacts on downstream competitors will not be enough to prove exclusivity. Examining the recent decisions in the EU, it can be seen that the duration of the infringement in Deutsche Telecom was between the years 1998-2002; while it was 2001-2006 in Telefónica. 8) Non-Existence of Objective Justification There might be many legitimate reasons why a company has set prices below its own costs for a period of time. Therefore, in order to establish an abusive margin squeeze, there should not be any justification or explanation for the dominant company’s downstream losses other than an exclusionary intent or object.

The legitimate reasons could be listed as: market conditions may be temporarily bad but expected to improve; the company may be favoring regular customers over occasional ones in times of shortage48; the company may be setting low prices as a temporary marketing initiative; it may have introduced a new product and currently has low volumes, but expects volumes to increase; a competitor may be charging unsustainable prices but will probably exit the market or revise its strategy; the market may be in decline and some market participants are expected to exit; the

47See Telefónica supra 4, paras. 546-549. 48Case 77/177 BP v. Commissioner [1978] ECR 1513, para. 34.

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company may have misjudged and entered the market on too large a scale; it may be able to improve its performance or its products; and so on.49

2.4 Conclusion

As a conclusion of this chapter, we see that in relation to the concept of margin squeeze, there are many discussions about the definition of specific terms, imputation tests50 and available defenses. These have been solved to quite an extent by courts and regulatory authorities in the various cases brought before them; however, some parts still remain controversial.

49Palmigiano Paolo: ”Abuse of Margin Squeeze under Article 81 of The EC Treaty And Its Application to New and Emerging Markets”, 2005, p. 17-18. 50See Section 4.1.1.2.

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3 Application Of Margin Squeeze In Turkey

3.1 General Competition Rules In Turkey

In 1963, Turkey signed an Association Agreement with the EEC, also known as the Ankara Agreement,51 which is the cornerstone in the establishment of a customs union that was finalized in the Association Council in 1995 with the signature of a Customs Union Agreement. According to Article 39 of the Decision52, Turkey shall ensure that its legislation in the field of competition rules will be compatible with the European Community and applied effectively. Moreover, the article requires Turkey to adopt a law, prohibiting behaviours of undertakings under the conditions laid down in Articles 101 and 102 TFEU, and establish a competition authority, which shall apply these rules and principles effectively. In that way, the rules on competition law of European Union could be capable of being implemented in Turkey.

Competition rules between the EU and Turkey are considered to have been adjusted in order to ensure the parallelism in legislation on Turkey’s way to becoming a full member of the EU. Therefore, the legislation was made in harmony with the available legislation in order to create an internal market with regard to the free movement of goods, services and capital and, moreover, to prevent antidumping conducts and to contribute to social welfare.

Upon this, Turkey enacted the Act on the Protection of Competition Nr. 4054 (TAPC) in 1994 before the entry into force of the Customs Union, but the Turkish Competition Authority53, which is an institution, considered as adequate by the European Commission and acting like a main guardian of competition, could

51In 1963, Turkey and the EEC and its Member States signed the Agreement establishing an Association between the EEC and Turkey. That Agreement was concluded, approved and confirmed on behalf of the Community by Council Decision 64/732/EEC of 23 December 1963. Under Article 2(1) of the Association Agreement, the aim of the Agreement is to promote the continuous and balanced strengthening of trade and economic relations between the parties, which includes, in relation to the workforce, the progressive securing of freedom of movement for workers and the abolition of restrictions on freedom of establishment and on freedom to provide services, with a view to improving the standard of living of the Turkish people and facilitating the accession of Turkey to the Community at a later date. 52Decision No 1/95 of The EC-Turkey Association Council of 22 December 1995 on implementing the final phase of the Customs Union (96/142/EC). 53It is an independent competent authority whose task is to ensure the formation and development of markets for goods and services in a free and sound competitive environment, to observe the implementation of the Competition Act Nr. 4054, and to fulfill the duties assigned to it by the Act.

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manage to become operational in 1997. In this respect, the TCA, as a ‘competition advocacy’, is responsible for the enforcement of the Turkish Competition Law and advocating the competition by providing its opinions on government policies and regulations that are likely to have an impact on competition.54

Since the main principles are based on the EU competition rules, one could say that the Turkish Competition Act is largely similar to the Union rules. On the other hand, this similarity is capable of being expanded due to the fact that the case law developed by the European Institutions is -at some points- also accepted by the Turkish Competition Board.

However, under Article 4 TAPC, which corresponds to Article 101 TFEU, it is provided that ‘[a]greements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited’. While an exemption mechanism (both individual and group exemptions) is provided for the agreements and decisions meeting certain conditions under Article 5, Article 6 regulates the prohibition of abuse of dominance with a non-exhaustive list of examples, similar to that of Article 102 TFEU.55 The rules governing general procedural aspects, sanctions and inquiry and investigation procedures are in line with the EU rules (request for information, on the spot investigation, notification, termination of infringement, substantive fines and procedural fines, access to file, right to defense etc).

Board decisions may be appealed to the Council of State, a judicial body. To address the problems posed by Turkish judges’ unfamiliarity with competition law, in 2004, a special chamber in the Council of State was created to deal with appeals against the TCA rulings. However, as it takes time to conclude the decisions because of intense work files, most of the appeals are still pending.

Abuse is an elusive concept and, as the list of abusive behaviour enumerated under Article 6(2) TAPC is non-exhaustive, it requires interpretation and the European

54According to the OECD’s view in “Turkey - Peer Review of Competition Law and Policy” in 2005 and a report by Khemani, S., R “Competitiveness, Investment Climate and Role of Competition Policy in Turkey”, 2006, p.4, it is said that the Turkish Competition Authority has continued to make excellent progress since 2002, and has developed a reputation as one of Turkey’s most effective and best administered agencies. 55Article 6(1) of TAPC “The abuse, by one or more undertakings, of their dominant position in a market for goods or services within the whole or a part of the country on their own or through agreements with others or through concerted practices, is illegal and prohibited.”

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case law and doctrine are primary sources in order to understand the concept; therefore, the Turkish Competition Authority frequently refers to European case law. In that regard, margin squeeze is discussed as an abuse under the Article 6 TAPC by the TCA, but when the decisions are examined, it is seen that they are quite limited.

3.2 Telecommunications sector in Turkey

Before starting to analyze the cases, it is be appropriate to summarize the general attitude of the Turkish Competition Authority and the Turkish Telecommunications Agency (ICTA)56 towards the telecommunications sector, as competition does not have a long history in the said sector. The telecommunications industry in Turkey has gone through a number of significant changes in the past few years. Before 2004, fixed telephony services were under state monopoly and provided by Turkish Telecom (TT), the leading communication and convergence technology group in Turkey providing integrated telecommunication services from PSTN and GSM to broadband internet. As the liberalization of the telecommunications sector is also one of the mandatory requirements for harmony with the EU legislation and for an effective competition according to the Association Agreement, in order to achieve this aim, the liberalization period should be completed as quickly as possible together with an end to state intervention. After establishing the Turkish Competition Board57 as a watchdog in Turkey, the importance of competition had increased much more and now the expectations from consumers were lower prices and better services, especially in the telecommunications industry. Moreover, the establishment of the ICTA in August 2000 as the first independent sector-specific regulatory body, with extensive powers to issue secondary legislation and compliance in areas such as tariffs, interconnection and licensing, under the Law nr. 4502 amending Article 5 of Law nr. 281358, was a major step

56It is the regulatory authority in Turkish telecommunications industry and its name replaced as “Information and Communication Technologies Authority on 10.11.2008 with the Law Nr. 5809. 57TCB is the decision making body of the Competition Authority and is the executive body enforcing the competition law in Turkey. 58According to the Article 67 of The Act on Electronic Communications Nr. 5809, the governing statute for ICTA, the name of the Telsiz Act Nr. 2813 was replaced by “Law On The Establısment of the Informatıon and Communıcatıon Technologıes Authorıty”.

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towards a more competitive market structure in Turkey that produced an opportunity to create an environment contributing to competition, introduction of new entries, investments and growth. There were hopes that Turkey’s quest for EU membership would facilitate the creation of such an environment.

The framework developed in Law No. 4502 was inspired by the 1998 regulatory framework in the European Union. It relied on an individual licenses regime and the identification of operators with significant market power (SMP) and the regulatory obligations that can be imposed on them were not designed as an exercise carried out on the basis of competition law, as was the case in the 2002 EU framework. The ICTA itself moved in the direction of the 2002 framework in its efforts to define markets and identify operators with SMP. Finally, with the adoption of Law Nr. 5809 in 2008, the regulatory framework became much more compatible with the 2002 EU framework.59

Under Article 7 of the Law Nr. 5809, as regards to protection of competition, the ICTA’s main duty is to take necessary measures to ensure that telecommunication networks and services are being operated in a completely competitive environment. In this regard, the ICTA could investigate any relevant matters including anti-competitive behaviour and may also impose obligations on operators with significant market power with the aim of ensuring and promoting an effective competition environment. In addition, the TCB will take into consideration primarily the ICTA’s view and the regulatory procedures of them on telecommunications-related cases taken before the Competition Authority. This is also mentioned in Article 16(m) of Law No. 4502 by stating that the TCA has to consider the ICTA’s opinion before making any decisions on the telecommunications industry. Therefore, it could be said that the ICTA has authority to arrange both ex-ante and ex-post regulations in Turkey.

In this regard, the only place margin squeeze classified as a restriction of competition is the Article 13 of the Act on Electronic Communications Nr. 5809:

‘If it is determined as an SMP operator, the ICTA shall review the practices

[of the operator] and adopt necessary regulations to prevent tariffs

restricting competition such as price squeezes or predatory pricing’.

However, the competence issue between the TCA and the ICTA concerning competition problems in telecommunications sector still contentious, which will be examined below.

59Atiyas Izak: “Regulation and Competition in the Turkish Telecommunications Industry: An Update”, 2009, p. 2.

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3.3 Case applications

Looking at the case law of the Turkish Competition Board, it can be observed that most of the practices fall under the category of exclusionary abuses under Article 6 TAPC and the pricing practices probably constitute the main sub-category as they comprise the range of pricing schemes as predatory pricing, selective pricing, price squeeze and discriminatory pricing. Almost half of the infringement decisions and more than two thirds of all cases involve a pricing behaviour. Among them, price discrimination and predatory pricing cases are the most common ones. Beside this, the TCB also dealt with many refusal to deal cases and in five out of 23 infringement decisions, the refusal was found to be abusive.60

In recent years, there have been many complaints about margin squeeze behaviours and when we observe the decisions of the TCB, we see that as a new kind of abuse, the margin squeeze abuses have been assessed only in the telecommunications industry in Turkey. ***TISSAD61;

The TCB started an investigation in 2001 upon the request of the TISSAD62 and a number of internet service providers (ISPs) concerning the alleged abuse of dominance by Turkish Telecom in the markets for internet service provision and internet infrastructure referring to the infringement of the Article 6 TAPC.

In this decision, it is claimed that Turkish Telecom has been providing the infrastructure through TTNet63 to the end-users below their costs, which was also provided to the ISPs. It was discussed whether the prices of Turkish Telecom made it difficult for the other competitors to enter the concerned market and therefore distorted competition because of predatory pricing.

The TCB decided that TT had a dominant position: 1) on the market for infrastructure needed for the provision of broadband internet services to corporate users; 2) on the market for infrastructure needed for the provision of narrowband internet services to residential users; 3) on the market for infrastructure needed to provide broadband internet access services to residential users; 4) on the market for satellite based international data transfer. The TCB also stated that the market for

60Cetin Tamer, “The Political Economy of Regulation in Turkey”, p. 99-100. 61Decision of Turkish Competition Board dated 2.10.2002, nr. 02-60/755-305 and dated 5.1.2006, nr. 06-02/47-8.

62The Association of Turkish Internet Service Providers. 63TTNET Inc. is the largest internet service provider in Turkey, as a subsidiary of Turkish Telecom, who provides high technology broadband services (ADSL/VDSL2) as well as value added services, and dial-up access to its customers in 81 provinces in Turkey.

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infrastructure needed for the provision of broadband internet services to corporate users and the tariffs of leased lines provided by TTAS to independent ISPs were significantly higher than the tariffs that TTNet applied to corporate users of internet services, making it impossible for independent ISPs to survive in this market. This practice amounted to an abuse of dominant position.

Following the decision, the TCB also decided on preliminary injunctions to TT. In the end, the TCB imposed a great fine of 1.136.376.790.621 Turkish Liras (approximately 496 Billion Euro) on Turkish Telecom pursuant to Article 16(2) TAPC, inter alia, for abusing its dominant position on the network market for broadband internet access by determining the tariffs for the access to network so high such that rivals cannot compete in the relevant market while determining the tariffs so low for the internet access. The TCB grounded its decision on the assessment of predatory pricing and found an abuse in this context.

However, the decision of the Board was annulled by the Council of State in 2005. Legal ground of the Court Decision is that ‘[t]he Board decision prejudices the principal of impartiality as the Board member involved in the investigation voted for the final decision.’ There has been increasing numbers of Court Decision based on the same reason. After the Court Decision, Competition Board reassessed the alleged abuse of dominant position of Turkish Telecom in the markets for internet services and internet infrastructure. The new decision of the Board nr.06-02/47-8 dated 5.1.2006 came up with the same conclusions stated in the previous Decision no. 02-60/755-305.

In the TISSAD case, the actual practice was predatory pricing rather than margin squeeze. However, it seems that even if the TCB had not detected pricing below cost, it could have found a violation via price squeeze. In fact, the TCB implicitly made a price squeeze analysis as it included essential facility and vertical integration concepts in its decision. Therefore, one can say that, if the decision had been decided today, it would be also have been examined under the conditions of price squeeze, which would probably not change the conclusion of the TCB.

***Turkish Telecom-/Teacher-Student Campaign64; The first real case about margin squeeze was the claim of infringement of Article 6 TAPC that Turkish Telecom had abused its dominant position with its ADSL campaign addressed to teachers, academicians and students.

64Decision of Turkish Competition Board dated 8.9.2005, nr. 05-55/833-226.

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Turkish Telekom had a dominant position in the telecommunications sector on both the downstream and the upstream markets (providing both infrastructure and internet itself) which also had monopoly in providing internet infrastructure. According to the Internet Service Provider Agreement concluded between Superonline65 and TT on 31.03.2005, Superonline was buying the ADSL port (the infrastructure for providing internet) from TT with an 18% discount pursuant to the tariff in force and selling it to the end-users.

