The "Essential Facility" Doctrine:Legal Limits and Antitrust Considerations

Gregory T Gundlach and Paul N. Bloom

The essential facility doctrine provides a basis for imposing antitrust liability for aftrm'srefusal to provide a rival acce,ss to something "essential" for competition in a particularmarket. For marketers, development of this legal doctrine .seems curiously at odds withaccepted notions of competition and strategic advantage. Its increasing application suggestsits importance. The authors trace the origins of the doctrine from law relating to refusals todeal and analyze its current application in the Federal judiciary. They then discussimplications for public policy and marketing.

A charge increasingly heard from competitors relatesto one firm's refusal to provide access to an "essen-tial" asset or gtxxl required for another firm to com-pete in a particular market. Most often these charges are lev-eled against a competitor thought to be involved in exclu-sionary or predatory conduct against rivals in ways thatlessen competition and injure consumers. The essentialasset or facility (i.e., tangihie physical object) provides thebasis for the alleged conduct. Antiti^st law embraces thisconcept under the rubric of the Essential Facility Doctrine.As stated by Sullivan [1977, p. 131]:

If a group of competitors, acting in concert [or individually], op-erate a common facility and if due to natural advantage, cus-tom, or restriction.s of scale, it is not feasible for excluded com-petitors to duplicate the facility, the competitor[s] who operatethe facility must give access to the excluded competitors on rea-sonable, non-discriminatory terms.

The problem the essential facility doctrine has sought toaddress encompasses those circumstances in which a com-petitor is prevented from serving desired customers becausethey patronize specific facilities or assets that are controlledor owned by another competitor. The competitor's monop-oly over facilities that are essential for serving denied cus-tomers has motivated actions by rivals and antitrust enforce-ment agencies to provide broader access to those facilities.Many successful challenges have been mounted, includingones that permitted competitors' access to airline computer-ized reservation systems, local telephone lines, football sta-diums, and multi-mountain ski-lift tickets.

Compared with notions of competition and marketing'sconcept of strategic advantage,' the essential facility doc-trine seems curiously in opposition to accepted notions of ri-valrous conduct. Its application raises implications regard-

GRKGORYT. GUNDLACH is an Assistant Professor, Department ofMarketing, College of Business Administration, University ofNotre Dame. PAUL N. BLOOM is a Professor, Kenan-Flagler Busi-ness School, University of North Carolina. The authors extendtheir appreciation to their respective departmental colleagues,three anonymous JPP&M reviewers, JAKKI J. MOHR, and the editorfor their helpful comments.

ing a firm's incentives to develop and maintain facilities pos-sibly considered essential and the potential of competitors"free riding" on their rivals' advancements. Notwithstand-ing these issues, application of the essential facility doctrineas a basis of antitrust liability has increased steadily andwith much^reater frequency in recent years. A survey ofcases ideimfying the doctrine suggests its increasing use inantitrusfcases by both competitors and antitrust enforce-ment agencies (see Figure I).

Most recently, Microsoft, the world's leading softwaremanufacturer, has been under investigation by the FederalTrade Commission (FTC) for alleged exclusionary businesspractices involving its products. Referring to Microsoft's re-luctance to share knowledge of its key operating systemsfor IBM-compatible computers with those seeking to pro-vide compatible software products, Philippe Kahn, Chair-man of Borland International Inc., laments, "We know thatMicrosoft takes full advantage of the fact that it owns Win-dows" [Rebeilo, Lewyn, and Schwartz 1992, p. 33].Though the FTC's probe is still pending, Borland and othercompetitors claim Microsoft has an unfair advantage in themarketplace because it sells both the operating system andsoftware applications. These competitors claim Microsoft'soperating system is an "essential facility" for competitionwithin the software industry and, therefore, they should beallowed access to knowledge surrounding the system.

In the future, greater use of the essential facility doctrinecan be expected as firms increasingly adopt joint ventureforms of combination to obtain efficiencies and achieve com-petitive advantages. Joint ventures provide a unique basisfor the development of essential facilities [Piraino 1991].Moreover, the trend toward outsourcing specialized pro-cesses and technologies is likely to promote conflicts overaccess to critical knowledge and resources. Marketing's em-phasis on relationship marketing and long-term associationsfor obtaining advantages can also be expected to increaseuse of the doctrine because these relationships possess thepotential for developing facilities considered critical by ri-vals to compete. Finally, the proliferation of informationtechnologies and other technological advancements consid-ered essential for competing in today's markets suggests

156 Journal of Public Policy & MarketingVoi 12 (2)

Fall 1993. 156-169

Journal of Public Policy & Marketing 157

Figure 1. Essential Facility Doctrine Analysis of Federal Court Cases

15

0 -—I—^ i—^ 1—^ i i i i i 1 n 1 "1 " î ~—i '^n ^ r

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992Year

^ B Cases per year

U.S. Supreme Court, Court of Appealsand District Court (total = 95)

the application of this doctrine [see Bloom, Milne, andAdler 1994]. The technologies themselves may serve as thebasis of an essential facility challenge.

Our objective is to examine antitrust policy toward the es-sential facility doctrine. We focus on the origins and devel-opment of the doctrine as well as its current judicial appli-cation. We then analyze it and discuss its implications formarketing and public policy.

Essential Facility DoctrineThe essential facility doctrine provides a basis for imposingantitrust liability for a finn's refusal to provide another firmaccess to something essential for competition in a particularmarket. An often cited statement of the doctrine is Neale's[1970, p. 67] synthesis of a variety of cases^ involving sim-ilar fact patterns from which the doctrine extends:

The Sherman Act requires that where facilities cannot practica-bly be duplicated by would-be competitors, those in possessionof them must allow them to be shared on fair terms. It is illegalrestraint of trade to foreclose the scarce facility.

The doctrine, which has evolved in various forms, hasbeen applied in industries ranging from railroads to fruitand vegetable wholesaling to telecommunications to profes-sional sports [Ratner 1988]. At its root is the idea that afirm or group of firms violate the antitrust laws when theyfail to make access to a facility important for competitionavailable to their competitors on fair and reasonable termsthat do not disadvantage them [Gerber 1988; Gorinson1990]. Using the doctrine, competitors have gained accessto facilities such as local telephone lines, newspaper wire ser-vices, and railroad switching stations.

Theoretical OriginThe origins of the essential facility doctrine may be tracedto theories underlying refusals to deal within antitrust law.Under monopolization theory, denying access to somescarce resource necessary for competition provides evi-dence of an intent to monopolize. In United States v. Grin-nell Corporation [1966, p. 570-71], the essential elementsfor monopolization were held to include "(1) the posses-sion of monopoly power in the relevant market and (2) the

158 The "Essential Facility" Doctrine

willful acquisition or maintenance of that power as distin-guished from growth or development as a consequence of asuperior product, business acumen or historic accident."Foreclosing a competitor from access to an essential facilitymay provide evidence suggestive of an intent to monopo-lize. The theory of monopolization has been employed fre-quently as the basis for an essential facility challenge underboth Sections 1 and 2 of the Sheniian Act.̂

Public trust theory also underlies the doctrine and is di-rected at preventing a party from exploiting, in a mannerthat reduces consumer welfare, some transfer of govern-ment resources into private hands. More particular than mo-nopolization, public trust theory applies in these limited cir-cumstances to protect consumer welfare [Epstein 1988].For example, in American Federation of Tobacco GrowersV. Neal \ 19501, a trade association, given the power to regu-late warehouse sales, denied another finii access to local auc-tions. Use of the essential facility doctrine to prevent exclu-sion in these circumstances is defended as a means of pre-cluding parties from exploiting a transfer of government re-sources into private hands [Hylton 1991].

Leverage theory provides an additional origin for the doc-trine and derives from a firm's use of its control over ascarce resource in one market to leverage controi in anothermarket. For example, a firm may use its control over theonly local television station to channel advertising businessin Ihe direction of one advertising agency. When control ofanother market is achieved through the concerted actions ofmore than one firm, this theory can provide the foundationsfor an essential facility challenge under Section 1 of theSherman Act. Anticompetitive leveraging conduct involv-ing single-firm conduct {Section 2) has also been held to beillegal \United States v. Griffith 1948]. Together, these the-ories provide the theoretical foundations from which the es-sential facility has been derived.

Concerted Versus Unilateral Activity AmongFirmsThe essential facility doctrine has been applied to both sin-gle-firm conduct and activities involving concerted actionamong several firms in an industry. Presumptions regardingthe anticompetitive intent of denying access to an essentialfacility in each of these circumstances have developedwithin the law.

