Essential facilities are inputs (goods or services) offered exclusively by a monopolist, or by a very small number of vendors. That is, it is difficult or impossible to find a lower-priced substitute product.
In other words, these essential facilities are materials, services, or even facilities that companies must hire for their production process. Thus, you have one or a few alternatives.
It should be noted that essential facilities are key inputs in production. That is, they are basic raw materials to get the merchandise.
Without access to these facilities, companies cannot compete because there are no appropriate substitutes and it is not feasible for them to build the essential facility on their own.
Characteristics of essential facilities
Among the characteristics of the essential facilities are:
- They are critical or essential inputs to manufacture the products that are sold to the end customer.
- They are completely controlled by a monopolist or a very small group of companies (oligopoly).
- It is not feasible to replicate the essential facility either because of its high cost or because technical issues prevent it.
Example of essential facility
An example of essential facility is the power distribution network that reaches the homes of final consumers. Without access to this network, electricity producers cannot sell their product and neither have the possibility to build another distribution network because the investment required is too expensive. Also, it is inefficient to have two parallel networks.
Another example of essential ease in the field of telecommunications is access to the network of the dominant company (with greater market share and / or with greater seniority). Without access to these networks, telephone companies and Internert cannot offer their service. In turn, they cannot build an alternative network.
Concerns about essential facilities
When a company controls an essential facility while competing at the retail or retail level, it may have the incentive to limit access to new companies. Then you can apply unfair practices such as imposing a fee well below the cost of production.
This is known as a predatory pricing strategy. Its objective is to discourage new companies from entering the market.
In these cases, access to the essential facility becomes a matter of public interest. In this way, the government imposes obligations on the owners of essential facilities to grant access under reasonable conditions and prices.