Legal Implications of Network Economic Effects

Abstract:     
Economic scholarship has recently focused a great deal of attention on the phenomenon of network externalities, or network effects: markets in which the value that consumers place on a good increases as others buy the good. Though the economic theory of network effects is less than fifteen years old, and is still not thoroughly understood, network effects are increasingly playing a role in legal argument. Judges, litigators and scholars have suggested that antitrust law, intellectual property, telecommunications law, Internet law, corporate law, contract law and even the law of racial discrimination need to be modified to take account of network effects. Their arguments reflect a wide range of views about what network effects are and how courts should react to them. In this Article, we explore the application of network economic theory in each of these contexts. We suggest ways in which particular legal rules should -- and should not -- be modified to take account of network effects. We also attempt to draw some general conclusions about the role of network economic theory in the legal enterprise, and about the way in which courts should revise legal doctrines in response to theories from fields outside the law.

JEL Classifications: K00

Accepted Paper Series