The Supreme Court on December 8th heard oral arguments in Pacific Bell v. Linkline. Here is a link to the transcript of the oral arguments, although you can take a short cut and read a summary here. There is also an comprehensive analysis of the case in the Antitrust Source, by Aryeh Friedman and Joyce Choi, Supreme Court Weighs Survival of Price Squeeze Claims (pdf).  I have posted some thoughts about Linkline previously, and in response to the oral argument, wanted to add a point about lawful monopolies and regulation.

In the oral argument, Deanne Maynard (Assistant to the Solicitor General), made this point for the government:

If a retail level rival can state a Section 2 claim against a vertically-integrated company by alleging nothing more than a margin-based price squeeze, one of two outcomes will result: Either the vertically-integrated company will have to raise its retail prices to its consumers; or it will be forced to share the benefits of its lawful monopoly with its rivals by lowering its wholesale price. Either outcome is inconsistent with this Court’s antitrust jurisprudence.

The issue with this argument is that it glosses over the role of regulation. Certainly it is a cherished feature of US antitrust law, that the lawful monopolist may profit from its lawful monopoly as long as it does not engage in anticompetitive conduct to maintain the monopoly. The classic formulation in Grinnell for the lawful monopoly is one achieved by “growth or development as a consequence of a superior product, business acumen, or historic accident.” I don’t see statutory grant of a monopoly in that list.

Of course that doesn’t mean that the de facto monopoly resulting from ILEC status is unlawful. But it does suggest that it is too simple to equate monopolies resulting from statutory grants with monopolies from superior products or business acumen. This is particularly salient when the statutory grant is fashioned to encourage competition (albeit mostly unsuccessfully so) and explicitly declares the antitrust laws to be applicable, as the Telecommunications Act does. Linkline is a case of incomplete and probably ineffective regulation. The regulation is incomplete because it affects only the wholesale level and it is probably ineffective because it does not appear to take into account the retail price charged by the vertically-integrated monopolist. In this situation, the Solicitor General’s position seems more fit for unregulated industries than the telecommunications industry. Would it actually be a problem if the ILECs were forced to “share the benefits” of their statutory monopoly with rivals, when the Telecommunications Act explicitly seeks to foster competition? Such “sharing” wouldn’t be penalizing a company for having a superior product or business acumen.

(I am assuming that Linkline’s factual allegations are true, since the case came before the Supreme Court on interlocutory appeal from the 12(b)(6) motion to dismiss for failure to state a claim.)

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