Turkish Telecom had started a campaign for the students, teachers and their first-degree relatives, which were almost 25% of Turkish population during the time between 06.21.2005-10.15.2005. Within the context of this campaign, TT did not take the ADSL connection cost or one month price for the ones who applied for ADSL service, which equals to the 17,35% discount in yearly based. However, TT did not apply its campaign to the end users who bought ADSL from Superonline as well as the other ISSs, and sold to the end users with the 18% same discount which they sold to Superonline as well.

In the end, it was mentioned that the total ratio of rebate that was applied to its end users under the campaign was 21.62% while it was only 18%, which was sold to ISSs under its wholesaler’s tariff. It was claimed by Superonline as well as by the other competitors, that because of the ratio of discount applied by Turkish Telecom -which was not applied to the other ISPs- rendered it impossible for ISSs to compete with TT as there would be also other additional costs have to be incurred by them. Therefore, they claimed that TT had abused its dominant position by margin squeeze.

The Board examined the conditions for margin squeeze and found out that Turkish Telecom was dominant as well on the market for internet access as on the market for network services. In order for ISPs to enter the market, they had to get the infrastructure and /or network access (ADSL & cable TV) which were under the control of Turkish Telecom. Therefore, they concluded that the input was indispensable for ISPs to be provided in which there were no other alternatives.

Regarding the costs, the Board mentioned that the price of the input determined by the dominant company might not render impossible for the others to compete with dominant company, as that input is a cost for them. Moreover, if that cost is not profitable enough for ISPs, they either will be driven out of the said market or could not even enter it. Therefore, the calculation of costs belong to the competitor in downstream market should be examined carefully to see whether the purchased input could meet the cost of it or not.

65It is an ADSL operator in Turkey whose current name is "Superonline Fiber Internet".

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However, the Turkish Competition Board decided not to launch any investigations and refused the claim of Superonline based on the reason that the contentious campaign was enforced by the permission and approval of ICTA so the conduct of TT in issue could not be assessed within the context of TAPC. This decision has been criticized a lot, i.e. by claiming that the TCB’s decision was wrong, as Turkish Telecom had acted autonomously of ICTA so that it would be wrong to allow them to continue its campaign as the protection of competition should be provided in telecommunications sector. The existence of the ICTA pretty much restricts the competence of the Board; nevertheless, this should not be a valid factor, which leads the Board being automatically out of force. *** Turkcell/ UMTH Corporate Tariffs66; In another case, the TCB assessed the claims that the dominant undertaking in GSM sector, Turkcell67, was active in margin squeeze by setting its retail tariffs for mobile calls for some of the special campaigns prepared for the corporate customers below the interconnection prices applied for the rival telephone operators which had to be approved by the ICTA in advance.

The complainant was an internet service provider engaged in providing UMTH.68 Regarding UMTH, due to the fact that Turkish Telecom and three GSM operators are both the providers and rivals of the complainant, the GSM operators created a sensitive area within the context of competition rules for the prices sold to their end-users and for the prices they provided to the others (i.e. interconnection prices constituting very important costs for undertakings providing UMTH).

The major claim of the complainant was that as the interconnection service given by Turkcell is indispensable in order to provide UTHL; Turkcell arranged its tariffs below the costs of the interconnection prices given to the other competitors, and therefore abused its dominant position by the way of margin squeeze.

The TCB found that these tariffs did not amount to a margin squeeze due to the existence of sufficient margin between the retail prices of Turkcell in downstream market and the costs of the competitors in the market in order to compete in the market. The Board also made an effect analysis and examined whether the alleged behaviour of the dominant undertaking damaged the operations of the complainant. As a result, it stated that the losses incurred by the complainants most likely 66Decision of Turkish Competition Board dated 4.7.2007, nr. 07-56/634-216. 67It is the first GSM operator inTurkey. 68It is used for the long distanced telephone services which are supposed to be provided through an agreement concluded between Turkish Telecom and GSM operators.

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resulted from high and anticompetitive prices compared with those of dominant undertaking, i.e. from the complainant’s free commercial preferences.

Because of the above-mentioned reasons, Turkish Competition Board decided not to launch any investigations and refused the claim. ***TTNet’s Summer Storm Campaign69;

The most recent leading judgement in Turkey is the ‘TTNet-Summer Storm’ decision (2008), in which the TCA launched a detailed investigation upon the request of the three ISPs (Tellcom /Superonline and Borusan) concerning the claimed abuse of dominance by Turkish Telecom in the markets for broadband internet access services through its affiliate TTNet restraining other ISPs’ competitive practices in the market through its campaign called ‘Summer Storm’.

According to the campaign, TTNet would provide wired-wireless modem together with broadband internet access. In this sense, the subscribers who signed a contract with TTNet would be charged 14.99 TL per month for broadband internet service and wired modem, or 19, 99 TL per month for broadband internet service and wireless modem. However, TT charged other ISPs, competitors of TTNet, 23.78 TL per month for the same size of package. Therefore, it was clear that, TTNet and so TT set monthly access charges to end-users below the charges applied by TT to ISPs for using the internet infrastructure. TT is the only provider of necessary infrastructure for ISPs in telecommunications sector in Turkey. ISPs have to buy the TT’s infrastructure to provide broadband internet services to end users. TT also provides internet services to the end-users through its affiliate, TTNet. To sum up, while TT operates infrastructure, and provides wholesale internet access services, TTNet provides retail internet access services. The complainants basically claimed that if the Summer Storm Campaign was not terminated, they would have to leave the market as TT and TTNet were cross-subsidizing profitable services with retail internet services and abusing its dominant position in internet infrastructure by offering different terms and conditions to purchasers with equal status, equal rights, and obligations due to the fact that TTNet and other ISPs already were competitors.

TCA firstly concluded that, although investigation had already been opened, two separate legal entities TT and TTNet should be examined as one undertaking, as

69See TTNet-Summer Storm, supra 5.

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they formed a single economic unit according to the Article 3 TAPC70 and that this unit held a dominant position in both wholesale and retail broadband internet access market. 71

Regarding dominance, the TCA did not change its traditional approach in this case too in relation to margin squeeze and mentioned that only upstream dominance is enough to find a violation of Art. 6 of TAPC. TT not only was found dominant; it had a monopoly in the relevant wholesale market for broadband internet access services. Therefore, the TCA found that wholesale services were essential to provide services in the downstream market; it also considered the fact that specific regulation was imposed on Turkish Telekom a duty to supply. TTNet was also found dominant in the retail market; however, the TCA stated that being dominant in the retail market was not required to find abuse. Therefore, it concluded that the relevant economic unit abused its dominant position in the relevant wholesale market via engaging in price squeeze in the retail market.

To establish the abuse, the TCA referred to two decisions given by the European Commission: Telefónica and Deutsche Telecom and, accordingly, they listed the conditions to constitute a margin squeeze as; (i) the existence of vertical integration, (ii) dominance, (iii) lack of substitutability of the input, (iv) unprofitable margins, (v) restriction of competition and (vi) non- justifiable reasons. The TCA found that all the criteria set above were present in this case and concluded the economic unit had abused its dominant position through price squeezing. The TCA also mentioned that margin squeeze is different from predatory pricing in the sense that the retail prices do not have to be predatory in order to create margin squeeze. Therefore, even if it was impossible to find a predatory behaviour on the downstream market, the dominant undertaking could still impede competition via price squeeze. In addition, contrary to the predatory pricing, there is no need for being dominant in the retail market in the margin squeeze

To determine how to calculate the ‘insufficient margin’, the TCA first looked at the difference between the wholesale price and the retail price, whether it was negative, and if it was not negative, they said that it should be examined whether competitors

70According to the Article 3 of TAPC, undertaking are described as “Natural and legal persons who produce, market and sell goods or services in the market, and units which can decide independently and do constitute an economic whole”. 71During the investigations, TCA also decided to take preliminary injunction which was saying that “TTAS and TTNet are required to end or reorganize in a proper form all of those campaigns, including the ‘Summer Storm’, setting charges below the cost, or inducing price squeezing” (Decision of Turkish Competition Board dated7.11.2007 nr. 07-59/676-235).

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who are as efficient as the undertaking could able to meet the costs of ‘increasing retail market’ (the market which is formed as a result of production of input) of the said product. While looking at the efficiency test, the own costs of the undertaking who is under scrutinized must be taken into account.

The TCA also considered other evidence such as internal e- mails and memos circulated among the managers as indicators of intent. At the same time, the TCA evaluated the arguments introduced by TT and TTNet, that had stated that the market was an emerging market and formation of a competitive market structure would take time; during this time, they were trying to contribute to this improvement and their conducts were just a matter of improving the broadband internet services in Turkey. The TCA did not accept these arguments as an objective justification and stated that improving the broadband internet services and expanding the use of internet in Turkey were essential, but achieving these aims and targets via anticompetitive behaviours could not be accepted as a justification. Moreover, the TCA stressed that, if TT has such an aim, it could achieve this aim through other facilities (such as price discounts) in the wholesale internet market, not through squeezing the margin of its competitors. As a result, the TCA concluded that the undertaking consisting of TT and TTNet had abused its dominant position on the broadband wholesale internet access services by the way of margin squeeze in the retail broadband wholesale internet service access according to Article 6 TAPC. Therefore, they were jointly fined with 12.394.781,16 TL. ***Others;

There are also plenty of margin squeeze cases recently given by the TCA, rejecting the claims that initiating an investigation was not necessary under the TPCA.

In the recent Nuh Cement72case, Detaş Beton Sanayi A.Ş. complained about Nuh Cement A.Ş (Nuh Cement) and Nuh Beton A.Ş (Nuh Beton) claiming that Nuh Cement had abused its dominance in cement market by margin squeeze and predatory pricing in the ready-mixed concrete market, in which it also engaged in activities through its subsidiary Nuh Beton. The Board decided that opening an investigation was not required in accordance with Act No. 4054, as a result of an examination made upon the claim that Nuh Cement, by exercising its power deriving from its dominant position in İstanbul Anatolian Bank (including İzmit), conducted a margin squeeze in the ready concrete market, infringing Act nr. 4054.

72Decision of Turkish Competition Board dated 10.07.2010 nr. 10-63/1317-494

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In this case, the TCA scrutinized the conditions for refusal to supply to be assessed under Article 6 TPCA, which they regarded as one of the ways of margin squeeze. The TCB concluded the issue by stating that another undertaking, Akçansa, was the leader both in capacity and in production in the relevant market. Therefore, Nuh Cement was not dominant in the said market, which was the main requirement for the infringement of Article 6, and it was decided that initiating an investigation was not necessary under the TPCA and the complaint should be rejected. In another case concerning TT and TTNet73, the TCB decided that it was not necessary to open an investigation in accordance with Article 41 of the Act No. 4054. In that case, the Board examined the claim that the economic entity made up of TT and TTNet had abused its dominant position in the sector by creating a price squeeze through pricing and ancillary practices (supplying to the customers metro ethernet without taking any connection fee and/or selling them with a very low margin) related to the metro ethernet internet service offered to end users resulting in a distortion of competition. To summarize the TCB’s decision, it was first said that the metro ethernet service was indispensable and had no alternative in the wholesale market; therefore, the other suppliers had to purchase it from Turkish Telecom in order to provide broadband internet access. It was also mentioned that, to constitute margin squeeze, it is enough for TT to be dominant in upstream market; therefore it was not necessary to examine whether TTNet was also dominant in the retail market. As regards the costs of TTNet, the TCB found out that they still had made profit during the years in which they were accused of squeezing the margins of the competitors. Thus, the Board concluded that, where the margin was already positive, it was not necessary to assess the other conditions in order to establish a margin squeeze abuse.74

In its recent judgement decided a few months ago, as a result of the examination based on the claim that Turkcell75 had complicated the operations of TT through its interconnection practices in the distribution system, as well as its anti-competitive and exclusionary practices in the voice transmission market; the Board decided that no investigation was necessary under Act no 4054 and refused the claim. The Board used the incremental costs of the dominant company, Turkcell, and made an analysis in order to test whether or not the dominant company had made profit and by this squeezed the margin of TT and other providers. It was finally found that Turkcell had not made any below-cost pricing; therefore, the claim was rejected. 73Decision of Turkish Competition Board dated 17.06.2010 nr.10-44/761-245. 74The TCA also added that the margin of TT was only negative in one company; however it was not sufficient enough for the existence of margin squeeze. 75Decision of Turkish Compeitition Board dated 27.01.2011 nr. 11-06/90-32.

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3.4 Controversial Issues In Turkey

According to the Commission’s 2010 Progress Report76, Turkey had made some progress in the field of competition, especially by adopting the implementing legislation except horizontal cooperation agreements and the de minimis rules. It was also mentioned that the administrative and operational capacity of the TCA was quite enough to give independence decisions.

Nevertheless, with regard to the telecommunications sector, European Competitive Telecommunications Association’s Report77, in 2009 found the margin squeeze issue to be one of the competition problems in Turkey.

According to its last ‘Regulatory Scorecard’ in 2009, in relation with the subjects such as i) overall institutional environment, ii) key enablers for market entry and network roll out, iii) the NRA’s regulatory processes, iv) application of regulation by the NRA, and v) regulatory and market outcomes, Turkey showed a very weak performance by being ranked 19th among 22 Member States.

When the specific issues were examined, the report said that Turkey had fulfilled a significiant amount of work to bring the regulatory environment in line with European benchmarks, and its score had increased as compared to 2008. However, considering foreclosure practices, such as margin squeeze, bundling and discounts, Turkey was criticized for not addressing them sufficiently. Moreover, regarding the competition in fixed lines, it was said that the competition was limited and the prices were quite high in Turkey.

Another concern of the association was the independence of NRA: the Turkish Government continues to retain significant ownership interests in leading undertakings or other telecommunications operators.

To sum up, there are many things in Turkey awaiting progress; as a conclusion, it could be said that despite the broad competence of its regulatory authority and necessary legislation, it was surprising that Turkey showed a very bad performance 76Commission’s 2010 Turkey Progress Report, Chapter 8, 4.8 77ECTA is the EU association, founded in 1998, which supports the regulatory and commercial interests of new entrant telecommunications operators, ISPs and suppliers of products and services to the communications industry. Its aim is to ensure an effective competition where the all electronic communications providers could compete fair terms for an effective European internal market.

