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

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, that could combine them at will, add retailing services, and sell local telecommunication service as a rival to the incumbent. AT&T, an entrant into the local telecommunications market, leased parts of Verizon's network. Curtis 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 local telecommunications services. The Telecommunications Act of 1996 allowed for competition in retail services and 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 Telecommunications Act of 1996 had set the lease price at "cost plus a reasonable profit." 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." Thus, if the "sacrifice principle" is applied, Verizon is liable.