Abstract

A price squeeze occurs when a vertically integrated firm "squeezes" a rival's margins between a high wholesale price for an essential input sold to the rival and a low output price to consumers for whom the two firms compete. Price squeezes have been a recognized but controversial antitrust violation for two-thirds of a century. We examine the law and economics of the price squeeze, beginning with Judge Hand's famous discussion in the Alcoa case in 1945, and concluding with the Supreme Court's 2009 Linkline decision, which applied a strict cost-based test to price squeeze claims. While Alcoa has been widely portrayed as creating a "fairness" or "fair profit" test for unlawful price squeezes, Judge Hand actually adopted a cost-based test, although a somewhat different one than most courts and scholars would adopt today. We conclude that strictly cost-based predatory pricing tests such as the one the Supreme Court developed in its 1993 Brooke Group decision are not always appropriate to the concerns being raised in a price squeeze. We also consider several efficiency explanations, the importance of joint costs, situations in which the dominant firm uses a squeeze to appropriate the fixed-cost portion of the rival's investment, as well as those where the shared input is a fixed rather than variable cost for the rival. Ultimately, we find little room for antitrust liability except in one circumstance: where a squeeze is used to restrain the rival's vertical integration into the monopolized market. That situation is not captured by the Linkline's cost-based rule.

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