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at implementating them.78 Thus, the regulatory authority was criticized for failing its obligations concerning the implementation of effective competition. From 2009 to now on, one could say that not too many things had changed. Nevertheless, according to the “State-Supervisory Report of Presidency”79 (herein ‘the Report’), concerning the activities of ICTA during the years 2006-2007-2008 in the sector-specific sector, there still exist serious problems in which one of them is the “margin squeeze” issue which have to be fixed. The problems will be briefly discussed in the sections below.

3.4.1 Clash of competence: the TCB v the ICTA

Some specific industries, such as energy, telecommunications and transportation, tend to have state-monopolies by their nature. Therefore, sector-specific remedies were imposed on these sectors in many countries in order to prevent state-owned monopolistic operators from abusing their powers and to contribute to the improvement of competition. The close relationship between the competition authorities and the sector specific regulations led to some overlapping in relation to their competences and the interventions80. There had also been some discussions regarding as to what extent the competition rules and the regulatory authorities are complementary or substitutable81 with each other. The scope coincidence between the regulatory and competition authorities had been reflected in the application of margin squeeze in the regulated markets. On one hand, some sector-specific regulations were arranged for the prevention of margin squeeze; on the other hand, the claims have been scrutinized by the courts as well as by the competent competition authorities.82 However in Turkey, ICTA has the authority in the arrangement for both ex-post and ex-ante regulations.83 Turkey also arranged some sector-specific regulations in relation to the telecommunications sector during the liberalization of it. As a result of these reforms, the ICTA as a sector-specific regulator was established in 2000 while the

78ECTA Regulatory Scorecard 2009. 79The State-Supervisory Report of Presidency dated 17.02.2010. 80Petit, N.,“The Proliferation of National Regulatory Authorities Alongside Competition Authorities: A Source of Jurisdictional Confusion”, GCLC Working Paper ,2004, page 3. 81Ardıyoka Şahin and Oğuz Fuat, “Competition Law and Regulation in The Turkish Telecommunications Industry: Friends or Foes?” 82Kaya Serife Demet, “Assessment of Margin Squueze Both From Economical and Legal Perspectives”, Ankara, 2008 83See Section 3.2

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Competition Authority enforcing economy-wide competition rules has been functioning in Turkey since 1997. Turkish Competition Law prohibits ‘in all industries’ agreements, decisions and concerted practices that prevent, restrict or distort competition in the markets for goods and services (Article 4), abuse of dominant position (Article 6), mergers and acquisition creating or strengthening a dominant position (Article 7). Therefore, there is no doubt at the law is applied to telecommunications sector as well with no exemptions. The Act on Electronic Communications Nr. 5809 favours ICTA in sharing the responsibility with the TCA for to provide effective competition in telecommunications industry.84 There are some provisions that explicitly accept the TCA's authority to examine competition infringements. Nevertheless, the same provision requires the TCA to consider the ICTA's opinion before giving its final decision on cases regarding the telecommunications industry. Due to an absence of a straightforward allocation of legal authority with respect to enforcement of competition rules in telecommunications, the TCA and the ICTA have conflicting views on the role of competition rules in this industry. The ICTA claims that the TCA lacks any authority to enforce competition rules in telecommunications markets.85 In addition, they alleged that the TCA is not able to question the ICTA's regulations with respect to competitive issues on legal grounds. which means in other words that the TCA does not have any standing to sue on any the ICTA decision or any regulation even if they are against the law. When it comes to decisions on the contested subject, margin squeeze, and discussions about the competences of the authorities, in the landmark case, TISSAD86, which was a claim about Turkish Telecom started by a complaint of the Association of ISPs, the TCA investigated a wide range of markets where competitive entries occurred after deregulation in the industry. At the actual time, the ICTA had just been established, so they joined to the case later on, and in its opinion asserted that it had jurisdictional authority and initiated its own investigation of the dispute. Despite its resistance, the TCA concluded the case and gave the first administrative fine to a state-owned undertaking. In the leading case, TTNet’s Summer Storm87, the defendants claimed that the TCA should have taken the view of the ICTA and especially the ICTA’s regulations in

84Article 6-a of Electronic Communications Act Nr. 5809 85Atiyas, Izak., “Competition and Regulation in The Turkish Telecommunications Market”, Tepav, Ankara ,2006. 86See TISSAD,supra 61. 87See TTNet-Summer Storm, supra 5.

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the retail internet services market before concluding its decision pursuant to the Article 7 of Telsiz Act. Moreover, they said that if the assessment concerned the telecommunications sector and due to the fact that the ICTA was specially authorized by the legislator, the ICTA’s view had to be taken into account primarily even in the situations where there is a subject falling under the scope of duties of the TCA. The TCA decided that as the retail market was not subject to any regulations, the undertaking concerned was free to determine its prices, therefore the TCB decided to examine the case within its authority. However, the TCA’s resistance did not last long. In TT-/Teacher-Student88, the TCB decided not to handle the case and refused the complaint because the contested campaign has already approved in advance by the ICTA due to the fact that both wholesale and retail markets were subjects to the regulations of the ICTA. In 2009, as a result of the investigation initiated upon the claim that the ’Jettvel, Jettfon, Jettfon Plus and Full LLU Tariffs’89 of TT led to a predatory price, price squeeze, cross-subsidization, and ‘Standard Line and Economical Line Tariff’ restrictions pushed the competitors out of the market, the Competition Board resolved in its decision by stating that it was not necessary to open an investigation of TT under Act Nr. 4054. The TCB based its decision on the ground that it is mandatory for them to ask the ICTA before giving decision in relation to the telecommunications area. The Board continued by saying that, as a result of their assessment with regard to the arrangements of the ICTA, they found out that all the tariffs services provided by TT, as well as their application methods, were approved in advance by the ICTA, as itself also admitted that the said tariffs did not lead to any margin squeeze. As a result, there is no clear division of duties between the ICTA and the TCA, which leads to confusions in the observation of the issues about telecommunications. From the decisions, it is clear that the TCA has still authority to examine the issue when the wholesale market is partially subject to regulations of the ICTA. However, when both markets are subjects to regulations, some authorities say that it will be suitable for the TCA to give its opinion to TTA - if there is any doubt about abuse - rather than directly intervening to the conducts of undertaking.

3.4.2 Lack of independence of ICTA

In 2000, the ICTA with powers to regulate prices, interconnection and access was established as an independent regulatory authority and the liberalization in fixed

88See TT-Teacher/Student, supra 64. 89Decision of Turkish Competition Board dated 21.10.2009 nr. 09-48/1206-306

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line telephony was introduced. In the beginning, the authority to issue licenses remained in the Ministry of Transport, but that was also subsequently delegated to the ICTA afterwards. Article 5 of the 5809 Act lists the duties of the Ministry of Transport, which include determining strategy and policy for electronic communications services that use scarce resources such as numbering, satellite positions and frequencies. It also authorizes the Ministry to determine the principles and policies for the promotion of competition in the electronic communications industry and take supportive measures. Although the above-mentioned provision, which gives some authority to Ministry of Transport, seems in line with the general approach adopted in the liberalization of network sectors where the Ministry and the independent regulatory shares responsibility for the general formulation of policy, strategy for the industry and the implementation of them, the ICTA has indeed been criticized for making policy-made decisions which gave rise to some kind of discrimination between the operators in the industry. It is said that the Ministry of Transport has been given too much authority and that it should be limited to include only areas such as expressing its views to the ICTA and planning the industry. Moreover, it is also complained that the appointment of the ICTA members by the Ministry destroys the autonomous characteristics of the ICTA, as the independence of an authority is in general directly related to the selective method of its members. However in the Report, it was also mentioned that the possibility of appointment of the ICTA members whose duties are expired by the decision of cabinets, gives harm to the autonomous structure of the ICTA and should be changed at once. It could be concluded that the main reason to establish the ICTA in telecommunications is to ensure effective competition. For this, the independency of the regulatory authority should be provided, otherwise, the objective and self-contained body of the ICTA would be destroyed.

3.4.3 Unimplemented & missing legislation

In order to qualify for membership in the EU, Turkey has implemented some rules as well as the secondary legislation. However, when it comes to implementation of them, the efforts are not satisfactory. Apart from the missing methodology that

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should have been introduced at once90, even the existing arrangements are not utilized effectively to prevent possible margin squeeze abuses. At this point, especially the ICTA has been criticized a lot as the responsible regulatory authority to adopt the necessary rules as well as to implicate them. In the Report arranged by the presidency, it was stated that, right now ICTA is too far from the expectations. They also complained that ICTA did not implement the necessary legislations and many things were being delayed which destroyed the competition in the said sector. In the Report, it was even suggested that duty of ICTA with regard to providing competition in the telecommunications sector should be restricted after all. A more detailed discussion regarding possible solutions to the issue can be found in Chapter 5 of this thesis.

3.5 Conclusion

Before 2008, there was a major development in the telecommunications industry in Turkey; however, it seems to have come to a standstill after 2008. In other words, the statistics demonstrates that there is an overall decline in competition in telecommunications. It is clear in order to qualify for membership in the EU, the available policies and strategies of Turkey, as well as the implementation, should be scrutinized. Despite all the problematic issues going on in Turkey in the telecommunications industry, there has been some progress. Considering the alignment of regulation, it could be reported that the ICTA has continued to adjust regulations with the EU framework legislation even if particularly in the areas such as authorization, spectrum management, access and interconnection, numbering, number portability, rights of way, and tariffs. The ICTA has introduced a strategic plan for 2010-2012 that provides a three-year perspective for the sector. Publication of ICTA Board decisions on the internet is a positive development with regard to transparency and accountability of the regulator’s activities. However, the primary law and the implementing regulations are not yet fully consistent with the acquis. One of the important improvements in the broadband internet services sector could the introduction of ‘naked ADSL’91, which entered into force in 2010. It means that Turkish Telecom could no longer bundle voice and data services together and

90See Section 5.2.2 91The naked ADSL service has been succesfully implemented in several EU Member States, such as Sweden, Italy and France.

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that the subscribers can subscribe to ADSL services alone, without having to pay for voice services as well. This is important for alternative internet service providers because, as it stands, a consumer who wishes to obtain broadband internet services from an alternative ISP would still need to go to TT to obtain a fixed line and this reduces incentives to then re-direct herself to the alternative ISP in the first place. The decision further states that the unavailability of naked DSL also negatively affects mobile operators because it slows down consumer switches from fixed to mobile telephony services. The availability of naked ADSL is expected to increase broadband penetration and considered as a major step in the effectiveness of competition. However, it is stated that some problems remain. As TT sells the first connecting equipment at a very high price to the subscribers who want to have it for the first time and /or due to many technical problems, that application could still not be implemented effectively.

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4 Application Of The Margin Squeeze In The EU & The USA

4.1 Application In The European Union

4.1.1 Commission’s general policy on margin squeeze

4.1.1.1 Is it a seperate abuse? After widespread liberalization of telecommunications and other public utilities, there has been ocular visible increase in margin squeeze allegations regarding abuse of dominance under Article 102 TFEU. However, most of the cases before the Commission or national competition authorities concern the telecommunications sector. Apart from the cases, in Commission Discussion Paper92, margin squeeze was described as a sort of refusal to supply which has a vertical foreclosure effect on market93:

‘The second group of abuses consists of refusal to supply, which here

includes margin squeeze cases. Whereas the aim in the situations described

above is to exclude B, a rival in the upstream market, in the typical refusal to

supply case the aim is to exclude an already active or a potential participant

in the downstream market, for instance Z (vertical foreclosure). From a

competition policy point of view, this is mostly only a worry if the dominant

company. A is itself active downstream…’

As discussed above94, there have been many debates in case law as well as in the doctrine regarding the issue whether margin squeeze is a separate kind of abuse under Article 102 TFEU or whether it rather should be assessed together with other abuses, i.e. refusal to supply or predatory pricing. In the beginning, the CJEU was reluctant to approach it as a separate abuse and rather preferred to assess it under

92DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses, 2005. 93Ibid, para. 72. 94See Section 2.2 above.

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other abuses.95 However, as we are going to examine in detail in the following section, in its recent judgements, the CJEU adopted a more consistent approach towards the margin squeeze by concluding that margin squeeze is an abuse by itself.96

4.1.1.2 EU: The calculation of margin >>Which test? In 1998, the Commission issued an Access Notice97 on the application of margin squeeze regarding the telecommunications sector where it was also defined. Although this relates to the telecommunications sector, it has a general applicability. In that Notice, the Commission suggested two tests for margin squeeze: i) Equally Efficient Competitor Test [‘EEC’]: ‘[. . .]a price squeeze could

be demonstrated by showing that the dominant company's own downstream operations could not trade profitably on the basis of the upstream price charged to its competitors by the operating arm of the dominant company’98

ii) Reasonably Efficient Competitor Test [‘REC’]: ‘[. . .] for access and the price which the network operator charges in the downstream market is insufficient to allow a reasonably efficient service provider to obtain a normal profit.’99

In 2001, the Commission however, appeared to have merged the first and second test in its ONP Committee document100, since it confirmed that it uses the dominant undertaking's costs as the benchmark for a reasonably efficient service provider101:

‘The suspicion of a "margin squeeze" arises when the spread between

access and retail prices of the incumbent's corresponding access services

is not wide enough to reflect the incumbent's own downstream costs. In

such a situation, alternative carriers normally complain that their

margins are being squeezed because this spread is too narrow for them to

95See Industrie des Poudres Spherique case, supra 20. 96See Deutsche Telecom and TeliaSonera cases, supra 42 and supra16, respectively. 97See Access Notice supra 7. 98Ibid para. 117. 99 Ibid para. 118. 100ONPCOM 01-17. 101Ibid para. 5.

