A Primer on Foreclosure

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A Primer on Foreclosure

• Patrick Rey Jean Tirole

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Agenda

• Introduction
• Definition
• Cases
• Form of Foreclosure
• Envisioned Remedies
• Informal Arguments Insights
• Rationale for Foreclosure
• Policy Implications
• Aftermarket - Kodak

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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.

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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

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Foreclosure Definition

• Foreclosure refers to any dominant firms
  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.

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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.

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Form of Foreclosure

• Vertical Integration
• Tying
• Refusing to cooperate
• Exclusive dealing

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Vertical Integration

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

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• 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 agents screen (a key competitive disadv.)
• The Civil Aeronautics Board (CAB) attempted to
  impose equal access in price and quality to the
  system.

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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

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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.

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I. Structural policies

• Structural policies such as divestitures and line
  of business restrictions are often considered in
  last resort.
• E.g ATT 1984 divestiture ATT 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.

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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 monopolists 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.

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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.

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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.

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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) pmcqi
• That is, the wholesale price is equal to MC and
  the fixed fee equal to the monopoly profit. Its
  then an EQm for D1 to accept it and D2 to decline
  it.

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Non Discrimination Input Price

• The fixed fee transforms a potentially
  competitive downstream industry into a natural
  monopoly (increasing returns to scale) industry.

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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 owners profit.

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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.

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THE END

• by Fred KU