Margin squeeze regulation and infrastructure competition

We investigate margin squeeze regulation in a market with infrastructure competition. To this end, we consider two integrated firms and one non-integrated retailer that compete in a horizontally differentiated retail market. The non-integrated firm relies on wholesale access provided by one of the integrated firms. Throughout several model variants we find that margin squeeze regulation lowers consumers’ surplus. In reverse, firms are likely to benefit from margin squeeze regulation, because it leads to higher retail prices or facilitates tacit collusion. From a total welfare perspective, margin squeeze regulation is only beneficial if it prevents foreclosure of the retailer, but even then, this is due to increased industry profits and at the expense of consumers’ surplus. These results question current European policy initiatives to augment the role of ex ante margin squeeze tests in sector-specific regulation.