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compete with the incumbent. [...] Provided access and retail services are

strictly comparable, a situation of a margin squeeze occurs where the

incumbent's price of access combined with its downstream costs are

higher than its corresponding retail price.’ While some are in the view of applying the REC test during the assessment of margin squeeze abuse, the others support the EEC test. For them, the main reason to use the EEC test is the idea that competition encumbers the dominant undertaking not to exclude its competitors who are as efficient as itself in order to compete on merits with them. In addition, using the EEC, it will be more practical and easy for the authorities to assess the costs of equally efficient one rather than determining the reasonable ones. The REC is also vague since it provides no way of calculating what the downstream costs of a hypothetical ‘reasonably efficient’ entrant would be. Because of these, to apply EEC will be more appropriate for the general competition policy as well as the practicability of it.102 However, in some situations, applying the REC test might be much more effective than applying the EEC test. For instance, if the contested market is non-competitive, if the dominant undertaking has a monopoly on the downstream market, and when both of the prices are over-costs, authorities should apply the REC test even if the competitors are less efficient in the market. 103 Their usage depends on the specific objectives of the NRAs and the circumstances of the case. For example, if the market is mature and the main aim is to promote competition, then it may be beneficial to use the REC test, but if there is a concern to protect investment and innovation incentives for the SMP operator, then the EEC standard might be more suitable. There is no discussion about the criteria which is testing the profitability of the rivals in downstream market against the pricing policy of the dominant undertaking should be taken into consideration while identifying margin squeeze104. However when it comes to controversial subject regarding which test should be applied to determine the anti-competitive infringement, despite the hesitation of the courts, it will be correct to say that they have shown an inclination towards the EEC, as it uses a criterion which is more objective and practical than the REC.

102See Geradin D. and O’Donoghue R. supra 23, p. 392 103Case 88/518/EEC – Napier Brown – British Sugar (1988). 104Crocioni, P.:“Price Squeeze and Imputation Test- Recent Developments”, E.C.L.R. Nr:10, 2005, p. 561

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However, it is still possible to see some inconsistencies in the CJEU’s decisions. In National Carbonizing decision105 the Commission referred to the REC test while assessing the abuse such as: ‘…the dominant undertaking shall provide the price which is enough for its reasonably efficient competitor in downstream market to be trade profitably’; while in the Deutsche Telecom case, the Court upheld the General Court’s judgement that the ‘as-efficient competitor’ test applied by the Commission in order to demonstrate that there was a margin squeeze was correct.106 The CJEU’s approval of the Commission’s approach reinforced the developing case law on the use of the ‘equally efficient competitor’ test in margin squeeze cases. Recently, the CJEU has re-opened the discussion about which test should be applied in a margin squeeze assessment. In the TeliaSonera judgement107, it decided that normally the as-efficient competitor test should be used; however, in some extraordinary situations, such as when it is impossible to analyze the costs of the dominant undertaking or the costs of the undertaking benefits from its dominance, then the costs of its competitors might have to be taken into account too. In other words, the Court emphasized that when the dominant undertaking’s costs are not enough ‘realistic’ or ‘calculable’ to assess, then costs of its competitors might be also considered, which gives the dominant undertaking less space to justify its abusive conduct. >>Which cost? Another issue with respect to EEC test is that which marginal costs should be taken into account to determine what this profitable margin should be since it has to be shown that the dominant company’s downstream concern could not trade profitably at that margin. These costs can be classified as AVC108, AAC109and LRAIC110. Among three of them, within the meaning of margin squeeze, the one mostly preferred by the courts is LRAIC. As LRAIC contains all costs occurred within the production of a new product including fixed and sunk costs; it is considered to fit best with the determination of prices /costs when finding an infringement especially in sectors such as telecommunications due to the fact that AVC and AAC are not sufficient to

105Decision 76/185/ECSC of 29.10.1975: OJ L 35 of 10.2.1976, para. 14. 106See Deutsche Telecom, supra 42, para. 203. 107SeeTeliaSonera, supra 16, paras. 45-46. 108See supra 17. 109Average avoidable costs are the costs that will not be incurred if an activity is suspended. 110Long run average incremental costs can be defined as including all the costs of services

provided within an increment. In the context of telecommunications, LRAIC has often been used to set interconnection charges with the increments usually defined as the whole group of services using the core network.

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reflect their real prices. Therefore, in absence of objective justification by the undertakings, the prices below LRAIC will be deemed to be predatory.111 The Commission also mentioned this in Deutsche Telecom decision112 which was approved by the CJEU: ‘To determine DT's product-specific costs for providing retail access to the local network, it is necessary to deduct overheads, i.e. the costs of merely providing the network infrastructure, from the total costs. Product-specific costs would arise from any special equipment required to provide analogue, ISDN and ADSL services and from DT's customer relations.’ However, according to the Commission’s Guidelines, the cost benchmarks to be adopted by the Commission are AAC and LRAIC113:

‘The cost benchmarks that the Commission is likely to use are average avoidable

cost (AAC) and long-run average incremental cost (LRAIC). Failure to cover

AAC indicates that the dominant undertaking is sacrificing profits in the short

term and that an equally efficient competitor cannot serve the targeted customers

without incurring a loss. LRAIC is usually above AAC because, in contrast to

AAC (which only includes fixed costs if incurred during the period under

examination), LRAIC includes product specific fixed costs made before the period

in which allegedly abusive conduct took place. Failure to cover LRAIC indicates

that the dominant undertaking is not recovering all the (attributable) fixed costs

of producing the good or service in question and that an equally efficient

competitor could be foreclosed from the market.’

4.1.2 Telecommunications sector in the EU

Telecommunications sector in the EU was governed by state monopolies until the early 1980s. With the liberalization of the industry and the privatization of public monopolies, limited competition was introduced in the EU. Most of the arrangements were made by 1998; but for some Member States such arrangements still continued i.e. Greece and Portugal. Nevertheless, the full liberalization was completed by 2001.

The reason why the telecommunications sector is of significant importance for the EU as well as the Commission lies in the fact that telecommunications is a key element for growth and employment which is also rapidly evolving with many

111See Discussion Paper, supra 92, para. 126 112See Commisson decision of DT, supra 2, para. 150. 113See Commission Guidelines, supra 9, para. 26.

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technological and market developments. Hence, the protection of competition in this sector is eminently substantial in order to prevent the barriers into innovation.

As mentioned before, margin squeeze had already identified with the telecommunications sector in EU. It was because of the high costs of the initial investments in the sector such as infrastructure, technology, etc. which were created with support of the Member States. The state interventions gave the incumbent undertaking a legal monopoly position in the sector which could be easily abused due to the fact that the other competitors have to use its infrastructure and/or technology.

After a few years later from the ‘1998 Regulatory Package’, which liberalising the telecommunications industry in Europe, it has gone through important changes.with the emergence of the new regulatory framework ‘2003 Regulatory Package’114. The aim of the 2003 package was to clarify and simplify existing rules, removing those that were deemed as no longer necessary, to achieve greater harmonization across Member States and develop a framework that made more systematic use of competition law. The main rational of the new framework in the EU was indeed inspired by competition law which aims the regulatory obligations should be imposed only where effective competition does not exist. After assessing the actual conduct, the types of obligations that can be imposed are described in several EU directives. The new package115 of the EU consisted of the following directives which are described very briefly below: • Framework Directive116: Provides the motivation of the framework and lays out the

main principles, including the idea that regulations will be inspired by competition law and ex-ante obligations are to be imposed only on operators with SMP.

• Competition Directive117: Defines electronic communications services so as to take account of convergence, prohibits the granting of exclusive or special rights, and imposes on dominant or state owned providers of public telecommunications services legal separation of cable networks.

• Access Directive118: Describes the principles to be followed in the regulation of access, interconnection, and obligations that can be imposed on SMPs.

114Atiyas Izak: “Competition and Regulation in the Turkish Telecommunications Industry”, Sabancı University November 2005, p. 8. 115The package was amended in December 2009 by the two Directives “Better law-making” and the “Citizens' rights”, as well as by a body of European regulators for electronic communications. 1167 March 2002 dated, 2002/21/EC. 11716 September 2002 dated, 2002/77/EC. 1187 March 2002 dated, 2002/19/EC.

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• Directive on Privacy119: Outlines measures needed for the protection of privacy over networks, especially in relation to the processing of personal data.

• Universal Service Directive120: Outlines principles to be followed in the design and financing of universal service obligations.

Regarding the margin squeeze issue, in the Access Directive Article 20, it is mentioned that the operators with significiant market power should be prevented from intervening in margin squeeze as:

‘Price control may be necessary when market analysis in a particular

market reveals inefficient competition. The regulatory intervention may

be relatively light, such as an obligation that prices for carrier selection

are reasonable as laid down in Directive 97/33/EC, or much heavier

such as an obligation that prices are cost oriented to provide full

justification for those prices where competition is not sufficiently strong

to prevent excessive pricing. In particular, operators with significant

market power should avoid a price squeeze whereby the difference

between their retail prices and the interconnection prices charged to

competitors who provide similar retail services is not adequate to ensure

sustainable competition…’ Moreover, Article 13(1) also defines the situations in which NRAs can impose obligations about price control and cost accounting:

‘A national regulatory authority may, in accordance with the provisions

of Article 8, impose obligations relating to cost recovery and price

controls, including obligations for cost orientation of prices and

obligations concerning cost accounting systems, for the provision of

specific types of interconnection and/or access, in situations where a

market analysis indicates that a lack of effective competition means that the operator concerned might sustain prices at an excessively high level,

or apply a price squeeze, to the detriment of end-users...’

1197 March 2002 dated 2002/58/EC. 1207 March 2002 dated 2002/22/EC.

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4.1.3 EU case law

The legal assessment of margin squeeze in telecommunications together with the necessary conditions in order to be regarded as an abuse under Article 102 TFEU has been drawn by the decisions of the Commission, the General Court, and the CJEU. We are going to assess the decisions of the EU by dividing them into two parts: the old cases that included the industries where one product was essential to the downstream product, which was a direct derivative of the raw material, and the recent cases, which involved telecommunications markets in regulated areas.

4.1.3.1 Old EU Cases in Unregulated Sectors ***National Carbonizing;121 In 1975, the Commission, for the first time, referred to the margin squeeze issue implicitly in National Carbonizing case. National Coal Board (NCB) was the UK company who held a monopoly in coal production and also in coking coal market through its subsidiary (NSF) in England. National Carbonizing Company (NCC) was buying all its coal from the NCB and it was in a competition with NSF. The Commission found that NSF was also the price leader on the downstream market and there was no possibility for NCC to increase its prices above NSF's. NCB increased the cost of raw material prices which were sold to NCC, so NCB's costs of production rose by GB£ 10.39 per ton, whereas NSF’s downstream price for the finished product was only GB£ 6.70. Therefore, for NCC it was impossible to make profit and applied to the Commission for an interim decision. Although the Commission at first rejected NCC’s complaint by saying that there was no abuse of dominance122, it still certified by its statements that the contested conduct could constitute an abuse. The statements were as follows123:

‘An undertaking which is in a dominant position as regards the production

of a raw material (in this case coking coal) and therefore able to control

its price to independent manufactures of derivatives (in this case coke),

121See National Carbonising, supra 105. 122The Commission concluded that there was no margin squeeze, since for both companies, industrial coke was profitable and domestic coke was not. 123Supra 105, para. 14

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and which is itself producing the same derivatives in competition with

those manufactures, may abuse a dominant position if it acts in such a way

as to eliminate competition from these manufactures in the market for

derivatives. From this general principle the services of the Commission

deduced that the enterprise in a dominant position may have an obligation

to arrange its prices so as to allow a reasonably efficient manufacturer of

the derivative a margin sufficient to enable it to survive in the long term.’

Upon the rejection of the decision by CJEU, the Commission took the interim decision. However, NCC had renounced its complaint afterwards. ***Napier Brown/British Sugar;124 The next case was also an UK case about British Sugar (BS), a company, found dominant both for the supply of raw and granulated sugar in the UK markets. Napier-Brown (NB) that was buying and selling sugar in competition with BS claimed that BS had abused its dominant position by intending to force them out of the UK sugar market through its pricing policies and campaigns. The Commission listed several abusive conducts by BS, among which was the ‘margin squeeze’ abuse. The Commission considered that any company as equally efficient as competitor would have been obliged to leave the retail market because of an insufficient margin if maintained in the longer run125 and it described the conditions how a margin squeeze could led to an infringement by adding that ‘maintaining … a margin between the price which it charges for a raw material to the companies which compete with the dominant company in the production of the derived product and the price which it charges for the derived product, which is insufficient to reflect that dominant company’s own costs of transformation (in this case the margin maintained by BS between its industrial and retail sugar prices compared to its own repackaging costs) with the result that competition in the derived product is restricted, is an abuse of dominant position.’126

124See Napier-Brown, supra 103. 125Ibid para. 65. 126Ibid para. 66.

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***Industrie des Poudres Spherique v. Commission;127 On 30 November 2000, the General Court gave its first legal definition of margin squeeze. In 1996, the Commission rejected a complaint by Industrie des Poudres Spheriques (IPS) who was a French undertaking that manufactured broken calcium metal from primary calcium metal, against Pechiney Electrometallurgie (PEM) which was also active on the broken calcium metal market (retail market). IPS applied to the Commission by claiming that the price of primary calcium metal set by PEM was very high and the price for broken calcium metal was very low; therefore the margin difference between wholesale and retail price was insufficient that the other competitors could not compete with PEM; therefore PEM’s pricing practices with respect to its primary calcium metal and broken calcium metal products, respectively, constituted an abuse of PEM’s alleged dominant position on the upstream market.

The Commission said that as the primary calcium metal was a special raw material which required additional costs which were reflected as an increase to the wholesale prices, the claim was rejected. Upon the rejection, IPS appealed to General Court for annulment of the Commission’s decision.

The General Court approved the decision of the Commission; but albeit for the first time defined clearly what a margin squeeze was. According to the definition;

‘... what is known as price squeezing. Price squeezing may be said to take

place when an undertaking which is in a dominant position on the market

for an unprocessed product and itself uses part of its production for the

manufacture of a more processed product, while at the same time selling

off surplus unprocessed product on the market, sets the price at which it

sells the unprocessed product at such a level that those who purchase it do

not have a sufficient profit margin on the processing to remain competitive

on the market for the processed product.’128

The Court also stated that as IPS had failed to prove the existence of abusive pricing of the raw material and in order to succeed, IPS should have proved either excessive prices or predatory pricing. In the absence of excessive pricing, the fact

127See Industrie des Poudres Spherique v. Commission, supra 20. 128Ibid para. 178.

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that IPS could not compete with PEM because of its higher processing costs did not show the abusive conduct of IPS129. Therefore, the Court rejected the claim.