Concerted Denial of an Essential FacilityFor concerted conduct, the element of joint activity pro-vides an easier basis from which a court may infer anticom-petitive intent under Section 1 of the Sherman Act. Joint ac-tivity among firms involving an essential facility closely re-sembles a group boycott—a per se violation of the antitnistlaws [Fashion Originators' Guild of America v. FTC 1941;Klor's Inc. v. Broadway-Hale Stores, Inc, 1959]. Cases in-volving joint conduct suggest a presumption that refusals todeal pursuant to an agreement are anticompetitive [Associ-ated Press V. United States 1945; Gameco, Inc. v. Provi-dence Fruit A. Produce Building, inc. 1952; U.S. v. Termi-nal Railroad 1912]. Joint conduct among firms involvingan essential facility may also provide evidence of the essen-tiality of the facility in question. Firms joining together sug-

gests the importance of the facility and the inability of theindividual firnis to procure the facility unilaterally.

Unilateral Denial of an Essential FacilityCases involving single-firm conduct present a more challeng-ing scenario. According to Areeda [1990, p. 849]:

Concerted activity is exceptional, whereas unilateral action Isomnipresent. Innumerable firms engage in unilateral actionevery day. We have to be very waiy about examinint; the deci-sion of each of those firm-s in our economy, particularly whenanything one has that another wants may be called an 'essentialfacility.'

The essential facility concept applied to single-firm conductrests wilhin Section 2 of the Shennan Act, which requires,beyond market power, conduct necessary to constitute mo-nopolization. At a minimum, "willful acquisition or main-tenance as contrasted with monopoly achieved as a result ofhistorical accident, business acumen, or the like" is re-quired [United States v. Grinnell Corporation 1966, pp.570-71]. An often employed characterization is "exclusion-ary [or predatory] conduct" or "monopoly power plus ex-clusionary conduct" [Byars v. Bluff City News Co. 1979].A firm's exclusionary or predatory behavior provides thenecessary evidence of "intent" for a Section 2 violation.

Cases associated with application of the doctrine to sin-gle-firm conduct distinguish circumstances involving verti-cally integrated firms and nonintegrated firms. Courts aresuspicious of refusals to deal by single-owner firms thatcompete at lower levels within a channel, because they fearthat monopolists who control one market may employ theirpower to gain an advantage in a second market.

In describing exclusionary conduct and the law, theCourt in United States v. Griffith [1948, p. 107], stated,"the use of monopoly power, however lawfully acquired,to foreclose competition, to gain a competitive advantage,or to destroy a competitor, is unlawful." A similar conclu-sion was reached in Lorain Journal Co. v. United Stales[1951], in which tbe Court held that a firm with an estab-lished monopoly position that leverages its power to ex-clude competition by refusing to deal with tbose who dealwith rivals violates the Sherman Act [p. 154]. Further sup-port for imposing a duty to deal on monopolists who com-pete with competitors on other levels within the market chan-nel is provided indirectly in Otter Tail Power Co. v. UnitedSlates [19731 (discussed subsequently).

In contrast to integrated fimis competing at various mar-ket channel levels, nonintegrated firms appear to enjoy a pre-sumption that their refusals to deal are valid until proven tobe predatory or monopolistic in intent [Fulton v. Hecht1978]. For example, in Official Airline Guides, Inc. v. FTC[1980], Airline Guides published a consolidated listing ofairline flight schedules but refused to include a small air-line. Concluding that Airline Guide had no reason (or in-tent) to act anticompelitively toward the airline, the Court re-jected imposition of the doctrine's duty to deal. Predatoryconduct by a nonintegrated monopolist to exclude a rivalthrough use of an essential facility, however, appears to pro-vide sufficient intent or "purpose" for an antitrust violation[Aspen Skiing Co. v. Aspen Highland Skiing Corporation1985].

Journal of Public Policy & Marketing 159

Economic AnalysisNotwithstanding the preceding arguments, some commenta-tors have suggested that judicial presumptions that a refusalto deal by firms jointly holding an essential facility or thepresumption that a single vertically integrated finn in pos-session of an essential facility is anticompetitive may not beconsistent with economic theory [see generally Boudin1986; Gerber 1988; Gorinson 1990; Hylton 1991; Owen1990; Ratner 1988; Reiffen and Kleit 1990; Troy 1983].

Concerted ConductIn the case of jointly held essential facilities, some econo-mists suggest that whether a facility is controlled by onefirm or many, the competitive effect and economic incen-tives remain the same. They argue differential treatment ofsingly versus multiply owned essential facilities must reston the greater likelihood that refusals to deal by jointlyowned facilities are collusive or anticompetitive. Examin-ing the economic logic underlying cartel theory, they findthis rationale to be suspect. These authors cite the many in-stances in which joint venture activity among firms pro-duces efficiencies otherwise unobtainable by the firms indi-vidually. To ignore these efficiencies through presumptionof some anticompetitive intent disregards the welfare produc-ing outcomes of joint venture conduct. Moreover, a presump-tion of ill intent for joint possession of an essential facilitymay thwart productive and efficient combinations amongfirms. Importantly, these authors argue only against a pre-sumption of anticompetitiveness for jointly held essential fa-cilities. Their arguments recognize that various circum-stances may exist where joint conduct by firms involvingan essential facility may involve anticompetitive intent.

Single Integrated Firm ConductFor refusals to deal by vertically integrated firms, these com-mentators argue the presumption that these organizationsseek to decrease competition in downstream markets (i.e.,leverage) contradicts the widely held view that vertical ar-rangements generally cannot augment monopoly power.They suggest that because monopolists do not need to re-fuse to deal to extract monopoly profits (i.e., they can sim-ply increase the price they charge), refusals are generally ef-ficient and not anticompetitive. Citing economic evidencethat vertical restrictions, including refusals to deal, permitfirms to reduce transaction and overhead costs and prevent"free riding" among downstream firnis, these authors coun-sel that a presumption toward integrated monopolists in pos-session of an essential facility is without foundation. Theyargue that such a view sanctions anticompetitive behaviorby nonintegrated monopolists, deters certain efficient behav-ior by competitor monopolists, and reroutes investmentfrom productive essential facilities into other suboptimalforms.

These commentators acknowledge, however, that undersome circumstances, refusals to deal by vertically inte-grated monopolists may indeed be anticompetitive. Specifi-cally, when a monopolist is prohibited from increasing itsprice (such as within a regulated industry), the incentive fora firm in possession of an essential facility to anticompeti-tively refuse to deal may be present. In short, refusing to

deal may provide a basis for the monopolist to evade priceregulation. Interestingly, essential facility cases tend to pro-liferate in regulated or semiregulated industries [see MCICommunications Corporation v. American Telephone andTelegraph Co, 1983; Otter Tail Power Co. v. United States1973; United States v. American Telephone & TelegraphCo. 1981].

Another circumstance in which a vertically integrated mo-nopolist's refusal to deal may be anticompetitive involvesthose circumstances, because of the nature of the essential fa-cility, in which the monopolist is unable to charge a discrim-inating price (i.e., the nonregulated price case). This wouldinclude, for example, a monopolist in possession of abridge or other asset for which only a flat fee may becharged. Flat fee pricing, in response to the inability to mon-itor usage, is common in many business settings. Pricing ofthis nature can occur when a firm finds it too difficult orcostly to monitor disproportionate usage (e.g. toll roads,bridge tolls, etc.). A monopolist employing fiat fee pricingmay not increase price relative to a user's output. Unable toincrease price to obtain monopoly profits, an anticompeti-tive vertically integrated monopolist in possession of an es-sential facility may resort to refusing to deal in order to elim-inate competition in the downstream market and thus createthe desired monopoly price.

Trends in Application of the DoctrineThough economists suggest that application of the doctrinemay not be consistent with economic theory under somecircumstances, its increasing use is evident through reviewof the case law. Figure 1 provides a summary analysis ofthe frequency with which the doctrine and its associatedcases have been referenced in the Federal judiciary since1977. This analysis was obtained through archival examina-tion of written opinions of the Federal judiciary containingreference to the doctrine. A computerized data base (WES-TLAW) search of cases before the U.S. Supreme Court,U.S. Court of Appeals, and U.S. District Courts was con-ducted and then content analyzed to ensure their proper ref-erence context.'* Two cases were deleted because of im-proper reference context (i.e., the words "essential facility"were not employed in the context of an antitrust violation),leaving a total of 95 cases. As can be seen in Table 1, appli-cation of the doctrine has increased steadily since its initialarticulation in Hecht v. Pro Football, Inc. [1977].

Judicial OriginsSeveral judicial principles have contributed to developmentof the essential facility doctrine. These principles address re-fusals to deal among competitors and other rivals. Each pro-vides a basis from which an essential facility challenge maybe formulated and includes (1) concerted refusals to deal in-volving bottlenecks, group boycotts, and resale price main-tenance agreements and (2) unilateral refusals to deal consist-ing of attempts at monopolization, unilateral foreclosure ofscarce resources, arbitrary refusals to deal, price squeezes,and vertical integration [Werden 1987]. Figure 2 summa-rizes these principles.

160 The ^'Essential Facility" Doctrine

Table 1. Elements Underlying Application of the Essential Facility Doctrine

Elements of InquiryIs the firm in possession of the alleged essential facility a"monopolist?"

What is the nature of the "facility?"

