How can a margin squeeze test be designed in a regulatory environment designed to promote competition?
New entrant telecoms companies that are reliant on essential inputs from incumbents continuously face the problem of margin squeeze, where the incumbent sets its prices so as to reduce the margins available to entrants. Competition policy has generally assumed that the entrant should be "equally efficient" as the incumbent. However, the European Commission has recognised that it is hard to be equally efficient when entrants do not enjoy the same economies of scale and scope and so the Commission has coined the term "reasonably efficient". BOT, an alliance of Dutch competitive telecoms operators, asked SPC Network to design a margin squeeze test based on a reasonably efficient operator and that promotes competition in a market dominated by an incumbent.
"SPC Network quickly understood the commercial and regulatory issues we face as companies and did not need telling twice. They were able to use that understanding to produce a high quality paper that has gained respect among policy makers and helped to advance our position. We were sufficiently satisfied with their work on margin squeeze that we have since awarded further projects to them."