4.1.3.2 The More Recent EU Cases in Telecommunications Having examined the decisions of the EU Institutions regarding the margin squeeze issue, it is clear that the assessment was mostly based on the raw material industries discussing with the other forms of abuses until the year 2000, while it came up as a separate kind of abuse, especially in telecommunications sector, after it.130 Therefore, it will be more convenient to examine the cases in detail which have been decided and concluded recently by the Commission, General Court and /or the Court of Justice of European Union. ***Wanadoo Interactive;131 On 2 April 2009, the CJEU dismissed an appeal brought by France Telekom against the judgement of the General Court, approving the Commission decision132 in the Wanadoo case. Although this case was named under the predatory pricing abuse in the first form, it would better fit with the margin squeeze abuse when the Commission’s approach was assessed. In September 2001, the Commission launched an investigation on Wanadoo's practises and on 16 July 2003, it decided that Wanadoo Interactive (“Wanadoo”)133, the internet subsidiary of France Telecom, had abused its dominant position by engaging in predatory pricing in relation to the supply of its high-speed internet access services (ADSL) between March 2001 and October 2002. The Commission found out that, from the end of 1999 to October 2002, the retail prices charged by Wanadoo were below variable cost until August 2001 and in the subsequent period, they were approximately equivalent to variable cost, but

129Ibid para. 179. 130Kallaugher, J., “The Margin Squeeze under Article 82: Searchingfor Limiting Principles”, GCLC conference “Margin Squeeze under EC Competition Law with a Special Focus on the Telecommunication Sector”, 10.12.2004, London p. 16-17. 131Case C-202/07 P France Telecom SA v Commission; also known as the “France Telecom” case. 132See Commission Decision of Wanadoo , supra 3. 133At the time of the Commission decision, Wanadoo Interactive was a part of the France Telecom group. In 2004, Wanadoo Interactive merged into France Telecom, therefore following the merger between Wanadoo and France Telecom in September2004, France Telecom became the applicant in the contested judgement. That is why Wanadoo and France Telecom are used interchangeably here.

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significantly below total cost. This practice restricted market entry and development potential for competitors, to the detriment of consumers. The Commission claimed that as a result of this practice, Wanadoo sacrificed profits in the form of substantial losses up to the end of 2002. The practice coincided with a company plan to pre-empt the strategic market for high speed internet access. While Wanadoo suffered large scale losses on the relevant service, France Telecom (which at that time held almost 100 % of the market for wholesale ADSL services for Internet service providers including Wanadoo) was anticipating considerable profits in the near future on its wholesale ADSL products. Therefore, the Commission ordered Wanadoo to bring the infringement to an end and imposed a fine on it of EUR 10.35 million. On 2 October 2003, France Telecom started an action for annulment of the contested decision before General Court. France Telecom maintained in essence that the Commission had infringed Article 102 TFEU in that it had not established to the requisite legal standard that they had abused its dominant position by charging predatory prices for the services in question. However, as the General Court approved the Commission’s decision in its entirety, this time France Telecom challenged it before the CJEU. The main things it claimed were its right to align its prices on those of its competitors, the existence of a plan of predation and the need to prove the possibility to recoup losses.134

Regarding the question of whether it was necessary to prove recoupment of losses in predatory pricing abuses, both the Commission and the GC rejected the idea of requiring evidence of the possibility to recoup losses in order to prove predation, while France Telecom claimed that the General Court had not shown sufficient reasons as to why it was not necessary. In this perspective, the CJEU confirmed that the GC had given sufficient reasons why the Commission was not required to prove that France Telecom had the possibility of recouping its losses. The Court continued by mentioning that the same reasoning adopted here also as did in AKZO v Commission135and Tetra Pak v Commission136 but explained also why the current situation differed from the said cases. The CJEU stated that in those cases, it had been held that prices below average variable costs must always be considered abusive and, second, that prices below average total costs but above average variable costs are only to be considered abusive if an intention to eliminate can be shown137. That is why in the Tetra Pak judgement (as the prices for non-aseptic

134See Wanadoo, supra 131, paras. 39/ 89 /101. 135See Akzo, supra 19. 136Case C-333/94 Tetra Pak II [1996] ECR I-5951. 137Para. 42 of Akzo case.

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cartons laid between average variable costs and average total costs) the GC was at pains to establish that Tetra Pak intended to eliminate a competitor.138

Regarding the applicant’s right to align its prices on those of its competitors, the CJEU also confirmed that together with special responsibility on dominant undertakings imposed by Article 102 TFEU, even if its own commercial interests are attacked, France Telecom could not rely on any absolute right to align its prices on those of its competitors in order to justify its conduct where such conduct constitutes an abuse of its dominant position which could not considered as reasonable.139

In relation to the calculation method, France Telecom also claimed that the method used by Commission to calculate the rate of recovery of both variable costs and full costs was wrong and so the test of predation was distorted. The CJEU held that the GC had been correct to say that the application of the calculation method chosen by the Commission enabled it to find that Wanadoo’s prices were lower than its costs contrary to what the appellant claimed. The Court also added that the period-by-period analysis by the Commission140 made it possible to take into account tariff variations occurring during the period that the infringement lasted and, accordingly, to achieve a sufficiently complete view of the profitability of a subscription.141

Lastly, on the existence of a plan of predation, the CJEU rejected France Telecom’s allegation that the Commission relied on subjective factors to establish the existence of such a plan.142 The CJEU held that the GC had deduced the strategy to pre-empt the market from objective factors, such as the undertaking’s internal documents. A differential fact in the Wanadoo case was that the Commission found (and heavily relied on) internal documents expressly setting up Wanadoo's predatory strategy against downstream competitors.

138However, Advocate General Mazák proposed in his opinion to change the approach adopted until now by EU case-law and urged the ECJ to conclude that proof of likely recoupment of losses was required in order to ascertain predation: Opinion of AG Mazák of 25 September 2008 in Case C-202/07 P France Telekom v Commission. 139See Wanadoo, supra 131, para. 47. 140Ibid para. 68:”As to the necessity of taking into account the entire 48-month lifetime of a subscription, the Commission is of the view that, since the rate of recovery was below 100% for all the successive short periods that were examined in the contested decision, totaling approximately one and a half years, the rate of recovery could only have been below 100% for the entire average subscription period, namely 48 months....” 141Ibid para. 71. 142Ibid para. 97.

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***Telefónica;143 On 4 July 2007, the Commission gave a significant decision on margin squeeze which is still pending at the General Court144 which Telefónica and Spain wanted GC to annul the contested decision. In 2003, upon the complaint of Wanadoo Espana alleging that Telefónica was engaging in a margin squeeze in the Spanish broadband internet access markets, the Commission launched a detailed investigation to find out that whether Telefónica had infringed the Article 102 TFEU by margin squeeze. Telefónica is the dominant telecommunications operator in Spain who controls the entire ADSL value chain in Spain, which is the main technology to provide broadband internet access services to consumers. As Telefónica has the local access network, it provides also wholesale broadband access products to the other operators who wish to provide retail broadband services. The Commission decided that between September 2001 and December 2006, the margin Telefónica's retail prices and the prices for wholesale broadband access at both the national and regional levels were insufficient to cover the costs that an operator as efficient as Telefónica would have to incur to provide retail broadband access which meant that a competing provider of broadband that was just as efficient as Telefónica was faced with the choice of either driving out of the market or incurring losses. 145

When deciding the existence of margin squeeze, the Commission basically used two profitability methods in accordance with established case law: i)period-by-period (which assesses Telefónica's profitability every year), and ii)the discounted cash flows (‘DCF’) method (which allows below cost pricing in the initial phase of an expanding market but requires Telefónica to be profitable over 2001-2006) proposed by Telefónica itself. And as a result, it said that both methods led to the same conclusion which acknowledged Telefónica engaged in a margin squeeze from September 2001 to December 2006. The Commission expressly declined to apply the Oscar Bronner146test of indispensability in relation to Telefonica’s wholesale products, arguing that it was unnecessary on the facts in issue.

143See Commission Decision of Telefonica, supra 4. 144Case T-336/07 Telefónica v Commission and T-398/07 Spain v Commission. 145Summary of Commission Decision of 4 July 2007 Case COMP/38.784 -Wanadoo España v Telefónica, section 3.1(1) 146See Bronner, supra 10.

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Regarding the effects of abuse, the Commission stated that the margin squeeze was capable of foreclosing competition in the retail market as it restricted competition by imposing unsustainable losses on equally efficient competitors and so delayed the entry and growth of competitors. Moreover, the Commission said that it also caused a considerable harm to consumers as they had to pay higher prices and were subject to less innovation depending on the decreased choices. In this perspective, the Commission did not accept any objective justification or efficiency defenses on terms of inducing the use of internet, creating efficiency and following the campaign of its competitors. In addition, the Commission mentioned in its decision that Telefónica had never been prevented from putting an end to its abusive conduct by offering lower wholesale prices to its competitors as until 21 December 2006, its national wholesale prices were not subject to any price regulation and wholesale regional prices had been regulated in the form of maximum prices only.

Therefore, the Commission concluded that Telefónica abused its dominant position by imposing unfair pricing in the form of a margin squeeze in the Spanish broadband markets, for more than five years (‘long duration abuse’) so imposed a fine of EUR 151. 875, 000 on Telefónica.

The fine imposed on Telefónica was significantly higher than the ones imposed to Wanadoo and Deutsche Telecom as the Commission was in the opinion that Telefónica's behaviour shows that the fines imposed in those cases did not have a sufficient deterrent effect. Moreover, it cleared that it was because the Spanish broadband market was significantly larger than the French and German broadband markets at the time of the respective infringements and Telefónica's abuse has harmed consumers more significantly than in the other cases. In addition, as discussed above, the room for the price adjustment left by regulation to Telefónica was much wider than in the Deutsche Telecom case. Contrary to Deutsche Telecom, Telefónica never adjusted its retail or wholesale tariffs with a view to reducing the margin squeeze.

***Deutsche Telecom;147

Deutsche Telecom AG (“DT”) is the incumbent telecommunication operator in Germany which had a legal monopoly in the retail provision of fixed line telecommunications services, before the full liberalization of the telecommunication sector in 1996 allowing entry to the market of other competitors by introducing the TKG. Deutsche Telecom both offers wholesale access and retail access services whose prices were subject to a strict regulatory scheme. While

147See Deutsche Telecom, supra 42.

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DT’s wholesale prices must be approved by RegTP148 in advance, its retail prices were also subject to a baskets price cap imposed by the regulator. In addition, even if ADSL charges were not subject to regulation under the price cap system, TKG still allowed RegTP to review them subsequently. However, after complaints by competitors, RegTP made an investigation on ADSL prices and found that DT was not selling below-cost, which is forbidden under German competition rules. During the years 1998-2001, DT made several reducements in the retail prices in both baskets after getting the prior authorization from RegTP. After the competitors’ complaints Deutsche Telecom’s pricing, the Commission started an investigation and in May 2003 adopted a decision149, finding Deutsche Telekom to be in a dominant position in the wholesale market and the retail market for access to narrowband and broadband connections, and holding that Deutsche Telecom had infringed Article 102 TFEU by margin squeeze. DT brought an action before the General Court seeking annulment of the decision or at least a reduction in the fine. On 10 April 2008, the General Court dismissed DT’s claims in their entirety150. Therefore, DT appealed to the CJEU for the annulment of the General Court’s judgement. In its judgement, the CJEU first indicated that margin squeeze can, in itself, constitute an abuse of dominance contrary to Article 102 TFEU. The abuse of margin squeeze is concerned with the unfairness of the spread between two vertically related prices. Therefore, it is not necessary to establish, in addition, that either the wholesale or retail price is, independently of the claimed squeeze, excessive (thereby amounting to a constructive refusal to deal) or predatory.151 The CJEU decided that the fact that the appellant was encouraged by the intervention of RegTP did not save them from falling under Article 102 TFEU, since the appellant had still scope to adjust its retail prices for end-user access services to avoid a margin squeeze of its competitors under the notion of special responsibility of dominant undertakings.152 The fact that the difference between the retail and wholesale prices was insufficient to cover the costs to the appellant if it had to pay the wholesale price to provide retail services, led to the “unfairness of spread” between the prices, although DT had scope to adjust its prices to reduce the

148Regelierungsbehörde für Telekommunikation und Post (RegTP) is the German regulatory authority.

149See Commission Decision of DT, supra 2. 150Case T-271/03, Deutsche Telecom v Commission, Judgement of 10 April 2008.

151See Deutsche Telecom, supra 42, para. 188. 152Ibid para. 80: “…if a national law merely encourages or makes it easier for undertakings to engage in autonomous anti-competitive conduct, those undertakings remain subject to Articles 101 TFEU and 102 TFEU”.

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margin squeeze. Therefore, DT’s actions can fall under Article 102(2)(a) TFEU prohibiting a dominant undertaking from directly or indirectly imposing unfair prices. The Commission continued to apply the as efficient competitor test in the present case too. However, DT claimed that the Commission was wrong as it took into account only the costs and charges of DT instead of the situation of its actual or potential competitors. The CJEU decided that both the General Court and the Commission were correct to rely on the as efficient competitor test, which can establish whether DT would have been able to offer its retail services to end-users otherwise than at a loss if it had first been obliged to pay its own wholesale prices for local loop access services. The Court continued that it was not necessary to take account of the cost structure of DT’s competitors, which may not be known to the dominant company. The only point, which the CJEU did not agree with the Commission, concerned the effects of the margin squeeze. The Court confirmed the General Court`s decision and rejected the Commission’s claims that it was not necessary for an anti-competitive effect to be demonstrated within the meaning of Article 102 TFEU. Therefore, according to the Court, evidence of anti-competitive effects is required to constitute an abuse of Article 102 TFEU.

In this regard, the Court considered that if the margin squeeze in question had the purpose of driving the competitors from the market by rendering market penetration impossible or more difficult for them, as it will be capable of effecting the trade between Member States through the exclusionary effect on the competitors, then it should be still regarded as an abuse in which the result does not have to be achieved ultimately;

‘Since the wholesale local loop access services provided by Deutsche Telekom are

indispensable to its competitors’ effective penetration of the retail markets for the

provision of services to end-users, a margin squeeze, in principle, hinders the

growth of competition in the retail markets in services to end-users, given that, in

those circumstances, a competitor who is just as efficient as the appellant cannot

carry on his business in the retail market for end-user access services without

incurring losses.’153

The Court concluded that by squeezing the margins of its competitors and thereby driving them from the market, the appellant had strengthened its dominant position and made the market entry difficult for the competitors, which was detrimental to 153Ibid para. 255.

