Vertical Leverage and the Sacrifice Principle: Why the Supreme Court got Trinko Wrong

Abstract

Trinko, a local telecommunications services customer of AT&T, sued Verizon for anti-competitively raising the costs of AT&T, Verizon's rival in the market for local telecommunications services. Pursuant to the rules of the Telecommunications Act of 1996, AT&T was leasing parts of the local telecommunications net- work (unbundled network elements, "UNEs") from Verizon at "cost plus reasonable profit" prices. The Supreme Court held that Trinko's complaint failed to state a claim under § 2 of the Sherman Act, and dismissed the complaint. I argue that the Court drew in- .correct inferences from its AsPen Skiing decision. The Court also missed a key vertical leveraging issue in Trinko. The opening of competition mandated by the Telecommunications Act of 1996 challenged Verizon's traditional monopoly in the local telecommu- nications services market. By raising the cost and/or decreasing the quality of the service of rivals in the retailing services market, Verizon aimed to preserve that monopoly. As a result of these ef- forts, rivals suffered a disadvantage. Yet Verizon also caused retail- ing rivals to lease a lower number of unbundled network elements and thus incurred a revenue sacrifice. Therefore the actions ofVer- izon in raising the costs of retailing telecommunications services ri- vals are an indication of. liability according to the. "sacrifice principle" proposed in the Government's brief in Trinko, according to which 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," eventhough the sacrifice principle defines a stringent condition for a finding of liability.