Margin Squeeze

Hannah Ha and John Hickin, Partners, Mayer Brown JSM

Margin squeeze is a form of exclusionary abuse where a (fully or partially) vertically integrated business controlling a key input or facility in the upstream market sells that input to its downstream rivals at substantially less favourable terms, to strengthen its own market power in the downstream market and hamper the ability of downstream rivals to compete effectively.

When is margin squeeze harmful to competition?

Although businesses generally have no duty to deal, or deal fairly, with its competitors, under certain circumstances a margin squeeze may cause undue foreclosure in the downstream market to equally efficient competitors.

Margin squeeze is a common practice in Hong Kong, and will only contravene competition law in very narrow circumstances. When assessing whether a margin squeeze may amount to abuse, the Competition Commission will consider:

  • The nature of the upstream input or facility.
    • The more important the input or facility and the more substantial it is as a proportion of overall production cost in the downstream market, the greater the potential negative impact on competition in the downstream market.
    • Supplying a key input or facility at unreasonable terms is akin to a constructive refusal to deal, which is unlikely to be problematic unless the business has a duty to deal in the first place.
  • The size of the margin squeeze.
    • Competition in the downstream market may be restricted where the business with substantial market power in the upstream market:
      • Sells an input to its downstream rivals at a price which exceeds the price at which it sells the end-product in the downstream market.
      • Uses profits from inflated prices charged to downstream rivals to subsidise its own cost of production, in order to sell the end-product at a below-cost price in the downstream market.