Is the facility "essential" for competition in the relevant market?

Ektes the firm in possession of the facility also maintain"control" of the facility?

Is the complaining firm a "competitor?"

Has the complaining firm been "denied access?"

Is access "essential" for the complaining firm to compete in therelevant market?

Dispositive PointsDoes the finii possess the power to raise price? Does the firmpossess the power to exclude competitors?

What is the nature of the "facility?" Is the "facility" a"structure?" Is the "facility a "tangible physical object?"

Is duplication of the facility "economically infeasible?" Woulddenial of access to the facility infiict a "severe handicap" on thewould-be competitor? Can the facility be "practicablyduplicated?" Would denial of access to the facility threaten the"economic existence" of the would-be competitor?

What is the nature of the refu.sing firm's control over Ihe facility?Is the facility owned by the firm? Does the firm have control vis-&-vis contractual rights? Does the firm have control by virtue ofltspower? What is the duration of the firm's control?

What is the nature of the relationship between the firms? Does thefirm that has been denied access compete at the same level as therefusing firm? Is the firm that has been denied access of the ' 'classof persons who [arej under a commercial compulsion to use theproduct?"

What is the nature of the access denial? Was the firm deniedaccess absolutely? Were less overt methods of access denialemployed (e.g., hard bargaining, price, etc.)? Was the firm deniedaccess unfairly and unreasonably? Was the firm denied access ina discriminate fashion?

Would provision of the "essential facility" be impractical?Would allowing access to the "essential facility" inhibit thefirm's ability to serve its customers?"

Concerted Refusals to Deal

BottlenecksThe essential facility doctrine is most often associated withthe Supreme Court's "bottleneck" decisions in UnitedStates V. Terminal Railroad [1912], Associated Press v.United States [1945] and Silver v. New York Stock Ex-change [1963]. "Bottleneck" entails the classic "essentialfacility" in which "one group alone has sufficient com-mand over some essential commodity or facility iti its indus-try" [Neale 1970, pp. 68-69].

Terminal Railroad involved a consortium of railroad com-panies that refused entry of a competitor to the sole St.Louis switching station. In condemning the association'sconduct, the Court stated, "the inherent conditions are suchas lo prohibit any other reasonable means of entering thecity, the combination of every such facility under the exclu-sive ownership and control of less than all of the companiesunder compulsion to use them violates" the Sherman Act[p. 409]. The Court further noted that access to an essentialfacility must be afforded "upon such just and reasonableterms and regulations as will, in respect of use, character,and cost of service, place every such company upon asnearly an equal plane as may be" [p. 411].

Associated Press v. United States [1945] involved an or-ganization of 1200 newspapers that prohibited its membersfrom selling news to nonmembers and excluded competi-tors from joining their association. Support for the essential

facility doctrine is provided through Justice Frankfurter'sconcurring opinion which compared the Associated Pressto a public utility—"a business infused with the public in-terest that was required lo serve all those desiring access."The Court also noted that the Associated Press bylawsserved "seriously to limit the opportunity of any new paperto enter," and thai its services "give many newspapers acompetitive advantage over their rivals" [pp. 13, 17].Though not directly characterizing the doctrine, the Court'srationale provides a substantive foundation for itsdevelopment.

Finally, in Silver v. New York Stock Exchange [1963],the Court condemned the Exchange's refusal to provide di-rect wire connections to two brokers who requested access.The court stated, "[a] valuable service germane to peti-tioner's business and important to their effective competi-tion with others was withheld from them by collective ac-tion" [p. 349, n. 5]. The Court appeared to be persuaded bythe presence of an important (i.e., essential) facility with-held from competitive rivals. Together, these cases providethe foundations on which a classic essential facility chal-lenge may be brought.

Group BoycottsAgreements among competing sellers (buyers) to refuse todeal with particular buyers (sellers), are known as "groupboycotts." Several Supreme Court decisions, beginningwith Eastern States Retail Lumber Dealers' Association v.United States [1914], suggest that group boycotts are a vio-

Journal of Public Policy & Marketing 161

Figure 2. Judicial Origins of Essential Facility Doctrine

Rcfbisals to Deal

Concerted Activii

Bottlenecks—Refusals to deal involving circumstancesin which firm.

Group Boyco!l.s—Refusals to deal involving agreementsamong competing sellers to refuse to deal withparticular buyers, or agreements among buyers to reftiseUi (ILMI wjih ccrt;iin sellers.

Resale Price Maintenance Agreements—Refusah todeal by a channel member in concert with another firmextending from a channel partner's noncompliance withresale price directives.

Unilateral Activity

Attempts at Monopolization—Refusals to deal by asingle firm motivated by exclusionary oranticompetitive purpose or effect.

masgawBii iiillTliilMllilllll'llllllftilBlffllWffinTIW

MH^BHNIHHHHHRHHHMHIUnilateral Foreclosure of a Scarce Resource—Refusalsto deal by a single fimi involving essential facilities thatcannot practicably be duplicated by would-becompetitors.

Arbitrary Refusals to Deal—Refusals to deal by asingle firm involving a noncompetilor.

Price Squeezes—Refusals to deal by a single firmthrough intentionally raising price to a level thatprohibits competitors or other rivals from reasonableaccess to supplies or needed good.s.

Vertical Integration—Refu.sals to deal stemming from asingle firm's attempt at integrating into the distributionof its own products ia a downstream market.

lation of the Sherman Act (Section 1) [see also FashionOriginators Guild of American, Inc. v. FTC 1941; NorthernPacific Railroad V. United States 1958; Times-Picayune Pub-lishing Co. v. United States 1953; United Stales v. Colum-bia Steel Co. 1948]. In 1959, group boycotts were formallyheld to be illegal per se in Klor's Inc. v, Broadway-HaleStores, Inc. [1959]. This case involved an agreement be-Iweeti one retailer and several manufacturet^ that preventedthe manufacturers from dealing with one of the retailer'scompetitors.

Recently, the Supreme Court has recanted its per se stand[Wholesale Stationers, Inc. v. Pacific Stationary and Print-ing Co. 1985]. The case involved a purchasing cooperativethat excluded a member for violating the cooperative's by-laws. The Court emphasized that "not every cooperative ac-tivity involving a restraint or exclusion will share ... the like-lihood of predominantly anticompetitive consequences" [p.294]. In distinguishing Wholesale Stationers from previousper se cases, the court held that [pp. 296-7]:

Unless the cooperative possesses market power or exclusive ac-cess to an element essential to effective competition, the conclu-sion that expulsion is virtually always likely lo have an anticom-petitive effect is not warranted.... Absent such a showing with re-

spect to a cooperative buying arrangement, courts should applya nile-of-reason analysis.

The ruling in Wholesale Stationers, in conjunction withlower court decisions,' indicates that a rule-of-reason anal-ysis will be employed for refusals to deal with competitorsinvolving concerted actions. For essential facility chal-lenges, these cases establish that concerted refusals to dealinvolving market power or exclusive access to an element es-sential to effective competition are illegal per se. However,in the absence of market power, or where the essentiality ofa "facility" is not established, other factors will be consid-ered in assessing the overall nature of the boycott conduct.

Resale Price Maintenance AgreementsRefusals to deal often extend from attempts at implement-ing or enforcing vertical restraints in market channel relation-ships. In particular, noncompliance with resale price direc-tives by an upstream channel member to a downstream part-ner may lead to the member's refusal to deal. Cases involv-ing resale price maintenance tend to hinge on whether con-certed activity is involved and therefore raise similar issuesas the essential facility doctrine.

162 The "Essential Facility*' Doctrine

Unilateral decisions to refuse to deal are consideredlegal. In United States v. Colgate & Co. [1919], Colgate'spractice of announcing a standard price policy and refusingto trade with anyone who did not follow the policy wasfound legal. In this case, the Court held that [p. 306]:

in the absence of any purpose to create or maintain a monopoly,the [Sherman] Act does not restrict the long recognized right oftrader or manufacturer engaged in an entirely private business,freely to exercise his own independent discretion as to partieswith whom he will deal.

In contrast, if the refusal to deal extends from an agree-ment that suggests "a conscious commitment to a commonscheme designed to achieve an unlawful objective" [p.364], a violation may be found. Consequently, concerted re-fusals to deal involving resale price maintenance agree-ments may fail witbin tbe rubric of the essential facility doc-trine (if access to a facility is denied).

Unilateral Refusals to DealIn contrast to joint conduct, unilateral refusals to deal in-volve an individual firm's refusal to engage in exchangewith a competitor or other rival. The principal origins of tbeessential facility doctrine underlying unilateral refusals todeal extend from cases involving (1) a single firm's foreclo-sure of a scarce resource (i.e.. true essential facilities), (2)an individual firm's attempt at monopolization, (3) arbi-trary refusals to deal involving a single firm and a noncom-petitor, (4) price squeezes tbat result in foreclosure of ascarce resource, and (5) downstream integration through re-fusals to deal. Eacb may provide a basis for an antitrust cbal-lenge under tbe doctrine.

