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 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 § 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 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.”Vertical Leverage, Refusal to Deal, Monopoly, Sacrifice Principle, Trinko

Pricing of Complementary Goods and Network Effects*

We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good, i.e., the extent of the network effect. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.calibration; monopoly; network effects; complementary goods; software; Microsoft

Quantifying the Benefits of Entry into Local Phone Service,

See http://www.netinst.org/NET_Working_Papers.html #46

VERTICAL LEVERAGE AND THE SACRIFICE PRINCIPLE: WHY THE SUPREME COURT GOT TRINKO WRONG

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.

A Critical Appraisal of Remedies in the EU Microsoft Cases

We discuss and compare the remedies in the two cases antitrust cases of the European Union (EU) against Microsoft. The first EU case alleged (i) that Microsoft illegally bundled the Windows Media Player (WMP) with Windows; and (ii) that Microsoft did not provide adequate documentation that would allow full interoperability between Windows servers and non-Microsoft servers as well as between Windows clients and non-Microsoft servers. After finding Microsoft liable and imposing a large fine, the EU imposed as remedies the requirements on Microsoft (i) to sell a version of Windows without WMP (Windows-N); and (ii) to publish and license interoperability information. Windows-N was a commercial failure, and there has been only limited cross-platform server entry. In its second investigation of Microsoft, the EU alleged illegal tying of Internet Explorer (IE) with Windows. The EU settled with Microsoft with Microsoft undertaking the obligation to ask (through compulsory Windows updates) consumers whose computers have Internet Explorer pre-installed to choose a browser from a menu of competing browsers. Thus, the EU imposed quite different remedies in the two cases: an unbundling remedy for the WMP but a close to a must-carry requirement for IE. We analyze and compare the different approaches.antitrust, remedies, Microsoft, complementarity, innovation, efficiency, monopoly, oligopoly, media player, interoperability, Internet browser

Real Options and the Costs of the Local Telecommunications Network

The Telecommunications Act of 1996 invites entry in the local telecommunications networks whereby entrants will lease parts of the network ("unbundled network elements") from incumbents "at cost plus reasonable profit." A crucial question in the implementation of the Act is the appropriate measure of cost. This paper examines the economic principles on which the cost calculation should be based. I conclude that the appropriate measure of cost (maximizing allocative, productive, and dynamic efficiency) is forward-looking economic cost and not the historical, accounting, or embedded cost of the incumbent’s network. In calculating costs, demand and supply uncertainty, as well as the asymmetric position of incumbents and entrants should be taken into account. Close examination of the issue of uncertainty in the local telecommunications network reveals that (i) for most unbundled network elements, there is little demand uncertainty; and (ii) that those elements that face significant uncertainty, do not have sunk value. Thus, the incumbent does not face higher expected cost by investing. Moreover, the rewards of the incumbent can be higher because buyers prefer to buy services from the owner of the network. Finally, strategic considerations in oligopolistic interaction are likely to dominate any uncertainty considerations and will increase the incentive of incumbents to invest.telecommunications, regulation, cost, real options

The Quest for Appropriate Remedies in the Microsoft Antitrust EU Cases: A Comparative Appraisal

The Microsoft cases in the United States and in Europe have been influential in determining the contours of the substantive liability standards for dominant firms in US antitrust law and in EC Competition law. The competition law remedies that were adopted, following the finding of liability, seem, however, to constitute the main measure for the “success” of the case(s). An important disagreement exists between those arguing that the remedies put in place failed to address the roots of the competition law violation identified in the liability decision and others who advance the view that the remedies were far-reaching and that their alleged failure demonstrates the weakness of the liability claim. This study evaluates these claims by examining the variety of remedies that were finally imposed in the European Microsoft cases, from a comparative perspective. The study begins with a discussion of the roots of the Microsoft issues in Europe and the consequent choice of a remedial approach by the Commission and the Court. It then explores the effectiveness of the remedies in achieving the aims that were set. The non-consideration of the structural remedy in the European case and the pros and cons of developing such a remedy in the future are briefly discussed before more emphasis is put on alternative remedies (competition and non-competition law ones) that have been suggested in the literature. The study concludes by discussing the fit between the remedy and the theory of consumer harm that led to the finding of liability and questions a total dissociation between the two. We believe that it is important to think seriously about potential remedies before litigation begins. However, we do not require an ex ante identification of an appropriate remedy by the plaintiffs, since this could lead to underenforcement or overenforcement.antitrust, remedies, Microsoft, complementarity, innovation, efficiency, monopoly, oligopoly, media player, interoperability, Internet browser