1. A Primer on Foreclosure
Patrick Rey & Jean Tirole

2. Agenda Introduction Envisioned Remedies Informal Arguments & Insights
Definition
Cases
Form of Foreclosure
Envisioned Remedies
Informal Arguments & Insights
Rationale for Foreclosure
Policy Implications
Aftermarket - Kodak

3. Informal Arguments & Insights
The foreclosure or essential facilities doctrine states that the owner of an essential facility has an incentive to monopolize complementary or downstream segments.
By restricting or denying access to the facility to some or most of the potential buyers, the bottleneck owner can favor a downstream independent firm or a downstream affiliate.

4. Foreclosure
Bottleneck input means that product cannot cheaply be duplicated by users who are denied access to it.
Examples of essential facilities or bottlenecks
Railroad bridge or station
Harbor
Power transmission or local telecommunications network
Computer reservation system

5. Foreclosure – Definition
Foreclosure refers to any dominant firm’s practice that denies proper access to an essential input it produces to some users of this input, with the intent of extending monopoly power from one segment, the bottleneck segment, of the market to the potentially competitive segment.

6. Examples Terminal Railroad Association (1912)
A set of railroads formed a joint venture owning a key bridge across the Mississippi River and the approaches and terminal in Saint Louis and excluded nonmember competitors.

7. Form of Foreclosure Vertical Integration Tying Refusing to cooperate
Exclusive dealing

8. Vertical Integration
The bottleneck owner can integrate vertically with one or several firms in the complementary segment.

9. Example – computer reservation systems
They were developed by major airlines, and smaller airlines, esp those competing head to head with integrated firms, had to pay a high price for access to the reservation systems and received poor display of their flights on the travel agent’s screen (a key competitive disadv.)
The Civil Aeronautics Board (CAB) attempted to impose equal access in price and quality to the system.

10. Tying The monopoly can refuse to deal with potential competitors.
It can engage in tie-ins and refuse to unbundle, thereby denying access to the bottleneck.
Kodak – refuses to sell replacement parts for photocopiers to owners

11. Exclusive Deadling
Granting exclusive right and thus exclude their rivals
E.g - Auckland Regional authority granted the exclusive rights to Avis and Hertz for the operation from the Auckland airport terminal building.
The Court held that it violated the New Zealand Commerce Act.

12. I. Structural policies
Structural policies such as divestitures and line of business restrictions are often considered in last resort.
E.g – AT&T 1984 divestiture –AT&T is forced by the Court to divest its regional operating companies.(RBOCs)
Milder forms – Making the essential facility be commonly owned by all users, with the provision that new entrants be able to purchase share & membership into the network ‘at a reasonable price’.

13. II. Access price control
Antitrust authorities often try to use other prices - for access or retail goods – as benchmarks for the access price.
Efficient Component Pricing Rule – links the integrated monopolist’s access and retail prices.
The access price charged to competitors should not exceed the price charged by the integrated firm on the competitive segment minus the incremental cost of that firm on the competitive segment.

14. II. Access price control
E.g – the access charge for the local telephone network may not be allowed to exceed the price of local calls for residential or business consumers.

15. III. ‘Common Carrier’ policies
The policymaker can require the contracts for intermediate goods be made public, with the hope that more ‘transparency’ in supply contracts will promote downstream competition.

16. Non Discrimination Input Price
Nondiscrimination laws may have the perverse effect of restoring the monopoly power that they are supposed to fight.
Suppose that U offer the following nondiscriminatory two-part tariff
T(qi) = πm+cqi
That is, the wholesale price is equal to MC and the fixed fee equal to the monopoly profit. It’s then an EQm for D1 to accept it and D2 to decline it.

17. Non Discrimination Input Price
The fixed fee transforms a potentially competitive downstream industry into a natural monopoly (increasing returns to scale) industry.

18. Example - Patent
A patentholder is the owner of an essential facility – a technology that can be used as an input in productive processes.
Once the bottleneck owner has contracted with a downstream firm for access, he has the incentive to provide access to other firms as well.
Downstream firms, knowing that fact, will be willing to pay less as there is competition, which hurts the bottleneck owner’s profit.

19. Example - Patent
The patentholder is unlikely to make much money if it cannot commit not to flood the market with licenses. Therefore, a patentholder would like to promise that the number of licenses is limited.
However, there is a commitment problem – once the patentholder has granted n licenses, it is then tempted to sell further licenses, thereby depreciating the value of the existing n licenses.

20. THE END
by Fred KU