Attempts at MonopolizationUnilateral refusals to deal may violate tbe Sberman Act (Sec-tion 2) on ihe basis tbat a firm's conduct was motivated byan intent to monopolize a particular market. In combinationwitb some "essential*' facility, an intent to monopolize amarket can provide the necessary elements for applicationof tbe essential facility doctrine.

In Eastman Kodak Co. v. Southern Photo Materials Co.[1927], acquisitions by Kodak were alleged to be an at-tempt at monopolization witbin tbe pbotographic suppliesmarket. Unable to complete tbe acquisition of SouthernPhoto, Kodak refused to sell supplies to Southern at otberprices than retail. Tbe Court held that Kodak's refusal todeal was part of a plan "in furtherance of a purpose to mo-nopolize" [p. 375] and in violation of the Sberman Act.Tbougb not directly addressing elements underlying an es-sential facility, tbe case provides a basis for finding illegalunilateral refusals to deal in furtberance of a monopoly.

In a subsequent case. Lorain Journal Co. v. UnitedStates [1951], a publisher refused to accept advertisingfrom any local business that advertised through a new radiostation. In analyzing tbe case, tbe Court appeared to iden-tify the Journal as an essential facility, concluding tbat it"was an indispensable media of advertising for many Lo-rain concerns" [p. 152]. Tbe Court then beld that "a singlenewspaper, already enjoying a substantial monopoly in itsarea, violates the 'attempt to monopolize' clause ... when ituses its monopoly to destroy threatened competition" [p.

154]. The importance of the case derives from identifica-tion of the Journal as an essential facility (i.e., "indispensa-ble media of advertising") within the context of an attemptat monopolization.

Furtber elaboration of "intent to monopolize" as a basisfor the essential facility doctrine is provided in UnitedSlates V. Griffith [1948] and Otter Tail Power Co. v. UnitedStates [1973]. In Griffith, the Court offered language thathas been equated to tbe essential facility doctrine, stating"tbe use of monopoly power... to foreclose compelition [inanother market], to gain a competitive advantage, or to de-stroy a competitor, is unlawful" Ip. 107|. In Otter Tail, sev-eral municipalities were found to have been illegally deniedaccess to electric power and/or access lines for servicingtbeir customers. Though not directly addressing tbe essen-tial nature of these "facilities," tbe Court did bold that at-tempts at monopolization involving what could be deemedan essential facility violate tbe Sherman Act.

Tbe most recent attempt-to-monopolize case witb whicbthe doctrine has been associated is Aspen Skiing Co. v.Aspen Highlands Skiing Corjforation [1985]. Aspen Skiing,owner of three of four ski areas, stopped offering a multi-mountain ticket witb Highlands. Tbe Court of Appeals up-held a jury verdict in favor of Highlands on the basis thatthe multi-mountain ticket was an "essential facility." TbeSupreme Court affirmed tbe decision, stating tbat if tbe juryfound that the defendant acted "with exclusionary or anti-competitive purpose or effect" then it could fmd for theplaintiff [Travers 1986].

Together, the cases dealing witb unilateral attempts at mo-nopolization provide support for the essential facility doc-trine. Though not focusing on the "essential" nature ofthose facilities at issue, the Court has tiiade it clear that afirm with monopoly power and monopolistic intent maynot act to exclude rivals.

Unilateral Foreclosure of a Scarce ResourceUnilateral foreclosure of a scarce resource to exclude rivalsprovides tbe elements of a "true" unilateral essential facil-ity dispute. Cases involving unilateral resource foreclosuresdiffer from tbe preceding monopolization cases in thatcourts have found antitrust violations without relying on tbeintent of the parties. For example, in Gameco, Inc. v. Provi-dence Fruit & Produce Building, Inc. [1952], tbe court,tbough applying "intent to monopolize" principles, was ex-pressly persuaded by tbe presence of an essential facilityand lack of justification for refusing access to a competitor.Tbe Court held tbat "it is incumbent on one witb the monop-olist's power to deny a substantial economic advantage ...to a competitor to come forward witb some business justifi-cation" [p. 489]. Similarly, in United States v. Otter TailCo. [1971], tbe lower court held tbat [p. 61]:

[A] unilateral refusal to deal with another, motivated by a pur-pose to preserve a monopoly is illegal... it is an illegal restraintof trade for a party to foreclose others from the use of a scarcefacility ... lt]he Sherman Act requires that where facilities can-not practically be duplicated by would-be competitors, those inpossession of them must allow them to be shared un fair terms.

Though not explicitly identifying tbe doctrine, the court's

Journal of Public Policy & Marketing 163

bolding closely parallels its articulation in not requiring an"intent" to monopolize.

Tbe first case to fonnatly state the essential facility doc-trine is Hecht v. Pro Football, Inc. [1977]. Tbe DistrictCourt stated [p. 992]:

The essential facility doctrine, also called the 'bottleneck prin-ciple' states that 'where facilities cannot practicably be dupli-cated by would-be competitors, those in possession of themmust allow them to be shared on fair terms. It is illegal restraintof trade to foreclose the scarce facility.'

Tbe case involved a potential franchisee of the AmericanFootball League's challenge of a covenant in tbe then-Washington Redskins' stadium lease, which prohibited itslease to any other professional football team. In formulatinga test, the Court of Appeals held that the covenant was an un-reasonable restraint of trade if (1) use of tbe stadium was es-sential to the operation of a professional football team inWashington, (2) the stadium could not practicably be dupli-cated, (3) anotber team could use tbe stadium without inter-fering witb tbe Redskins' use, and (4) access was in fact de-nied because the covenant prevented potential competitorsfrom sharing the stadium [p. 993]. Following Hecbt. thecourt in MCI Communications v. American Telephone andTelegraph Co. [1983] articulated a virtually identical test.^

Other courts have similarly applied the doctrine to unilat-eral refusals to deal and applied equivalent tests [see AspenSkiing Co. v. Aspen Highlands Skiing Corporation 1985;City of Mishawaka v. American Electric Power Co. 1981].In United States v. American Telephone and Telegraph Co.[1981], the doctrine is cited and referred to as an "applica-ble legal standard" that declares [p. 1352], "any companywhich controls an 'essential facility' or a 'strategic bottle-neck' in tbe market violates tbe antitrust laws if it fails tomake access to tbat facility available to its competitor onfair and reasonable terms that do not disadvantage them."In Fishman v. Estate of Wirtz [1986], the court applied tbedoctrine finding the Chicago Stadium to be an essential fa-cility and denial of access to it violated tbe Sherman Act.

Arbitrary Refusals to DealRefusals to deal involving a noncompetitor dxt termed "ar-bitrary" refusals to deal and also provide a basis for appli-cation of the essential facility doctrine. Arbitrary refusals todeal generally involve a nonintegrated monopolist refusingto deal in a downstream market in wbicb it does not com-pete. A leading case is Official Airline Guides, Inc. v. FTC[1980], in wbicb the FTC challenged the Official AirlineGuides' refusal to publish information on connectingflights ofcommuter airlines as violative of the FTC Act pro-hibiting unfair methods of competition [La Peyre v. FTC1966].''

Recently, tbe FTC has suggested the viability of the FTCAct as a basis for condemning essential facility related con-duct. In an unprecedented consent settlement in August1992, the FTC used tbe Act to order Vons Supermarketchain of California to sell one of its three acquired storeswithin a concentrated market. A key point in the case wasVon's earlier refusal to sell its store (i.e., an essential facil-ity) to a would-be competitor at a higber price than Vons re-

ceived from the drugstore company tbat purchased it [Da-vidson 1992].

Price SqueezesAn often employed tactic for refusing to deal involves"price squeezes," or intentionally raising price to probibitcompetitors or other rivals from reasonable access to sup-plies or needed goods. Tbough few cases specifically artic-ulate tbe elements of a price squeeze, tbe use of tbis tacticcan underlie an essential facility cballenge. In United StatesV. Corn Products Refining Co. [1916], for example. ComProducts was found to violate tbe Sherman Act for using amonopoly and price tactics on glucose and starch to driveout downstream competitors. Similarly, in United States v.Aluminum Co. of America (Alcoa) [1945], Alcoa possessedmonopoly power in primary aluminum. The court foundthat Alcoa had charged ingot and sheet prices which pre-vented independent fabricators from operating at a profit.Thougb otber factors were involved in both cases, each pro-vides tbe basis for application of the essential facility doc-trine when facilities are denied through other tban pure re-fusals to deal.

