Many vertically integrated corporations operate as both wholesalers and retailers of some materials or services. In other words, such a company not only sells some materials or services that are necessary inputs for one of its competitor`s finished goods or services, but it also sells the same finished goods or services at retail. What happens, then, if the seller prices its wholesale services so high that its competitor cannot profitably compete with the low price at which the dominant firm sells at retail? This is the question that the United States Supreme Court set out to answer in Pacific Bell Tel. Co. v. linkLine Communications, Inc.
The case arose in the context of internet DSL service, which both AT&T (after a merger with Pacific Bell) and several independent service providers (ISPs) offer to consumers. But because the service is offered over telephone lines, competing DSL providers need access to AT&T`s land-line facilities. The ISPs filed suit against AT&T, arguing that AT&T violated Section 2 of the Sherman Act by, among other things, subjecting them to a ``price-squeeze`` — i.e., by setting a high wholesale price for DSL transport and a low retail price for DSL internet service. The district court and the Ninth Circuit Court of Appeals both held that this theory was actionable. The U.S. Supreme Court disagreed.
The Court`s reasoning is twofold. First, AT&T has no antitrust duty to deal with the ISPs at all. (Any duty to deal flowed from FCC regulations, not the Sherman Act.) Thus, according to the Court, if there was no duty to sell at all, there could be no duty to sell to the ISPs at prices they would prefer. Second, because low prices typically benefit consumers, there can be no liability for retail pricing unless that pricing is ``predatory.`` Therefore, unless AT&T could be shown to have priced (1) below an appropriate measure of cost and (2) is likely to ``recoup`` its investment in below-cost pricing after driving off the ISPs, then AT&T cannot be liable for its low retail prices. Summing up, the Court held that the ISPs` price-squeeze claim is ``nothing more than an amalgamation of a meritless claim at the retail level and a meritless claim at the wholesale level. If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals` profit margins.``
The takeaway for any business operating at both wholesale and retail levels is this: if there is no generalized duty to deal with a purchaser under the federal antitrust laws and if the business is selling at retail above its cost, then there is no duty to price its wholesale and retail sales at levels assuring a wholesale customer/retail competitor a ``fair,`` ``reasonable,`` or ``sufficient`` profit. In other words, ``[i]f both the wholesale price and the retail price are independently lawful, there is no basis for imposing antitrust liability simply because a vertically integrated firm`s wholesale price happens to be greater than or equal to its retail price.``