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the benefit of consumers and resulted with damage to the competition in the internal market.

As a result, on 14 October 2010, the CJEU gave its ruling on the judgement under appeal and confirmed the decision of the General Court in its entirety, ordered Deutsche Telekom to pay for EUR 12.6 million for squeezing its competitors out of the market which was contrary to Article 102 TFEU. Deutsche Telecom is a noteworthy case from many respective. Firstly, it constituted the first clear legal confirmation that the margin squeeze represents a stand-alone type of abuse. Secondly, it defined the scope of application of the competition rules in sectors subject to ex-ante regulation by providing that the existence of regulatory arrangements did not save dominant undertakings to fall under Article 102 TFEU. Finally, the judgement brought some light to the issue of effects-based approach by the statements of the Court which required an effects-based analysis in order to establish that a certain conduct is contrary to Article 102 of TFEU. While Telefónica and Deutsche Telecom are in line with each other in many points except the novelties brought by DT, there are some differences between Wanadoo and DT judgements. The main difference between the two cases was caused by the forms of the abusive behaviour; in Wanadoo, the abuse was based on an isolated view of the retail customer prices, while in the Deutsche Telekom, the relative spread between the wholesale and retail tariffs was considered abusive. However, the Commission did not assess the Wanadoo case as a margin squeeze abuse and rather examined it as a case of predatory pricing abuse because of the non-existence of a vertically integrated undertaking, which is the main condition for a margin squeeze. During the material time in which the infringement occurred, Wanadoo was independent in legal terms from France Telecom. So if Wanadoo had been a wholly-owned subsidiary, most likely the case would be assessed under margin squeezing instead of predatory pricing. Despite the fact that in three of the cases, the Commission opted for the “equally efficient operator” test; however, a difference exists that in Deutsche Telecom the European Commission explicitly calculated DT's downstream costs, whereas in Wanadoo, it assessed them implicitly by looking at Wanadoo's net margins, without making any distinction between downstream and upstream input costs.

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***TeliaSonera;154

One of the most recent cases concerning margin squeeze is the TeliaSonera case regarding an alleged abuse of dominant position by way of a margin squeeze, which also made the controversial issue clear in many points.

TeliaSonera is the Swedish fixed telephone network operator and the owner of the Swedish fixed line telecoms network who used the network to sell its telecommunications services to consumers, but also offered other operators access to its infrastructure in two ways. On the one hand, it offered unbundled access, in accordance with its obligations under EU law, while on the other hand, without being legally obliged to do so, TeliaSonera offered operators an ADSL product intended for wholesale users.

According to the Swedish Competition Authority (“Konkurrensverket”), between April 2000 and January 2003, TeliaSonera abused its dominant position to the extent that it applied a pricing policy under which the spread between the sale prices of ADSL products intended for wholesale users and the sale prices of services offered to end users was not sufficient to cover the costs which TeliaSonera itself had to incur in order to distribute those services to the end users. Therefore, the Konkurrensverket brought an action before the StockholmsTingsrätt (the Stockholm District Court) claiming that TeliaSonera should pay an administrative fine for its infringements of the national competition rules and of article 102 TFEU, during the years 2000 and 2003.

Upon this, in February 2009, the Swedish District Court, requested the CJEU to give a preliminary ruling on the discussed issue. In the absence of a detailed finding of facts, it raised a number of questions about the circumstances in which an abusive margin squeeze may be found.

In accordance with earlier case law, the effects‐based approach and the general framework of analysis of exclusionary conduct approach, the CJEU first applied here the ‘as efficient competitor test’ by ruling that margin squeeze would exist if the spread between the wholesale prices for ADSL input services and the retail prices for broadband connection services to end users were either negative or insufficient to cover the costs of the TeliaSonera so that that spread does not allow an equally efficient rival to compete for the retail service155. Although the Court confirmed the application of an equally efficient competitor test that takes into account the dominant undertaking's prices and costs, it also identified the exceptional situations - especially when the costs of the dominant undertaking are

154SeeTeliaSonera, supra 16. 155Ibid, para. 32.

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not precisely identifiable - in which competitors' costs could also be taken into consideration156.

Contrary to the Advocate General opinion157 and the Commission’s Guidelines158, The CJEU held that margin squeeze is a stand-alone abuse under Article 102 TFEU, distinct from a refusal to supply, as it is applicable even in the absence of any regulatory obligation to supply159. It means that the strict requirements for finding a refusal to supply need not be met to constitute a margin squeeze as an abuse. Therefore, the Court stated that for an abusive margin squeeze, it was irrelevant that TeliaSonera was not subject to a regulatory obligation to supply competitors160.

The real novelty brought by TeliaSonera case, was the indispensability issue in which the CJEU recognized that the indispensable nature of the wholesale input as a relevant factor in assessing potential anticompetitive effects, but not as a necessary condition for finding a margin squeeze161. Therefore, it held that there is no requirement, as there is in a refusal to supply case, that the dominant undertaking’s input be indispensable.

Lastly, the Court confirmed its judgement in Wanadoo Interactive162 that, in order to establish a margin squeeze abuse, the fact that the dominant undertaking is unable to recoup its losses is also irrelevant163.

4.1.4 Conclusion

By its judgement in TeliaSonera, the CJEU defined margin squeeze quite broadly, then it has to face with some criticisizms concerning that the Court went too far this time as it had already rejected the idea of ‘indispensability’ to constitute a margin squeeze abuse and held the operators responsible for their conducts in those are not subject to any regulatory authorities.

156Ibid para. 46. 157In para. 16 of AG opinion, his view was that margin squeezes were merely a form of refusal to supply (i.e., a constructive refusal to supply) and, therefore, “the same framework of analysis and the general concerns about the incentives of dominant undertakings to invest should apply ". 158See Commission’s Guidelines, supra 9. 159In the present judgement, the CJEU also stressed that the stringent conditions for refusal to supply set out by the in Bronner case (see supra 10) is not necessary in margin squeeze abuses.

160However, in para. 21 of his opinion, AG Mazak concluded that, incumbent telecommunications may be subject to a competition law margin squeeze test where they are “subject to a regulatory obligation compatible with EU law to supply the wholesale products”. 161See TeliaSonera, supra 16, para. 72. 162See Wanadoo Interactive, supra 131. 163Ibid paras. 101-103.

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We first witnessed in Deutsche Telecom that even if the telecommunications operators subject to ex-ante regulations, they could still fall under the infringement in Article 102 TFEU if they have some scope to adjust their prices. However, in the TeliaSonera case, we see that, the margin squeeze can still apply in the absence of any sector-specific regulation. Furthermore, while in Deutsche Telecom, the Court decided that it was not necessary to take account of the cost structure of DT’s competitors164, in Teliasonera it concluded that prices and costs of its competitors on the same market could also be examined in some particular circumstances165.

As can be seen from all these judgements, when it comes to the margin squeeze issue, the Commisson could be rather sentitive. However, the ongoing case, Slovak Telecom166 (“ST”) demonstrates the Commission's worries about the situation in the new Member States, where competition is still at an early stage of development. On 8 April 2009, the Commission opened proceedings to investigate whether the behaviour of Slovak Telekom, the incumbent operator in telecommunicaitons, could prevent or hinder competition in broadband internet access and other electronic communications markets in Slovakia. In this regard, the Commisson is going to investigate ST's possible margin squeeze with respect to the unbundled local loop and other wholesale and retail broadband access services in Slovakia, and a possible refusal of supplying access to infrastructure. The case has still not been decided; however, the decisions of the Commisson which extended the scope of the investigation by including ST’s parent company, Deutsche Telekom, into the investigation means that the Commission is going to make an in-depth assessment of the case and most probably is going to come with an infringement decision of Deutsche Telecom and its Slovak subsidiary under Article 102 TFEU. Regarding the competence issue of Member States under Modernisation Regulation167 in relation to a margin squeeze abuse, it will be appropriate to mention shortly about a very recent judgement of the CJEU, Tele2 Polska, which was decided just a few weeks ago.168

164See Deutsche Telecom, supra 42 para. 202. 165See TeliaSonera, supra 16, para. 46. 166Slovak Telekom is the largest telecommunicaitons company operating in Slovakia whose majority share owned by Deutsche Telecom. On 1 July, 2010 Slovak Telekom officially merged with the mobile provider T-Mobile and became ”T-Mobile Slovakia”. 167Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 101 and 102 TFEU. 168Case C-375/09, Judgement in Case C-375/09 Prezes Urzędu Ochrony Konkurencji Konsumentów v Tele 2 Polska sp. z o.o., (now Netia SA).

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Competence is also an important issue, even though it does not directly concern the notion of margin squeeze. As already mentioned by the Court in Deutsche Telecom, the Commission cannot be bound by a decision taken by a national body; otherwise, the effective competition under the EU competition rules would be undermined. On 3 May 2011, the CJEU almost implied the same objective in its Tele2 Polska decision. Upon a preliminary ruling by the Polish Supreme Court, the CJEU decided that the Polish Competition Authority had gone too far by exceeding the limits on its competence under Art 102 of TFEU by issuing a decision that it found no abuse of dominance under the said article.

The Prezes Urzędu Ochrony Konkurencji169, started a procedure against Polish Telecom170, the national telecommunications provider in Poland whose biggest shareholder is France Telecom, suspected of having infringed Article 8 of the Law on Competition and Consumer Protection and Article 102 TFEU171. The Polish Competition Authority found that the conduct of the dominant company did not constitute an abuse and that, therefore, it did not lead to an infringement of the national law and of Article 102 TFEU. Consequently, Polish Competition Authority took a decision under national law stating that TPSA had not implemented any restrictive practice with regard to the infringement of Article 102 TFEU; therefore it put an end to the procedure.

Upon this, Tele2 Polska, a competitor of TPSA, contested that decision before the Court for Competition and Consumer Protection in which at the end had been referred to the CJEU by the Polish Supreme Court for a preliminary ruling asking whether European Union law precludes a national competition authority, where it finds that there has been no abuse on the basis of its national law, from taking a decision stating that there has been no breach of the Treaty provisions.

The CJEU held that under the framework of Regulation 1/2003172, even if NCAs may require that an infringement be brought to an end, order interim measures, accept commitments, or impose fines, periodic penalty payments or any other penalty provided for in their national law where they could apply national competition law to any abuse prohibited by Article 102 TFEU; however, their

169It is the Polish Competition Authority which is acting as the NCA for the purposes of Article 3(1) of the Regulation. 170Telekomunikacja Polska SA (‘TPSA’) is the dominant telecommunications operator who operates some internet services such as ISDN, ADSL, PSTN and IDSL.

171In 2007, Poland's telecommunication regulator fined TPSA for 339 million zlotys ($121 million) for refusing to follow the regulator's orders on the broadband Internet market which would have forced the company to offer its access services independently from its phone services. TPSA claimed that the regulator had no right to regulate the Internet market and appealled the fin; however Poland's antitrust court Monday cancelled the said fine. 172Article 5 of Council Regulation 1/2003.

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discretion is limited to the adoption of a decision stating that there are no grounds of action when NCA decided that the conditions for prohibition are not met. 173

The Court clearly indicated that the cooperation mechanism between the Commission and NCAs brought by the Modernization Regulation, did not allow NCAs to decide that there had been no breach of Article 102 TFEU, which would undermine the power of the Commission and so the objectives of Regulation-indicating a uniform application of the competition rules set up by the Treaty, since such a negative clearance might prevent the Commission from finding that the practice in question amounts to a breach of those rules.

Therefore, the CJEU concluded that the only authority to decide that Article 102 of TFEU is not applicable is the Commission itself.174

In conclusion, it would be correct to state that apart from the conflicts between the NCAs and the EU Institutions, there are even some inconsistencies between the institutions of the EU itself. However, regarding scope of the margin squeeze concept, while in the 2009 Commission Guidelines175, the Commission itself classified margin squeeze as a type of refusal to deal, and thus was considered abusive only where the Bronner conditions176 were satisfied, in its recent cases, the CJEU decided that it is an independent type of abuse under Article 102 TFEU. The main reason for the change of approach in the EU in a short period of time could be considered as to prevent the dominant undertakings to take incentives against their abusive conducts as they had defended themselves by referring to Bronner case in many of the judgements and /or decisions above. It seems like the efforts of the Commission as well as the judgements of the EU Courts in order to deter the big operators from preventing them squeezing the margins of their competitors have really narrowed the scope of margin squeeze , provided with a broad interpretation regarding the necessary conditions required for its application.

173See Tele2 Polska, supra 165, para. 21. 174Article 10 of Council Regulation 1/2003. 175See Commission’s Guidelines, supra 9. 176See Bronner case, supra 10.

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4.2 US Application

4.2.1 General approach on margin squeeze

In the US, the concept of margin squeeze has been discussed under the Section 2 of Sherman Act177 which prohibits monopolisation, attempts to monopolise and conspiracies to monopolise trade. The legendary judgement about margin squeeze in US anti-trust law is the Alcoa178 case, which recognized margin squeeze as a stand-alone antitrust abuse for more than half a century; however the recent decision of the Supreme Court in LinkLine179 appears to have eliminated the possibility of maintaining an independent margin squeeze action180. In the following section in order to determine the boundaries of margin squeeze in the US antitrust system, we shall examine the most crucial judgements in the US including the Alcoa and LinkLine jurisprudences as well.

4.2.2 US case law about margin squeeze

*** The first application of the notion of margin squeeze in US is the United States v Aluminum Co181 case which took place between 1930s and 1940s on an unregulated market in the US. Second Circuit of Court of Appeals examined the appeal brought by the US government claiming that Aluminum Co (‘Alcoa’) ‘consistently sold aluminium ingot at a very high price that the “sheet rollers”, who were forced to buy from it, could not pay the expenses of “rolling” the “sheet” and make a profit out of the price at which Alcoa itself sold’182 In his famous decision, Judge Learned Hand found Alcoa, who held a monopoly in the US, which it sold to sheet aluminium manufacturers, and also itself produced sheet aluminium, responsible for increasing the price of its competitors’ essential inputs, aluminium ingot, so that they could not compete with Alcoa in sheet rolling

177See 15 U.S.C. § 2., supra 35. 178United States v Aluminium Company of America et al. 148 F.2d 416, 65 U.S.P.Q. 6 (1945), commonly known as “Alcoa”. 179Pacificbell Telephone Co. v LinkLine Communications, Inc SBC California, Inc., No. 07-512 (2009). 180Dunne Niamh: ‘Margin Squeeze: Theory, Practice, Policy’ ,EUSA Conference, March 2011. 181See Alcoa, supra 178 182Ibid para. 437.