More recently, cases involving several airline carriersand their computerized airlitie reservation systems em-ployed illustrate the elusive nature of a price squeeze[Guerin-Calvert 1989]. Smaller airlines have long com-plained that tbe fees cbarged by larger airlines for use oftbeir reservation systems put them at a competitive disadvan-tage. In 1984, tbe Civil Aeronautics Board (CAB) issuedrules governing fees and practices associated with the re.ser-vatlon system, whicb were cballenged by tbe major airlinesin United Airlines el ai v. Civil Aeronautics Board [\9%5].Tbe CAB successfully argued tbe major airlines, tbroughtbeir pricing and other practices, effectively denied reason-able access by smaller airiines to tbe "essential" reserva-tion systems. However, in a later suit, Alaska Airlines et al.V. United Airlines [1991], a U.S. Circuit Court of Appealsruled that the practices of tbe airlines did not effectivelydeny access to tbeir "essential" reservation systems.

Vertical IntegrationRefusals to deal tbat stem from a firm's attempt at integrat-ing into tbe distribution of its own products can provide thebasis for an essential facility doctrine cballenge. For exam-ple, in Byars v. Bluff City News Co. [1979], new owners ofa business cbose to deal direct to all retailers and tenninateda previously employed independent distributor. The courtstated [p. 861]:

There are situations ... where a refusal to deal as part of a verti-cal integration scheme is anticomf>etitive. That is, (I) where in-tegration facilitates price discrimination so that the monopolistcan reap the maximum monopoly profit from different custom-ers; (2) where integration increases first-level entry barriers sothat potential competitors are stymied; and (3) where integra-tion facilitates evasion of regulation of monopoly profits. ... Insuch cases, a court should not hesitate to find a Section 2violation.

Articulating the same rule in the reverse context, tbecourt in Becker v. Egypt News Co. [1983] stated, "since ver-tical integration by monopolists can have procompetitive ef-fects, a refusal to deal to accomplish tbis integration, 'as

164 The "Essential Facility" Doctrine

sucb without more, cannot be beld violative of tbe ShermanAct'" [p. 366]. Otber cases have held sitnilar results [seeBelfore v. New York Times 1987; Paschall v. Kansas CityStar Co. 1984, which states (p. 181), "vertical integrationeven by a monopoly publisher 'does not, without more, of-fend Section 2"'J- These cases indicate that vertical integra-tion alone, even wben rivals are excluded, will not be foundunlawful. However, when additional circumstances are pre-sent, exclusionary integration (vertical) may violate the an-titrust laws and provide a basis for application of the essen-tial facility doctrine.

Elements of InquiryTbougb the essential facility doctrine bas not been formallycharacterized by tbe Supreme Court, lower court articula-tion of tbe necessary elements underiying an essential facil-ity challenge in several cases provides a generalized prescrip-tion of tbe doctrine. Tbese judicial decisions may be distin-guisbed for tbeir application of tbe doctrine across differingcircumstances. Studying tbem enables identification of keylimitations and aspects of the doctrine. Table I provides alisting of questions or elements considered key points of in-quiry by the courts when applying the doctrine followingthe test in MCI Communications v. American Telephoneand Telegraph Co. [1983]. Eacb is analyzed as it relates tojudicial standards of application for the doctrine.

Is the Firm in Possession of the Alleged EssentialFacility a "Monopolist"?According to traditional antitrust analysis, "the material con-sideration in determining whether a monopoly exists is[whether] power exists to raise price or to exclude competi-tion" [American Tobacco Co. v. United States 1946, p.811]. Applying this standard, a monopolist need not be oftbe pure form. The mere existence of the ability to raiseprice or exclude competition witbin a defined market is allthat may be required.^

Analysis to date of tbe cases tbat apply the essential facil-ity doctrine suggests tbat tbe doctrine was intended to em-brace only pure monopolies witbin a defmed market. Themajority of cases applying tbe doctrine involve pure monop-olies, and it is difficult to reason tbeir opinions under circum-stances involving other than monopolies of a pure form.For example, in Hecht v. Pro Football. Inc. [1977], thecourt probably would not bave found a restrictive covenantin tbe stadium lease to be a per se violation had a pure mo-nopoly not been involved. The presence of a monopoly con-tributed persuasively to the essentiality of the facility. Also,in Gameco, Inc. v. Providence Fruit & Produce Building,Inc. [1952], it is unlikely tbat a violation would bave beenfound if a competitor bad been denied entry within the con-text of a nonmonopoly. As such, it remains unclear as towbich "monopoly" standard is controlling. The lack of clar-ity also highlights tbe importance of market definition intbis determination. A narrow standard is likely to result inmore "pure" monopolies being found. In contrast, a morebroadened market defmition would result in the determina-tion of fewer "purer" monopolies and potentially constrainapplication of the doctrine.

What Is the Nature of the "Facility"?Tbe definition of what constitutes a "facility" under the doc-trine is not specifically addressed by the courts. Presuma-bly, bowever, the use of tbe term "facility" was not acciden-tal. At least one commentator bas suggested tbat "facility"applies only to a broadly defined "structure" [Werden1987]. Authority for tbis position is not strong, but cursoryreview of the cases that mention tbe doctrine involve struc-tures (defmed broadly).

At least one court has questioned application of tbe doc-trine to anything but "tangible physical objects" [NorthAmerican Soccer League v. National Football League1979, p. 676, n. 20]. Anotber court refused to apply tbe doc-trine to the denial of hospital privileges involving moretban mere access to a hospital building [Pontius v. Chil-dren's Hospital 1982]. Characterizing tbe refusal to licensetechnology as a facility has been questioned by tbe FTC inE.I. du Pont de Nemours & Co [1980]. Cited in the samecase, the FTC notes that a monopolist is under no obliga-tion to disclose new product developments or design itsproduct so as to facilitate competition [Berkey Photo, Inc. v.Eastman Kodak Co. 1979]. Patents bave also been foundnot to be facilities within the meaning of tbe doctrine [seeSperry Rand Corp. v. Nassau Research and Development As-sociations 1957; United States v. L.D. Caulk Company1954].

In contrast, some courts have intimated tbat restricting"facilities" to denote "structures" may be too limiting. InAspen Skiing Co. v. Aspen Highlands Skiing Corp. [19851,an often cited case in support of the doctrine, the "facility"involved a ticket to tbree ski mountains constituting one es-sential facility. Tbougb the Supreme Court declined toadopt tbe essential facility doctrine for its disposition of tbecase, the decision stands as one in wbich the doctrine hasnot been restricted to "structures." Anotber case is Direc-tory Sales Management Corporation v. Ohio Bell Tele-phone Company [ 1987], which involved Obio Bell's provi-sion of the yellow pages. Tbougb the court found the ser-vices were not essential, it did not comment on whether theservices constituted a "facility." Finally, in United StatesFootball League (USFL) v. National Football League(NFL) [1986], tbe USFL claimed tbat they had been un-fairly denied access to one of the three major television net-works. The USFL cbarged that the NFL used its monopolypower to coerce tbe networks into denying il access to tbetelevision media. Tbe court focused on the television mediaas a "facility." Tbougb tbe jury found USFL's cbargestrue, because it was unable to detertnine whether lossesclaimed by tbe USFL were caused by illegal activities or le-gally competitive acts, it awarded tbe USFL only one dollarin damages (trebled).

Is the Facility Essential for Competition in theRelevant IMarket?Judicial standards for assessment of the "essential" natureof a facility are stated in Hecht v. Pro Football, Inc. [ 1977,p. 992]:

To be 'essential' a facility need not be indispensahle; it is suffi-cient if the duplication of the facility would be economically in-

Journal of Public Policy & Marketing 165

feasible and if denial of its use inflicts a severe handicap on po-tential market entrants.

In MCf Communications v. American Telephone & Tele-graph Co. [1983], the court simply stated facilities are essen-tial if they "cannot be practicably duplicated" Ip. 1132]. To-gether, these cases suggest that to find a violation, courts re-quire that denial of access serves to exclude the would-becompetitor from a particular market in whicb tbe competi-tor attempts to compete.

Thougb this standard seetns obvious, at least one commen-tator proposes a substantially different test—that tbe doc-trine should be invoked only if denial of access threatens"the economic existence" of the would-be competitor[Troy 1983], Focus on tbe existence versus competitive abil-ities of the would-be competitor shifts antitrust emphasisfrom competition to competitive survival.

Does the Firm in Possession of the Facility alsolVlainiain "Control" of the Facility?That ownership of a facility constitutes one form of controlis clear from analysis of cases applying tbe doctrine [e.g.,Hecht V. Pro Football 1977]. Control, bowever, may alsobe obtained tbrougb contractual rights or by virtue of powerand dependence. In MCI Communications v. American Tele-phone & Telegraph Co. [1983] and other decisions, tbecourts suggest application of the doctrine extends also tocontractual integration. However, tbe degree of contractualintegration necessary for tbe doctrine to apply is not clear.

Extending the doctrine to those instances in which a firmwas simply offered (albeit through contract) use of an essen-tial facility on an exclusive or sbort-term basis raises a vari-ety of issues. Such application suggests that a firm offereduse of an essential facility may risk antitrust liability. Moreo-ver, an owner of an essential facility may find it more prof-itable to exercise its monopoly power downstream througban exclusive contract [Werden 1987].

