Hit and Miss: Leverage, Sacrifice, and Refusal to Deal in the Supreme Court Decision in Trinko

Abstract

Under the rules of the Telecommunications Act of 1996, incumbent local exchange carriers, including Verizon, were obligated to lease parts of their local telecommunications network to any firm at cost plus a reasonable profit prices which could combine them at will, add retailing services and sell local telecommunication service as a rival to the incumbent. AT&T, an entrant in local telecommunications, leased parts of Verizon's network. Trinko, a local telecommunications services customer of AT&T, sued Verizon alleging various anti-competitive actions of Verizon against AT&T, including that Verizon raised the costs of AT&T, its downstream retail rival. The Supreme Court held that Trinko's complaint failed to state a claim under Section 2 of the Sherman Act, and dismissed the complaint. I argue that Verizon had two monopolies in local telecommunications: a monopoly of the local telecommunications network, as well as a monopoly in retail services. The 1996 Act allowed for competition in retail services and also imposed cost-based pricing on leases of Verizon's network. Verizon, unable to increase the lease price on its network, reverted to raising-rivals-costs strategies against its retail competitors. Thus, Verizon used its monopoly of the network infrastructure to disadvantage entrants in retail. In doing so, Verizon lost short term profits that it would have earned from leasing its network to entrants, since the 1996 Act had set the lease price at cost plus "reasonable profit." Thus, Verizon is liable if the "sacrifice principle" is applied. According to the sacrifice principle, a defendant is liable if its conduct "involves a sacrifice of short-term profits or goodwill that makes sense only insofar as it helps the defendant maintain or obtain monopoly power."

Keywords: Vertical Leverage, Refusal to Deal, Monopoly, Sacrifice Principle, Trinko