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in the downstream market. He held that margin squeeze occurred under the Section 2 of the Sherman Act under the following conditions183:

(i) the vertically integrated firm holds a monopoly in the upstream market, ii) the upstream price is higher than a ‘fair price’ and iii) the downstream price is so low that its competitors cannot match the price and still make a ‘living profit’. However, as Alcoa judgement has received considerable attention over the years, the opinion of Judge Hand in Alcoa continued to represent a precedent for the other US courts for many years, especially in regulated sectors such as telecommunications and energy after 1970s. 184 According to his opinion; the US antitrust rules aimed most likely to protect ‘for its own sake and in spite of possible cost, an organization of industry in small units’. Some decades later, the Alcao decision started to lose its appeal as most courts and commentators supported the view that the main goal of antitrust rules should be the protection of consumer welfare where it was difficult to reconcile with the concepts of ‘fair price’ and ‘living profit’ adopted in Alcoa decision. Furthermore, it was criticised for being inconsistent with the more economic approach to antitrust law adopted by the courts during the years following the decision.185 *** In 1990, in Town of Concord186 case, First Circuit of Court of Appeals rejected margin squeeze claims because of the conditions in Alcoa were not set up in the said issue where both the wholesale and retail prices of the undertaking’s product in question had been regulated. The circuit court decided in that a margin squeeze case where the monopolist undertaking is regulated upstream, does not fall under Section 2 of the Sherman Act. In this case, the judge also criticised the opinion of Judge Learned Hand in Alcoa which stated that an upstream monopolist must charge a “fair price” for the wholesale input and must allow its downstream competitors to make a “living profit”; as it was difficult to establish “fair price” for courts and also hard to distinguish efficient rivals from inefficient ones in courts and also hard to distinguish efficient rivals from inefficient ones in determining the “living profit” test in which he said that it protects competitors rather than competition.

*** It is difficult to say whether the US courts were inconsistent with earlier case law, especially when it comes to telecommunications sector which generally is a

183Ibid para. 438. 184Joskow, P.L.(1985), “Mixing Regulatory and Antitrust Policies in theElectric Power Industry: The Price Squeeze and Retail Market Competition”, MIT Press, London, p. 189. 185Sidak J. Gregory: ‘Abolishing the Price Squeeze as a Theory of Antitrust Liability’ , 2008-01. 186Town of Concord v Boston Edison Co. 915 F.2d 17 (1st Circuit, 1990).

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regulated area. In Trinko187, the US Supreme Court refused to extend an anti-trust obligation to deal to circumstances where the incumbent telecommunications operator was under an ex-ante regulatory obligation to supply the wholesale product and services to its competitors. In other words, even if the undertaking was obliged to supply its infrastructure by regulatory authorities, if it was not under an obligation for duty to deal, it still could not be held responsible for a margin squeeze abuse188. However, in another decision, Covad/Bellsouth189, it was held that in order to establish a margin squeeze under Section 2 of Sherman Act, the undertaking should apply predatory pricing to its competitors. *** One of the landmark judgements is the Linkline190 judgement, concluded in 2009 and reflecting the most recent approach of the US courts in relation to margin squeeze issue and drawing the boundaries of margin squeeze as an anti-competitive practice. In 2003, LinkLine brought an action against AT&T, its wholesale DSL supplier, for engaging in anticompetitive margin squeeze contrary to the Section 2 of the Sherman Act. Upon the rejection of AT&T’s argument by the Circuit Courts, the main question asked to the Supreme Court in 2009 was whether a price squeeze could constitute a stand-alone abuse. Firstly, the Supreme Court rejected the claim that unfair or inadequate margin spread in itself was not illegal and held that a margin squeeze ought to be regarded as a violation under Section 2 of Sherman Act only if there is a refusal to deal at the wholesale level or predatory pricing at the retail level. Moreover, the Supreme Court preferred to apply the Trinko judgement rather than Alcoa judgement and concluded that margin squeeze did not constitute a separate abuse, but should rather be assessed within the frames for refusal to deal or predatory pricing abuses. Regarding ex-ante regulations, the Supreme Court in Linkline confirmed the approach in Trinko adopting the idea that the existence of a regulatory duty to deal removed any scope for imposing an antitrust duty to deal in the market concerned. In other words, it means that the presence of any economic regulation precludes any finding of breach of the antitrust laws as the courts of the US hesitate to intervene.

�

187Case Verizon Communications Inc. v Law Offices of Curtis V. Trinko, LLP, 540 U.S. 682, 2004. 188This judgement was also supported by the Covad/BellAtlantic decision in 2005: Covad Communications Co. v Bell Atlantic Corp. 398 F.3d 666 (D.C. Cir 2005). 189 Covad Communications Co. v BellSouth Corp.374 F.3d 1044 (11th Cir. 2004). 190See Linkline, supra 179.

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4.3 Main differences between the EU & the US approaches concerning margin squeeze

Apart from the structural difference in their legislations which requires a dominant position for the margin squeeze abuse under the EU rules, while the undertaking should have a monopoly under US rules, there are crucial differences between the current EU and US jurisprudences in respect of margin squeeze issue as an abuse which could be basically summarized as follows: i) Regarding whether margin squeeze is an independent type of abuse, the CJEU

made it clear specifically in its Deutsche Telecom and TeliaSonera judgements that margin squeeze can constitute a stand-alone infringement of Article 102 TFEU where the spread between wholesale and retail prices charged by a vertically integrated firm is negative or insufficient to cover the costs incurred by that firm (or its as-efficient competitor). Therefore, in order to fall under Article 102 TFEU, the strict criterions for refusal to supply need not be met. However, in the US, margin squeeze does not create a separate violation of Section 2 of the Sherman Act and must instead be assessed together with the (constructive) refusal to deal or the predatory pricing abuse.

ii) In relation to the ex-ante regulations, the EU institutions took the view that the

existence of sector-specific regulations does not preclude the application of margin squeeze there is some scope left for the dominant firm to adjust its retail prices. On the contrary, in the US, the ex-ante regulations in a specific sector will exclude the possibility of intervention of the US courts to assess the anti-competitive conduct under the anti-trust rules; so that only regulatory duties can arise and regulatory remedies be imposed.

iii) Regarding consumer benefit, the EU approach is more consumer-oriented than the US approach. In handling cases, the Commission and/or the CJEU generally took into consideration not only the actual harm to competition but also the potential effects of it. It is probably because the Commission consists of economic experts who are well qualified to deal with situations of potential harm in the market.

In the USA, the courts prefer not to intervene until there is an actual evidence of harm to the market being caused. They consider that sector-specific regulators fit better to assess ex-ante measures, as judges might not have the required expertise of the market structure and the economics of it to determine the potential harms.

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In recent years, there has been a shift to a more consumer-oriented supporting the ‘efficiency’ of competition which means that efficiency considerations will play a greater role in determining the existence of a margin-squeeze. Put simply, ‘more-consumer oriented’ means ‘more likely to find out the abuse in terms of margin squeeze’.

After all, as a result, it is possible to conclude that, due to the different meaning attributed to competition by different legal systems, while a fine might be imposed on the dominant undertaking in Europe because of its anti-competitive behaviour, the same conduct will not be regarded as an abuse in the other side of the world.

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5 Analysis Of Turkish Approach

5.1 Are the TCB’s Decisions in line with the EU?

Within the context of Association Agreement signed with the European Union, Turkey adjusted its rules on competition and made most of the necessary arrangements by establishing and/or amending the laws as well as the establishment of secondary legislation. In relation to the telecommunications sector, both the regulatory regime and the Competition Act were inspired by the European telecommunications regulatory framework. Even if Turkish Competition Law was modeled using the EU Competition rules, when it comes to the legal assessment and implication - as already examined above - in respect of margin squeeze issue, significant divergences still exist in practice. Nevertheless, despite the differences, could one still assume that Turkey is mostly near to the European approach, or affected by another legal approach such as US antitrust rules? Even if margin squeeze has been addressed only in a limited number of decisions by the TCB, which in those the claims were mostly rejected, it still gives us enough perspective to highlight the tendencies of Turkish Competition Authority in order to test whether the decisions are in harmony with the EU law or not. In 2005, the issue was indeed first mentioned in TT /Teacher-Student Campaign case191 ; the TCB refused all the claims concerning the margin squeeze abuse. While examining the disputed issue, the Board listed the conditions such as dominance, vertically integrated undertaking and indispensability of the input, which seems in line with the case law of the EU. However, regarding the calculation test to find out whether there was an unprofitable margin for the competitors; they preferred to use REC test (the cost of competitors) rather than EEC which is considered as the most appropriate one in the EU case law as well as in the literature. Nevertheless, the Board decided not to start any investigations as the market in the issue was a complete-regulated one means both in downstream and upstream markets were regulated. Therefore, they refused the claims on the ground of permission and approval of the ICTA. Here the hesitance of the TCA reminds us the attitude of US courts that are reluctant to intervene in situations where the telecommunications markets are regulated. 2 years later, in 2007, in one of the leading judgements on margin squeeze, the Turkcell/UMTH Corporate Tariffs case192 regarding the allegations whether the dominant undertaking Turkcell in the GSM sector was engaging in price squeeze by 191See TT /Teacher-Student, supra 64. 192See Turkcell/UMTH, supra 66.

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setting its retail tariffs for mobile calls (which had to be approved by the ICTA in advance) below the interconnection prices for its competitors, the TCB decided that these tariffs did not give rise to a margin squeeze due to the existence of sufficient margin covering the costs. However, regarding the calculation of costs, the Board still insisted on the REC test again as to the issue which costs should be applied; therefore, the Board used again the costs of Turkcell’s competitors cost. In this case, only the upstream market was regulated. However, it could be said that, the most compatible decision with the EU approach is the TTNet-Summer Storm Campaign193 (2008), in which the inconsistencies were pretty much abolished by finally using the “as efficient as competitor” test and by imposing a fine around 12.394.781,16 TL on TT and TTNet. The Board also referred to the Deutsche Telecom and Telefónica cases; this time, it conducted the fully distributed costs (which are generally used in predatory pricing cases) as the profitability calculation method which may not seem to be compatible with the Commission’s practice of using incremental costs or avoidable costs as also proposed by the Discussion Paper in margin squeeze cases. However, the TCB based this to the fact that as TTNet’s only business was limited to the resale model and the incremental costs and fully distributed costs it had incurred were almost equal; therefore, even if the case had been treated as a predatory pricing case, the analysis and the cost definition would not have changed. In relation to the issue of dominance, it could be said that Turkish Competition Board followed the decisions of the EU Institutions (as Deutsche Telecom and TeliaSonera cases) by mentioning in many of its decisions that in order to establish a margin squeeze abuse under competition law, the undertaking concerned does not have to be dominant on the downstream market and only the dominance in upstream market is sufficient. Regarding the presence of intent and anti-competitive effects, it is worthwhile reminding that in Deutsche Telecom, the CJEU rejected the Commission’s approach by concluding that evidence of anti-competitive effects is required to constitute an abuse of Article 102 TFEU. In this perspective, the TCB seems to share the idea of the Commission and yet reach a different outcome. In TTNet-Summer Storm Campaign, the Board said that, Article 6 of TAPC, does not mention that intent of the conduct may be adequate to prohibit it as an abuse of dominant position, however from the list of abusive practices under article and reasoning of it, it could be interpreted as conduct may be prohibited if its intent alone is anti competitive. Therefore, there is no need to demonstrate anti-competitive effects of the price squeeze to prohibit it as an abuse. In this regard, they decided that some internal business plans, correspondence and presentations between TT and TTNet,

193See TTNet-Summer Storm, supra 5.

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which resulted in anti-competitive effects in the market, were enough to indicate their intent. Another US reflection could be seen in the Nuh Cement194 decision of TCA given in 2010. Here the TCA emphasized in some parts of the decision that; refusal to supply is one of the ways of margin squeeze. After all, it would not be wrong to state that almost all other applications about margin squeeze infringement were concluded with the refusal of the TCB in which most of those, it based on the reason that the market/s in issue was/were already regulated by the ICTA through ex-ante regulations. As a result, it could be said that the Turkish attitude towards margin squeeze is not totally in line with the approach of the EU. However, the most recent infringement decision by the TCB shows that the Board has finally started to apply almost the same reasoning and the method as the European Commission and the courts. In this regard, it is important to provide the consistency in the decisions. Nevertheless, the hesitation of the Turkish Competition Authority is still a bleeding wound in Turkey where especially both downstream and upstream markets are subject to the ICTA’s regulations. The decisions of the Board could be interpreted as not to intervene the margin squeeze infringements when they are already approved by the ICTA in advance. Therefore, it could be correct to conclude that insofar the Turkish approach is very close to the EU model as regards the margin squeeze issue in the telecommunications industry; however, Turkey could still benefit from the US approach when it comes to regulated areas.

194See Nuh Cement, supra 72.

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The Assessment Chart about Margin Squeeze Cases between EU & Turkey (Figure 2195)

Which case

Authority Which test

Type of market

Conclusion/ Fine

Telefonica

Commission /still pending

in GC

EEC

Half

regulated

Administrative fine-

151. 875 million Euro

Deutsche Telecom (2010)

CJEU

EEC

Both

regulated

Administrative fine-

12,6 million Euro

TeliaSonera (2011)

CJEU EEC / REC

(exceptionally)

Half

regulated

Preliminary ruling

TT/Turkish Teacher-Student (2005)

Turkish

Competition Board

REC

Both regulated

Refusal of the claim

Turkcell/ Corporate- UHTL (2007)

Turkish

Competition Board

REC

Half

Regulated

Refusal of the claim

TT-TTNet Summer Storm

Turkish

Competition Board

EEC

Half

Regulated

Administrative fine

12.394.781,16 Turkish Liras

195Inspired by Kaya Şerife Demet, “Assessment of Margin Squueze Both From Economical and Legal Perspectives”, Ankara, 2008

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5.2 Some Suggestions To The Turkish Authorities

The ongoing controversial issues have been discussed in Chapter 3. Now I am going to look for some answers to the problems raised in the said chapter. In this regard, the following economical and legal applications by the authorities might be a solution to the existing troubles, in order to prevent margin squeeze in Turkey.

