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

NET Institute Working Paper No. 05-05

NYU Working Paper No. EC-05-13

NYU Annual Survey of American Law, Vol. 61, No. 3, 2005

36 Pages Posted: 12 Sep 2005

See all articles by Nicholas Economides

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

Date Written: August 2005

Abstract

Trinko, a local telecommunications services customer of AT&T, sued Verizon for anti-competitively raising the costs of AT&T, its rival in the market for local telecommunications services who, pursuant to the rules of the Telecommunications Act of 1996 was leasing parts of the local telecommunications network (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 Section 2 of the Sherman Act, and dismissed the complaint. I argue that the Court drew incorrect inferences from its Aspen Skiing decision. The Court also missed a key vertical leveraging issue in Trinko. Verizon leveraged its monopoly of local telecommunications network infrastructure by raising the costs of rivals in retailing services who leased unbundled network elements from it as well as decreasing the quality of their services so that such rivals were disadvantaged. Verizon used such actions that raised the costs and/or decreased the quality of rivals in retailing services aiming to preserve its traditional monopoly in the local telecommunications services market which was challenged by the opening of competition mandated by the Telecommunications Act of 1996. In doing so, Verizon caused a lower number of leases of unbundled network elements from itself to retailing rivals, and thus incurred a revenue sacrifice. Therefore the actions of Verizon in raising the costs of retailing telecommunications services rivals 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," even though the sacrifice principle defines a stringent condition for a finding of liability.

Keywords: Vertical leverage, sacrifice principle, Supreme Court, monopolization, Trinko, telecommunications, Sherman Act section 2, vertical price squeeze, raising rivals' costs, Telecommunications Act of 1996

JEL Classification: K21, K23, l42, l43, l41, l51, l13

Suggested Citation

Economides, Nicholas, Vertical Leverage and the Sacrifice Principle: Why the Supreme Court Got Trinko Wrong (August 2005). NET Institute Working Paper No. 05-05, NYU Working Paper No. EC-05-13, NYU Annual Survey of American Law, Vol. 61, No. 3, 2005, Available at SSRN: https://ssrn.com/abstract=797142 or http://dx.doi.org/10.2139/ssrn.797142

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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