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Vertical Leverage And The Sacrifice Principle: Why The Supreme Court Got Trinko Wrong

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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 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 § 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 telecommunications 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 efforts, rivals suffered a disadvantage. Yet Verizon also caused retailing rivals to lease a lower number of unbundled network elements and thus incurred a revenue sacrifice. Therefore the actions ofVerizon 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.

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Paper provided by NET Institute in its series Working Papers with number 05-05.

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Length: 36 pages
Date of creation: Nov 2005
Date of revision: Nov 2005
Handle: RePEc:net:wpaper:0505
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