The Wall Street Journal-20080126-Supreme Opportunity
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Supreme Opportunity
Long ago, in a legal galaxy far, far away, American courts saw antitrust law as a way to protect competitors from, well, the competition. These days everyone outside the Ninth Circuit Court of Appeals concedes that if antitrust has any claim to legitimacy, it lies in its ambition to maximize consumer welfare, not competitor protection.
As for that Ninth Circuit, well, there's a reason it's the circuit most often reversed by the Supreme Court. And it has offered the High Court a chance to do it again in AT&T v. linkLine, if it will take the case. This week the Court asked the U.S. Solicitor General to provide his views on the case, with the goal of deciding whether to hear AT&T's appeal from the Ninth Circuit, which deployed a long- discredited antitrust theory to uphold a case against the phone giant.
LinkLine buys DSL capacity from AT&T, which it then resells to consumers. This puts linkLine in the sometimes-awkward, but not unheard-of, position of being AT&T's customer in the wholesale market but its competitor in the retail market. LinkLine's lawsuit, however, alleges that the margin between the wholesale price that linkLine pays AT&T and the retail price that AT&T charges its customers is too small for linkLine to make a profit -- which is known in antitrust jargon as a "price squeeze."
In recent years the courts have largely rejected the notion of a price squeeze as a legitimate antitrust claim -- except in special circumstances. The problem is that a price-squeeze complaint amounts to telling one company -- AT&T in this case -- that it is charging consumers too little. And forcing AT&T to raise its retail prices might help linkLine, but it would hurt consumers, who would be forced to pay more for Internet access in the name of preserving a "competitive" market. Our courts used to think that punishing consumers to keep competitors alive was normal, reasonable behavior. Antitrust regulators in Europe still think this way. And so, apparently, does the Ninth Circuit, which may explain why it ruled that linkLine's case should go forward.
But the Supreme Court has rejected this kind of argument before, most recently in the 2004 Trinko case. In addition to the dubiousness of raising prices to assist less-efficient competitors, the High Court deemed it misguided to complain about the wholesale price when the wholesaler was free not to sell to the competitor in the first place. The only way to justify this kind of competitor-protection is by arguing that the courts, not the markets, are the right place to determine how many players a particular industry "needs," and to order everyone in that industry to behave accordingly.
As we say, this sort of industrial planning is still popular in Europe, but in the U.S. it was consigned to history until the Ninth Circuit tried to resurrect it. We'd argue that this difference plays some part in the greater economic dynamism the U.S. enjoys over Europe. For the sake of its precedent in Trinko as well as the American economy, the Supreme Court should take the linkLine case and hand the Ninth Circuit one more well-deserved reversal.