5.2.1 The necessity of collaboration between the ICTA and the TCA

In most of the cases, upon the claims about margin squeeze in relation to the tariffs to the TCA, it rejected the allegations on the grounds of its non-competence concerning the issue as it was already regulated by the ICTA; therefore, the rules of TAPC could not be applied. In order for the said issue to be examined by the ICTA, there must be an arrangement; however, when the tariff- approval decisions are examined, it is seen that they do not supervise any effects of the tariffs to the competition, or do not inspect the possible anti-competitive conducts as regards to the margin squeeze. Therefore, the margin squeeze could not be examined by any of the authority, which in the end would be detrimental to the consumers. It is clear that a functioning cooperation between the ICTA and the TCA is critically important for the competitiveness in the telecommunications markets. However, the main deficiency in the legislation is that it is not precise which authority will have the last word in case of disagreement during the proceedings. Therefore, the first thing that should be done is to clarify the division of duties between the ICTA and the TCA as the existing legislation contains many ambiguities. As it is open to some kind of discretions and interpretations made by the authorities, a more strict formation of legislation should be introduced. At this point, the role of the TCA is very important. Contrary to the European Member States, Turkey does not have an institution as the European Commission.196 So to act and to interpret like the Commission at some points might be an effective solution to preclude margin squeeze infringements. In case of any margin squeeze claim in the telecommunications industry, even if it is an issue regulated by the ICTA, the TCA should examine the issue carefully and should not refrain from investigating activities because it is not authorized to do so. The TCA should continue to seek opportunities for cooperation with the ICTA because the

196The decisions taken by the TCA and the ICTA can be appealled before the Council of State; however it takes very long time to conclude because of the intense work files in the Court;and the infringement will already give enough harm to competition.

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issues of overlapping jurisdiction impose uncertainty on private sector undertakings and impair competitive market operations. As a result, even though the aims of the ICTA and the TCA are in the same line with each other, their characteristics of duty and mechanisms might differ. However, in order to achieve economical efficiency in the telecommunications sector, which is the common aim for both agencies, they should collaborate with each other more often. The transparency and practicability of the division-task mechanism will enable them to handle the issues in a much more simple and fast manner for both of the authorities and at the same time provide trust for the companies in the mentioned industry.

5.2.2 Missing methodology should be implemented by the ICTA

As repeated several times, the ICTA has great importance on contributing of competition in telecommunications sector in Turkey. Therefore, its most important mission is to prevent anti-competitive pricing conducts of the operators and to create an effective, fast and competitive mechanism for the current situation of the country and the specifications subject to the telecommunications industry. Nevertheless, one of the biggest problems with margin squeeze in Turkey is the lack of implementation of rules by the ICTA. Apart from the arrangements have never been introduced, the ICTA fails to implement the existing regulations too. Not only should it break the silence by being more active in precluding the infringements, but it should also take the initiative to adopt necessary regulations by well analyzing the country’s economical and social conditions. Some suggestions to the ICTA are as follows:

5.2.2.1 Introduce the “Price Bottom Communiqué”; The tariffs of fixed lines of Turkish Telecom, the incumbent operator in telecommunications in Turkey, have to be approved by the ICTA in advance according to the Price Cap Communiqué 2007 setting out the principles governing the approval of tariffs of some services supplied to users by operators that have significant market power in relevant markets of “access to fixed telephone network” or “call services across fixed network”. However, this Communiqué is not satisfactory enough. Apart from the absence of the related articles on margin squeeze, Article 20 of the said Communiqué stipulates that ‘[the] Communiqué is not designed to prevent predatory pricing,

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cross subsidization and/or discriminatory pricing...’Therefore, it is obvious that the ICTA did not investigate enough while creating the price caps which have considerable importance to prevent margin squeeze and other anti-competitive pricing behaviour of undertakings. Moreover, the Price Cap Communiqué alone is not enough to prevent margin squeeze. In addition, Price Bottom Communiqué in retail prices should be implemented by the ICTA, until effective competition is achieved. By limiting the minimum prices of the operators, having significant market power in their retail-price applications, the abuse of dominance via margin squeeze would be precluded.

5.2.2.2 Adjustment of interconnection prices with retail prices;

In order to engage in the relevant market, the other operators have to pay some sort of interconnection prices to the incumbent operator. However, if those prices are not in line with, and proportional with the retail prices presented by the dominant undertaking, the other competitors could not survive profitably in the relevant market or will be driven out of the market soon. Therefore, the other ex-post measure that should be applied by the ICTA is the arrangement of interconnection prices with the retail prices of incumbent. The same pricing method should be used both in retail prices supplied to the end-users by the dominant operator and in interconnection prices which the other suppliers are obliged to pay the dominant company in order to engage in market activities.

5.2.2.3 Ensurement of reasonable margin ratio; In order for an operator to compete in the sector, satisfactory conditions are required to ensure profitable trade. Otherwise, there is no reason for him to enter the market. Examining the situation in Turkey, it is observed that the margin for other suppliers rather than the dominant undertaking is too little to compete. In EU, the margin left to the other competitors changes between 20-40% and is deemed as the existence of margin squeeze, when the dominant undertaking supplies its retail prices under that substantial ratio. However, in Turkey, the range is far from ideal. For example, in the appeal petition of Telkoder to the 13th Council of State, 2007 /1056 where it was the plaintiff, it was claimed that the retail prices of TT and the margin left to the UMTH operators were too less for them to compete in the relevant market as they had many additional costs to pay except interconnection

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prices. They said that, the cost for a trunk call for an UMTH supplier was 7,0 Turkish Liras per minute while the same service was provided to its end users for 6,86 Turkish Liras by TT. The calculated margin was -6%, and therefore it became impossible for the other competitors to trade profitably. 197 In order to prevent such claims, the ICTA should implement the necessary legislation at once, which provides at least around 20% margin to the other suppliers. Then a concrete step will be taken to ensure effective competition.

5.2.2.4 Division of infrastructure-service; One of the conditions for margin squeeze is that a dominant undertaking should have an essential input so that no other alternatives exist in the market. In Turkey, even if the telecommunications sector had been liberalized, TT still has the incumbent structure to provide infrastructure to others in the telecommunications industry, which led to a de facto monopoly by TT. In this regard, the establishment of other alternatives and infrastructures might break the cumulative conditions for margin squeeze and prevent it. To be able to do that, we should put an end to the infrastructure- service component. In other words, the operators who control the infrastructure should be precluded from providing services at the same time. In order for the system to function effectively, the subsidiaries of the dominant provider also should also either be separated from them completely or should be prohibited from supplying services. However, in most of the decisions, the claim was that TT had squeezed the margin of its rivals through its subsidiary TTNet, one of the suppliers on the downstream market.198 In conclusion, there is still a long way for Turkey to reach the EU standards in telecommunications sector. Considering this, the ICTA, as the regulatory authority, has the most crucial role. An effective cooperation with the TCA, combined with implementation of existing legislation, is the key to an effective competition in Turkey. 197However, Council of State refused the plaintiff’s suspension of execution claim partially. 198See TTNet-Summer Storm, supra 5.

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6 CONCLUSION

This thesis has showed that margin squeeze has a not very long but still an appreciable story in the history of competition law, especially in telecommunications industry. After the liberalization of telecommunications, which is mostly subject to the regulations by the national authorities, margin squeeze claims started to be raised. Its significance and extension is increasing gradually due to the fact that it might be a serious threat for the ensurement of effective competition. However, it is not always easy to establish a margin squeeze abuse; many conditions have to be fulfilled. For the undertaking concerned, the conditions include being vertically integrated and having dominance on the upstream market; while for the competitors the conditions are the existence of essentiality of the product and getting an unprofitable margin on the relevant market. At the end, competition on the said market should be restricted and no objective justification should exist which could be relied on by the dominant undertaking. Moreover, it is seen that there are still many discussions regarding the relationship between the margin squeeze and other pricing conducts such as predatory pricing, refusal to supply and excessive pricing. Prima facie they have many common points; in the doctrine, some uphold a conservative view that margin squeeze should be assessed within the context of other abuses; whereas others claim that it should be evaluated as a separate abuse. The difference in views is reflected in national legal systems as well. We witnessed that despite the fact that the margin squeeze claims were not reviewed as a separate abuse by the EU in the beginning, it has eventually been accepted as a stand-alone type of abuse under the TFEU in the contemporary decisions of the Commission. On the contrary, the US anti-trust rules support the idea that in order to consider margin squeeze as an abuse under the Sherman Act, there should be other anti-pricing abuses, which in other words means that margin squeeze is not an independent kind of abuse. In addition, the existence of a regulatory duty to supply removes the possibility to find an infringement in the market concerned. While the US courts do not tend to deal with the margin squeeze issue, specifically where the markets are regulated by the NRAs; the Commission has definitely a more intervening approach. When it comes to Turkey; after having examined the evolution of the telecommunications industry, it is observed that in spite of the increasing amount of claims about margin squeeze, the number of decisions is still very limited. It is

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because the TCA is very reluctant to handle the issue where the market/s are already regulated by the ICTA. Given the efforts of Turkey to implement the necessary legislations and to adjust its rules to become compatible with the EU, insofar, it seems to be a meat in the sandwich where both the EU and the US attitudes coexist. The analysis presented in the paper suggests that most of the regulatory framework in Turkey has been implemented but there are still some deficiencies. Apart from the missing legislation and silence of the ICTA about the issue, the biggest disruption in Turkey is the absence of collaboration between the TCA and the ICTA. The ‘battle’ between two authorities prevents the improvement of effective competition. The division of tasks between the two agencies needs to be clarified; however, that should not preclude the two agencies from extensive dialogue during design of arrangements and investigations about anti-competitive conducts of dominant undertakings. Indeed, the following statement, referring to the cornerstones of the competition, summarizes the importance of it very well:

“No authority has the monopoly of good ideas, for more competitiveness in the markets competition authorities and the sectoral regulatory authorities should be acting in a concerted practice. Cooperation and consultation with Competition Authorities is an essential facility for the sectoral regulatory authorities. “199

To conclude, given the statistics, the telecommunications sector forms a substantial part of the domestic income of Turkey. It means that the more competitive it is, the faster improvement in the sector will be which is going to provide the less prices with high quality. The remediation in the industry and the improvements in the regulatory regime would have a considerable effect on investment and growth in Turkey. New investments would require a less restrictive approach towards the new entrants and more stringency against the anti-competitive practices by the dominant undertakings. Actually, no matter which approach adopts Turkey, the best solution in order to prevent the margin squeeze would probably be to find out the most appropriate way, which suits the cultural and social structure of the country.

199Oz-Ascıoglu Gamze:“Regional experiences and lessons learnt in fostering competition in regulated sectors, focusing on the link between competition agencies and regulated bodies”, 2006.

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Table of Cases

EU Institutions; • Advocate General in Case C-202/07 P France Telekom v Commission • Advocate General in Case C-52/09 Konkurrensverket v TeliaSonera AB • Commisson Decision of 14 October 2003, 2003/707/EC, Deutsche Telekom • Commission Decision of 16 July 2003,Case COMP/38.233 Wanadoo Interactive • Commission Decision of 4 July 2007 Case COMP/38.784 -WanadooEspaña v

Telefónica • Commission Decision 76/185/ECSC OJ L 35 of 10.2.1976, National Carbonizing • Case C-7/97, Oscar Bronnerv Mediaprint, [1998] ECR I-7791 • Case C-52/09 17 February 2011, Konkurrensverket v TeliaSonera AB • Case C-62/86 AKZO Chemie BV v Commission [1991] ECR I-3359 • Case T- 5/97 Industrie des Poudres Spheriquev Commission [2000], ECR II-3755 • Case United Brands Company v Commission 27/76, 1978 , ECR 207 • Case C-280/08 P, 14 October 2010, Deutsche Telekom AG v Commission • Case 77/177 BP v. Commissioner [1978] ECR 1513 • Case 88/518/EEC – Napier Brown – British Sugar (1988) • Case C-202/07 PFrance Telecom SAvCommission • Case C-333/94 Tetra Pak II [1996] ECR I-5951 • Case T-336/07 Telefónicav Commission and T-398/07 Spain v Commission • Case T-271/03, Deutsche Telecom v Commission, Judgement of 10 April 2008 • Case C-375/09, PrezesUrzęduOchronyKonkurencjiKonsumentów v Tele 2 Polska

sp. z o.o. US Courts; • United States v Aluminium Company of America et al. 148 F.2d 416, 65 U.S.P.Q.

6 (1945) • Pacificbell Telephone Co.vLinkLine Communications, Inc SBC California,

Inc.,No. 07-512 (2009) • Town of Concord v Boston Edison Co. 915 F.2d 17 (1st Circuit, 1990) • Case Verizon Communications Inc. v Law Offices of Curtis v Trinko, LLP, 540

U.S.682, (2004) • Covad Communications Co. v Bell Atlantic Corp. 398 F.3d 666 (D.C. Cir 2005) • Covad Communications Co. v BellSouth Corp. 374 F.3d 1044 (11th Cir. 2004)

83

Turkish Competition Authority; • Decision of Turkish Competition Board dated 19.11.2008 nr. 08-65/1055-411 • Decision of Turkish Competition Board dated 2.10.2002, nr. 02-60/755-305

and dated 5.1.2006, nr. 06-02/47-8 • Decision of Turkish Competition Board dated 8.9.2005, nr. 05-55/833-226 • Decision of Turkish Competition Board dated 4.7.2007, nr. 07-56/634-216 • Decision of Turkish Competition Board dated 10.07.2010nr. 10-63/1317-494 • Decision of Turkish Competition Board dated 17.06.2010 nr.10-44/761-245 • Decision of Turkish Compeitition Board dated 27.01.2011 nr. 11-06/90-32 Decision of Turkish Competition Board dated 21.10.2009 nr. 09-48/1206-306.