Is the Complaining Firm a Competitor?At the extreme, some courts bave limited tbe essential facil-ity doctrine only to "true" competitors. These cases pre-clude a noncompetitor (e.g., a customer in an adjacent tnar-ket) from use of the doctrine. Other courts bave Iitnited thedoctrine to cases in which "the monopolist competes at an-other level witb Ibose foreclosed from access, and ... thoseforeclosed are tbereby excluded from tbe market in whicbthey would compete with the monopolist" [Dart Drug Cor-poration V. Corning Glass Works 1979, pp. 1097-98, n.9;Fulton V. Hecht 1978, pp. 1247-8; Shapiro v. General Mo-tors Corporation 1979, p. 644]. Still otber decisions have ex-tended the essential facility doctrine analysis to that "classof persons who were under a commercial compulsion touse the product [of the facility]" [General Motors (CrashParts) V. FTC 1982, paragraph 22,330; cf. Official AirlineGuides, Inc. v. FTC 1980]. For example, in Official Airline,the commuter airline omitted from the guide did not com-pete with the publisber of tbe reference book (i.e., defen-dant). Nevertbeless, the FTC found tbat tbe commuter air-lines' absence from the guide placed them at a substantialcompetitive disadvantage relative to large air carriers in-cluded in tbe guide.

Application of the doctrine for otber tban competitorsmight imply that tbe courts are attempting to protect "com-petitors" rather than competition or conversely that the es-sential facility is so intimately associated witb competitorsas to inhibit competition.

Has the Complaining Firm Been '^DeniedAccess"?The question of what constitutes denial of access to an es-sential facility is straightforward in those instances involv-ing absolute refusals to deal. However, less overt methodsof access denial are possible and raise implications for ap-plication of tbe doctrine. For example, hard bargaining andless-than-reasonable terms (e.g., price, delivery, etc.) maybe construed as a refusal to deal.

Most cases applying the doctrine have involved absolutedenial [see Blumentbal 1990], so the courts have bad few oc-casions to consider less overt metbods. Dicta in many oftbe cases imply tbat essential facilities tnust be made avail-able on a "fair and reasonable" basis [Town of Massena v.Niagara Mohawk Power Corporation 1980, paragraph76,812, n. 41; United States v. American Telephone & Tel-egraph Co. 1981, p. 1353] or "nondiscriminatory" terms[MCI Communications v. American Telephone & Tele-graph Co. 1983]. In Fishman v. Estate ofWirtz. [1986],thougb Wirtz did offer to make tbe stadium available to Fisb-man, the terms of the offer were found by the court to be un-reasonable [pp. 527, 540-41]. In Consolidated Gas Co. ofFlorida v. City Gas of Florida [1987], City Gas would onlypermit access to its pipeline at what was detennined to bean unreasonably bigb price "tantamount to a refusal todeal" [paragraph 58,927]. Sitnilarly, in the airline reserva-tion cases [e.g., Alaska Airlines et al. v. United Airlines1991; United Airlines et al. v. Civil Aeronautics Board1985], high prices and other practices were found to effec-tively deny access to tbe reservation systems.

Perbaps the best guidance as to wben terms of access areunreasonable is provided in United States v. American Tele-phone & Telegraph [1981], in which the court ruled that [p.1353]:

access must be offered 'upon such just and reasonable termsand regulations as will, in respect of use, character and cost ofservice, place every company upon a nearly as equal a plane asmay be.'

However, in a civil suit involving the same parties, tbecourt ruled tbat "Absolute equality of access to essential fa-cilities ... is not mandated by the antitrust laws." Conse-quently, it remains uncertain as to when terms of accessmay be construed as denying access to an essential facility.

Is Access "Essential" for the Complaining Firm toCompete in the Relevant Market?According to tbe court in Hecht v. Pro Football, Inc.[1977], "tbe antitrust laws do not require tbat an essetuial fa-cility be shared if sucb sharing would be impractical orwould inhibit the defendant's ability to serve its customersadequately" [pp. 992-3]. Tbis dictum suggests some de-gree of exclusion of a rival may be allowed in order not toimpair the competitive advantage of a firm in possession ofan essential facility. At least one commentator bas sug-

166 The "Essential Facility'* Doctrine

gested that this qualification of the doctrine implies a monop-olist may give preference to itself and make only excess ca-pacity available to competitors [Werden 1987]. Citing thelanguage in Southern Pacific Communications Co. v. Amer-ican Telephone and Telegraph Co. [1984], this author con-tends that [p. 457]:

[Tlie] restriction presupposes that the essential facility doctrinedoes not impose a common carrier obligation with its concomi-tant requiremenl of prorationing when operating at full capac-ity. The freedom not to prorate, in fact, may be what is meantby the dictum that 'absolute equality of access ... is notmandated.'

Marketing and Public PolicyImplicationsFor marketers, emergence of the essential facility doctrineand its increasing application provides a variety of implica-tions. Perhaps most notable is the doctrine's apparent con-trast to accepted notions of competitive conduct. Though abasie tenet underlying much of marketing theory and prac-tice is the concept of competitive advantage, interpretationand application of the doctrine challenges this learning. De-fined as the distinctive competence obtained through spe-eial or unique capabilities of an organization, tbe concept ofcompetitive advantage underlies mueh of marketing [Kerin,Mahajan, and Varadarajan 19901. In an attempt to articulatethis concept. Day and Wensley [19881 identify two sourcesof competitive advantage—skills and resources. Superiorityacross these sources provides the firm with an advantageover its rivals. Superior skills arise from the ability to per-form certain functions more effectively than competitors.These skills (e.g., engineering, technical, marketing, etc.) en-able a firm to produce better products than its competitors.Superior resources, in turn, are tangible requirements thatprovide a firm with the ability to develop advantages overtheir competitors. These resources include plant and equip-ment, distribution systems, production facilities, and uniquesourcing of raw materials. Though each of these resourcesmay provide a firm with distinctive competencies and a com-petitive advantage, they may also furnish the underlyingbasis for an essential facility challenge.

This dilemma is not without consequence. Of immediateconcern is the potential of a firm "competing" itself intoan antitrust challenge. That is, successfully creating a distinc-tive resource-based competence that is then challenged by arival as an essential facility. It is not difficult to envision aprospective market entrant employing this strategy to gainaccess to a new market or product arena. Rivals might alsoattempt to "free ride" on current competitors in this fash-ion. By allowing other competitors to develop key products/systems or "facilities" and then challenging them as essen-tial facilities, these firms could gain access to critical re-sources without the burden of development costs, etc. Cur-rent rivals might even consider this scenario as a predatorystrategy to gain an advantage through increasing the firm'scost vis-i-vis defending such an antitrust challenge. Themere process of an antitrust suit can be costly in terms ofboth financial and managerial resources.

The prospect of these outcomes is compounded by the in-creasing emergence of .strategic alliances, strategic partner-ing, single-sourcing, and other exchange arrangements thatemphasize long-tenn relationships and closely coordinatedworking associations. Competitors, excluded from such ar-rangements, could argue that these relationships deny themaccess to essential facilities. Consequently, a direct implica-tion of the doctrine's emergence in the context of changingpatterns of exchange, currently the focus of much interest inmarketing, is the prospect of greater risk incurred to these ex-change participants.

An indirect implication extending from increasing use ofthe doctrine is the prospect that the risk associated with a po-tential essential facility challenge may deler antl/or reduce in-centives for development and maintenance of new prod-ucts, technology, etc. Firms involved in these activitiesmight foresee the possibility of an essential facility chal-lenge as precluding the benefits from investment in these ac-tivities. The potential risks of expending considerable re-sources in the development of new products or technologiesand then having to share these with rivals is illustrated inthe previously cited case involving Microsoft's computer op-erating system. Though charges that Microsoft was attempt-ing to take advantage of its ownership of the essential oper-ating system are pending, it is difficult to distinguish theiractions from simply strong competition.

Concerns underlying some essential facility challenges ob-viously have merit. As many of the "intent" cases citedhere attest, a refusal to provide access to a critical "facil-ity" to purposely injure a competitor is not difficult to en-vision. Firms pressed to compete on narrower and narrowergrounds may in fact find the strategy an option. It also isnot difficult to envision firms teaming together in concert toachieve such anticompetitive ends. The doctrine's increas-ing use suggests organizations facing this form of anticom-petitive conduct may have a useful tool for its deterrenceand redress in the fonn of the essential facility doctrine.

