The 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 substitute product of lower price.
That is, these essential facilities are materials, services, or even facilities, which companies must hire for their production process. Thus, it has one or few alternatives.
It should be noted that essential facilities are key inputs in production. That is, these 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 that they can build the essential facility by itself.
Characteristics of essential facilities
Among the characteristics of the essential facilities are:
- They are critical or essential inputs to manufacture the products sold to the final 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 an essential facility is the energy distribution network that reaches the homes of final consumers. Without access to that network, electricity producers cannot sell their product, nor do they have the possibility to build another distribution network because the necessary investment is too expensive. In addition, it is inefficient to have two parallel networks.
Another example of essential facility in the field of telecommunications is the access to the network of the dominant company (with greater market share and / or with greater seniority). Without access to these networks, telephone and Internet companies cannot offer their service. In turn, they cannot build an alternative network.
Concerns that generate 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 businesses. Then, you can apply unfair practices such as imposing a rate well below the cost of production.
The above 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 them access under reasonable conditions and prices.