An essential facility may be defined as a facility or infrastructure, without access to which competitors cannot provide services to their customers. An essential facility may exist either at the manufacturing (upstream) or distribution (downstream) level. Examples of essential facilities include technical information, transport infrastructure (e.g., rail, port or airport) and pipelines/wire for the supply of water, gas, electricity or telecommunications services.
The problem arises when one firm is active in both upstream and downstream activities (it is vertically integrated) and refuses to grant other firms who wish to provide either upstream or downstream services only, access to the “facility”. The refusal to supply may be anti-competitive if it prevents third party firms from entering the market and consequently has the effect of lessening competition. A dominant firm which controls access to an essential facility may be abusing its dominant position if it refuses access to the facility without reasonable justification or grants access only on discriminatory terms such that its competitors in the related market are disadvantaged.
An assessment of the “essential facilities” argument must carefully identify whether a facility is indeed essential. It must be established that access to the facility is indeed necessary for third party firms. If there are viable alternatives to that facility or if it can be easily replicated, then it would not be considered essential. The mere fact that a competitor is disadvantaged by not having access to the facility is not sufficient. Any assessment must consider the static (short run) implications of compulsory access to a facility against the dynamic (long run) effects on firms’ incentives to invest and innovate.