Alternatively, application of the doctrine in those circum-stances involving the absence of anticompetitive intent ormeans (i.e., "true" essential facilities) seems tnjiy at oddswith marketing's concept of competitive advantage and faircompetition. Forcing a competitor monoptilist to provide ac-cess to critical resources obtained through proper competi-tive conduct is difficult to square with traditional notions ofcompetition. Prudent application of the doctrine under thesecircumstances requires analysis of the overall impact that de-nial of access to an essential facility has on consumer wel-fare. When welfare is substantially enhanced (e.g., competi-tion improved, prices reduced), imposing a duty to share anessential facility may be justifiable. Such enhancement is un-likely, however, when imposing a duty to deal would in-hibit other socially desirable activity (i.e., product develop-ment, etc.), the possessor of the facility is not an actual or po-tential competitor, the firm's merely substitute for one an-other, or the monopolist already is charging a monopolistprice [Areeda 1990],

Even when these conditions are satisfied and consumerwelfare would benefit through granting access to an essen-tial facility, basic fairness suggests that a duty to deal be im-posed only where it is critical to the competitive vitality

Journal of Public Policy & Marketing 167

(i.e., the competitor cannot compete without it and practicalalternatives are not available) of the would-be competitor.In addition, the firm in possession of the essential facilityshould be allowed to proffer some legitimate business pur-pose for its denial, which the challenger must prove is un-justified. In this regard, the recent case of Image TechnicalService, Inc. v. Eastman Kodak Co. [1990] suggests reasonsproffered must be "genuine" and not "pretextual." In thiscase and on being granted Certiorari (i.e., review) by the Su-preme Court [Eastman Kodak Company v. Image TechnicalService, Inc. 1992], the Courts questioned the validity ofKodak's business justifications for an equipment-servicetying arrangement that excluded other service suppliers. Cha-racterizing the arrangement as that of an essential facility,the Court of Appeals and subsequently the Supreme Courtfound, in denying Summary Judgment, that Kodak's mo-tives of quality maintenance, controlling inventory costs,and "free rider" considerations were not justifiable.

Future policy development in the area of essential facili-ties requires that these considerations be recognized and in-corporated within the current elements of inquiry. Addition-ally, development of the doctrine requires recognition of dif-fering modes of competition (e.g., cooperation) now com-monplace in many industries. Cooperative forms of compe-tition, including strategic alliances and long-term partner-ships, represent complicating factors to the current inquiryschema. In particular, assessment of questions relating tothe level of control, nature of a competitor, and extent of ac-cess denied (see Table 1) are affected by these emergent mar-ket forms. The evolution of technology and its impact onhow firms compete must be considered as well. New tech-nologies (e.g.. information networks) and the rate of techno-logical change bear implications for the questions to beasked within an essential facility inquiry.

Further development of the doctrine also depends on itsability to identify circumstances in which denial of accessto an essential facility undermines consumer welfare. Inthis vein, researchers exploring aspects of the doctrinecould provide information useful for its development. Mar-keting's understanding of the elements and dimensions of"products" (i.e., "resources" that might be the target of anessential facility challenge) could be usefully employed formore fully delineating what constitutes a "facility." At themargin, this issue remains to be clarified in the courts. Im-portant influences complicating this prospect include con-flicting principles underlying patent and copyright laws andassociated ' 'confiict of laws'' issues. For example, a key el-ement to any essential facility case inquiry is characteriza-tion of the offending facility holder to possess "monop-olistic" powers. Current antitrust doctrine emphasizes mar-ket definition as substantive in this determination. Market-ing's extensive knowledge of market definition, segmenta-tion, and strategy could inform policy makers and thecourts in this respect. Indeed, work by Dunfee, Stem, andSturdivant [1984] may be directly applicable in this context[see also Day, Massy, and Shocker 1978; Milne 1992].

Further understanding of what constitutes an "essential"facility is also required. Current standards depend on the gen-eral economic criteria of "indispensabiiity" and "feasibil-

ity of duplication." The nature of these elements require fur-ther elahoration and understanding. Research into the essen-tiality of resources possessed by one firm and desired by an-other would benefit development of the doctrine. Studies ofbuyers' decision-making, and especially of what it mighttake to persuade buyers to break away from their loyalty toa disputed facility, could be very relevant.

Another example of research involves further characteri-zation of the nature of "control" over a facility required be-fore it is considered under the dominion of a particular mo-nopolist firm. Control may be achieved through a variety ofmechanisms beyond ownership, including contractual inte-gration, power, dependence, etc. Research into the differingnature of these mechanisms and their implications for thedoctrine is needed.

Further insight into what constitutes denial of access toan essential facility is also required. Research involving iden-tification of strategies employing less overt methods of ac-cess denial than absolute refusals to deal would benefit thedoctrine's development. Conduct, such as less than meticu-lous bargaining, unreasonable price and trade terms, andother conduct may be employed to deny access to an essen-tial resource. Research examining the nature of this form ofdenial is needed.

ConclusionUnder the essential facility doctrine a firm's refusal to pro-vide another finn access to some resource considered "es-sential" for competition in a particular market is unlawful.The nature and increasing application of the doctrine cou-pled with the doctrine's apparent contrast with accepted no-tions of competition and competitive advantage suggests itsimportance to marketers and others. Analysis provided hereis intended to aid these individuals as they attempt to under-stand the legal nature and implications of this doctrine.

Notes1. Day and Wensley [1988] reference two sources of competitive

(strategic) advantage—skills and resources [cf. Kerin, Ma-hajan, and Varadarajan 1990]. In a strict sense, we refer to ad-vantages emanating from "resources." Application of the doc-trine to nonresources (i.e., skills) has yet to be endorsed by thecourts Isee discussion, intra. "What Is the Nature of theFacility?"].

2. Though disagreement exists as to the specific cases, the doc-trine's origin is most commonly associated with a series ofcases beginning with United Stales v. Terminal Railroad Asso-ciation [1912], Associated Press v. United States 11945], andGameco. Inc. v. Providence Fruit & Produce Building, Inc.[1952]. Neale's synthesis in 1970 provided the first scholarly ar-ticulation of the doctrine. The first case to formally state the doc-trine was the district court case Hecht v. Pro Football. Inc.[1977].

3. Section 1 provides:

Every contract, combination in the forms of trust or other-wise, or conspiracy in restraint of trade or commerce amongthe several States, or with foreign nations, is hereby declaredto be illegal.

168 The "Essential Facility*' Doctrine

Section 2 of the Sherman Act provides;

Every person who shall monopolize, or attempt to monopo-lize, or combined or con.spire with any other person or per-sons, to monopolize any part of the trade or commerceamong the several States, or with foreign nations, shall bedeemed guilty of a felony.

4. The search was conducted on November 10, 1992 employingthe key term "Essential Facility" and its derivatives.

5. The Court's use of a rule-of-reason analysis is consistent withlower court decisions that have employed a similar approach[See, e.g.. Allied International. Inc. v. International Longshore-men's Association. AFL-CIO 1981; Eliason Corporation v. Na-tional Sanitation Foundation 1980; Kreuzer v. American Acad-emy of Periodontology 1984; M & H Tire Co. v. Hoosier Rac-ing Tire Corporation 1984],

6. In this case AT&T refused to interconnect MCI with the distri-bution facilities for AT&T's local operating companies. Thecourt concluded that AT&T's conduct was governed by the es-sential facility doctrine and provided a four-element test for itsapplication: (I) control of the essential facility by a monopo-list, (2) a competitor's inability practicably or reasonably to du-plicate the essential facility, (3) the denial of the use of the fa-cility to a competitor; and (4) the feasibility of providing the fa-cility Ipp. 1132-3].

7. Though reversed on appeal, the FTC has steadfastly maintainedthat arbitrary refusals to deal violate the antitrust laws Lsee Gen-eral Motors Corporation v. FTC 1982, slating that "until andunless it is repudiated by the Supreme Court we hold to our in-terpretation of the case law on arbitrary refusals to deal by mo-nopolists," p. 580, n. 45].

8. This particular point is important in the context that we con-trast the essential facility doctrine with the basic tenets of com-petitive advantage. In the event that a "strict" monopoly (i.e.,single firm within a relevant market) were required, such a stan-dard would limit the doctrine's contrast to competitive advan-tage to those circumstances of market entry.

ReferencesAlaska Airlines et al. v. United Airlines (1991), CA 9. No. 980-

55162,90-55163, 10/29/91.

Allied Intemational, Inc. v. International Longshoremen's Associ-ation. AFL-CIO (1981), 640 F. 2d 1368.

Amerian Federation of Tobacco Growers v. Neat (1950), 183 F.2d 869.

American Tobacco Co. v. United States (1946), 328 U.S. 781.

Areeda, Phillip (1990). "Essential Facilities: An Epithet in Needof Limiting Principles," Antitrust Law Journal, 58, 841-53.

Aspen Skiing Co. v. Aspen Highlands Skiing Corp (1985), 472U.S. 585.

Associated Press v. United States (1945) 326 U.S. 1.

Becker v. Egypt News Co. (1983), 713 F. 2d 363.

Betfore v. New York Times (1987), 826 F. 2d 177. cert, denied(1988).

Berkey Photo. Inc. v. Eastman Kodak Co. (1979), 603 F. 2d 263.

Bloom, Paul N., George R. Milne, and Rohert Adler (1994),"Avoiding Misuse of New Information Technologies: Legaland Societal Considerations," Journal of Marketing,forthcoming.

