Wednesday, April 16, 2008
Posted by D. Daniel Sokol
Greg Sidak of Georgetown Law School and Criterion Economics suggests that the US Supreme Court should undertake an effort at Abolishing the Price Squeeze as a Theory of Antitrust Liability.
ABSTRACT: A “price squeeze,” or “margin squeeze,” is a theory of antitrust liability that concerns the pricing practices of a vertically integrated monopolist that sells its upstream bottleneck input to firms that compete with the monopolist in the production of a downstream product sold to end users. At issue is the size of the margin between the input price and the price that the monopolist charges in the downstream market for the end product incorporating that particular input.
Trinko, it should go without saying that a “squeeze” that neither causes nor threatens the monopolization of an identifiable market cannot pass muster under section 2 of the Sherman Act. Trinko established a rule that a monopolist’s refusal to deal with a competitor does not state an antitrust violation “where there has been no prior course of voluntary dealings between the parties.” Further, Brooke Group instructs that courts should not discourage “a price cut” that “forces firms to maintain supracompetitive prices, thus depriving consumers of the benefits of lower prices.”
The fountainhead of antitrust’s pre-Trinko price-squeeze jurisprudence is Judge Learned Hand’s 1945 opinion in Alcoa. Under Alcoa, a vertically integrated monopolist must charge downstream competitors not more than a “fair price” for its bottleneck input, and it must charge end users a retail price for its downstream product that is high enough to ensure that its competitors can match that price and still make a “living profit.” A new generation of antitrust price-squeeze cases in the telecommunications industry rests upon the Alcoa model of price-squeeze antitrust liability, and has divided the U.S. Courts of Appeals.
The D.C. Circuit has properly concluded that because under the antitrust laws a vertically integrated monopolist retains the greater power to refuse to provide its upstream inputs to its downstream competitors, it naturally retains the lesser power to raise the price of its upstream inputs without incurring antitrust liability. On the other hand, through its decision in linkLine, the Ninth Circuit permitted a price-squeeze theory to survive a motion for judgment on the pleadings. The Ninth Circuit’s analysis implies (1) that the primary concern in price-squeeze cases is not consumers, but competitors, and (2) that, in the American setting, the requisite analysis more resembles the work of a public utilities commission than that of a federal judge presiding over an antitrust case.
The price squeeze theory is incompatible with contemporary antitrust jurisprudence as well as economic principles. A price squeeze by a firm lacking market power cannot possibly rise to the level of an antitrust violation because it has no chance of reducing consumer welfare. Further, the antitrust laws are concerned with the competitive process, not its end results. The inability of a single firm to stay in business is irrelevant as a matter of antitrust law unless the behavior inducing that firm to exit the market also harms the competitive process. Price-squeeze liability also discourages investment, retail price competition, and the voluntary provision of inputs on negotiated terms by vertically integrated monopolists to current and potential rivals otherwise unable to obtain or self-provide them. Finally, a price squeeze is a regulatory issue, which makes sense only as a rule of price regulation in an industry already subject to duties to deal and to control by institutionally competent regulators.
The Supreme Court should resolve the dispute among the circuits and clarify that the proper response to a price-squeeze allegation is a regulatory undertaking, not an antitrust cause of action. The price-squeeze theory of antitrust liability provides courts and litigants an excuse to depart from Trinko, Brooke Group, or both by recasting claims appropriately analyzed as refusal-to-deal cases or predation cases as something different—price-squeeze” claims. It is timely for the Supreme Court to revisit Alcoa and to explain why alleging a price squeeze neither states a claim in American antitrust law nor justifies deviation from the principles announced in Brooke Group and Trinko.