Blumenthal, William (1990), "Three Vexing Issues Under the Es-sential Facilities Doctrine: ATM Networks as Illustration," An-titrust Law Journal, 58, 855-69.

Boudin, Michael (1986). "Antitrust Doctrine and the Sway of Met-aphor." The Georgetown IMW Journal, 75, 395-422.

Byars v. Bluff City News Co. (1979), 609 F. 2d 843.

City of Mishawaka v. American Electric Power Co. (1981), 616 F.2d 976, cert, denied, 449 U.S. 1096 (1981).

Consolidated Gas Co. of Florida v. City Gas of Florida (1987),1987-2 Trade Cases CCH, paragraph 67,741.

Dart Drug Corporation v. Coming Glass Works (1979), 480 F.Supp. 109L

Davidson, Joe (1992), "FTC Broadens Antitrust Use Of an OldLaw," Wall Street Journal, September 30, Bl.

Day, George S., William F. Massy, and Allan D. ShcKker (1978),"The Public Policy Context of the Relevant Market Question,"in Marketing titul the Public Interest, John F. Cady, ed. Cambr-idge: Marketing Science Institute. Report No. 78-105, 51-67.

and Rohin Wensley (1988). "Assessing Advantage: A Frame-work for Diagnosing Competitive Superiority," Journal of Mar-keting, 52 (April), 1-20.

Directory Sales Management Corporation v. Ohio Bell TelephoneCo. (1987), 833 F. 2d 706.

Dunfee, Thomas W., Louis W. Stem and Frederick D. Sturdivant(1984), "Bounding Markets in Merger Cases: Identifying Rele-vant Markets," Northwestern University Law Review, 78 (4),733-73.

Eastern States Retail Lumber Dealers' Association v. UnitedStates (1914), 234 U.S. mo.

Eastman Kodak Co. v. Image Technical Service. Inc. (1992), 112S.Ct. 2072.

Eastman Kodak Co. v. Southern Photo Materials Co. (1927), 273U.S. 359.

E.I. du Pont de Nemours & Co. (1980), 96 F.TC. 650.

Eliason Corporation v. National Sanitation Foundation (1980),614 F. 2d 126, cert, denied. 449 U.S. 826.

Epstein, Richard A. (1988), "The Public Trust Doctrine," in Pub-lic Choice and Constitutional Economics. James D. Gwartneyand Richard E. Wagner, eds. Greenwich, CT: JAI Press.

Eashion Originators' Guild of American, Inc. v. FTC (1941), 312U.S. 457.

Federal Trade Commission v. I du Pont de Nemours & Co (1980),96 F.TC. 653.

Fishman v. Estate of Wirtz (1986), 807 F. 2d 520.

Fulton V. Hecht il97S), 580 F. 2d 1243, cert, denied, 440 U.S. 981(1979).

Gameco. Inc. v. Providence Fruit & Produce Building, Inc.(1952), 194 F. 2d 484. ceri. denied 344 U.S. 817.

General Motors Corporation v, FTC (1982), 99 F.TC. 464.

General Motors (Crash Paris) v. FTC (1982), 3 Trade Reg. Re-porter (CCH), paragraph 21,931.

Gerber, David G. (1988), "Rethinking the Monopolist's Duty toDeal: A Legal and Economic Critique of the Doctrine of 'Essen-tial Facilities."' Virginia Law Review, 74, 1069-113.

Gorinson. Stanley M. (1990). "Overview: Essential Facilities andRegulation," Antitrust Law Journal, 58, 871-86.

Journal of Public Policy & Marketing 169

Guerin-Calvert, Margaret E. (1989), "Vertical Integration as aThreat to Competition: Airline Computer Reservation Sys-tems." in The Antitrust Revolution, John E. Kwoka and Law-rence J. White, eds. Glenview, IL: Scott, Foresman & Co., 338-70.

Hecht V. Pro Football, Inc. (1977), 570 F. 2d 982, cert, denied,436 U.S. 956(1978).

Hylton, Keith N. (1991), "Economic Rents and Essential Facili-ties," Brigham Young University Law Review, 2, 1243-84.

Image Technical Service, Inc. v. Eastman Kodak Co. (1990), 903F. 2d 6!2.

Kerin, Roger A.. Vijay Mahajan and P. Rajan Varadarajan (1990),Contemporary Perspectives on Strategic Market Planning.Needham Heights, MA: Allyn and Bacon.

Klor's Inc. v. Broadway-Hale Stores. Inc. (1959). 359 U.S. 207.

Kreuzer v. American Academy of Periodontology (1984), 735 F.2d 1479.

La Peyre v. FTC (1966), 366 F. 2d 117.

Lorain Journal Co. v. United States (1951), 342 U.S. 143.

M & H Tire Co. v. Hoosier Racing Tire Corporation (1984), 733F. 2d 973.

MCI Communications Corp. v. American Telephone & TelegraphCo. (1983), 708 F. 2d 1081, cert, denied, 464 U.S. 891 (1983).

Milne, George R. (1992), "A Marketing Approach for MeasuringProduct Market Differentiation and Concentration in AntitrustCases," Joumal of Public Policy & Marketing, II (Fall), 90-100.

Neale, A. (1970), Tlie Antitrust Laws of the U.S.A.: A Study of Com-petition Enforced by Law. Cambridge: Cambridge UniversityPress.

North American Soccer League v. National Football League(1979), 465 F. Supp. 665.

Northem Pacific Railroad v. United States (1958), 356 U.S. I.

Official Airline Guides, Inc. v. FTC (1980), 630 F. 2d 920, cert, de-nied, 450 U.S. 917 (1981).

Otter Tail Power Co. v. United States (1973). 410 U.S. 366.

Owen, Bruce M. (1990), "Determining Optimal Access to Regu-lated Essential Facilities," Antitrust Law Joumal, 58, 887-94.

Paschall v. Kansas City Star Co. (1984), 727 F. 2d 692. cert, de-nied, 469 U.S. 872 (1984).

Piraino. Thomas, Jr. (1991), "Beyond Per Se, Rule of Reason orMerger Analysis: A New Antitrust Standard for Joint Ven-tures." Minnesota Law Review, 76, 1-71.

Pontius V. Children's Hospital (1982), 552 F. Supp. 1352.

Ratner, James R. (1988), "Should There Be an Essential FacilityDoctrine?" University of California, Davis Law Review, 21,327-82.

Rebello, Kathy, Mark Lewyn, and Evan L Schwartz (1992), "DidMicrosoft Shut the Windows on Competitors?" Business Week(September 28), 32-33.

Reiffen, David and Andrew N. Kleit (1990), "Tferminal RailroadRevisited: Foreclosure of an Essential Facility or Simple Hori-zontal Monopoly," Journal of Law and Economics, 33, 419-625.

Shapiro v. General Motors Corporation (1979), 472 F. Supp. 636,644, cert, denied, 451 U.S. 909 (1981).

Silver v. New York Stock Exchange (1963), 373 U.S. 341.

Southern Pacific Communications Co. v. American Telephone andTelegraph Co. (1984), 740 F. 2d 980.

Sperry Rand Corp. v. Nassau Research and Development Associa-tions, Inc. (1957), 152 F. Supp. 91.

Sullivan, Lawrence (1977), Handbook of the Law of Antitrust. St.Paul, MN: West.

Times-Picayune Publishing Co. v. United States (1953). 345 U.S.594.

Town of Massena v. Niagara Mohawk Power Corporation (1980),1980-2 Trade Case CCH paragraph 63,526.

Travers, Arthur H. (1986), "Does a Monopolist Have a Duty toDeal With Its Rivals? Some Thoughts on the Aspen SkiingCase," University of Colorado Law Review, 57, 727-46.

Troy, Daniel E. (1983), "Unclogging the Bottleneck: A New Es-sential Facility Doctrine," Columbia Law Review, 83, 441-87.

United Airlines et al. v. Civil Aeronautics Board (\9%5), 776 F. 2d1107, petition denied.

United States v. American Telephone & Telegraph Co. (1981),524 F. Supp. 1336.

United States v. Aluminum Co. of America (1945), 148 F. 2d 416.

United States v. Colgate A Co. (1919), 250 U.S. 300.

United States v. Columbia Steel Co. (1948), 334 U.S. 495.

United States v. Com Products Refining Co. (1916), 234 F. 2d.964.

United Slates v. Griffith (1948), 334 U.S. 100.

United States v. Grinnell Corporation (1966), 384 U.S. 563.

United States v. LD. Caulk Company (1954). 126 F. Supp. 693.

United States v. Otter Tail Co. (1971). 1971 WL 584 (D. Minn.)

United States v. Terminal Railroad (1912), 224 U.S. 383.

United States Eoothall League v. National Football League(1986), 634 F. Supp. 1155.

Werden, Gregory J. (1987), "The Law and Economics of the Es-sential Facility Doctrine," Saint Louis University Law Joumal,32, 433-80.

Wholesale Stationers, Inc. v. Pacific Stationary and Printing Co.(1985), 472 U.S. 284.