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Doctrinal cross-dressing in derivative aftermarkets: Kodak, Xerox and the copycat game.

Article Excerpt
The articles in this special issue on complexity theory present a promising framework for evaluating the competitive impact of conduct undertaken by a new breed of dominant firm. The framework was described in terms of business networks or commercial ecosystems. The point was that "keystone" or "hub" firms at the center of such networks can exercise significant economic power even when they do not hold large market shares. These keystone or hub firms have access to another form of economic power--"architectural power"--that derives from their positional centrality. Like the hegemon at the center of an ecopolitical network of sovereigns, the keystone or hub firm has both great power and special responsibilities to lesser players at other nodes in an economic network. This new display of power, this paradigm shift from market power, to architectural power, presents a challenge to antitrust economists and traditional market analysts to develop new tools for gauging economic power and for determining the commercial impact of conduct undertaken or fostered by keystone or hub firms. The economic genre of complexity theory, some articles suggest, may not have matured enough to yield practical tools that market analysts can use to evaluate the antitrust significance of architectural power and its exercise outside the market-based approach of mainstream antitrust economics.

Nonetheless, complexity theory has a next of kin, game theory, that has already made small inroads into antitrust analysis. Their kinship lies in the shared view that human behavior generally, including economic conduct, is more usefully understood when seen in systematic or relational terms. Markets make more sense when firms are recognized as components of an eco(n)system rather than as entirely independent entities. This view has deep roots in American jurisprudence, ranging from Yale law professor Wesley Hohfeld's relational view of property entitlements in the early 20th century to Harvard economist Edward Chamberlin's oligopoly theory. (1)

Game theory has entered three precincts of antitrust analysis. First, there is the impact on innovation economics of Brian Arthur's work in the complexity theory of path dependence and historical accident. (2) Second, in a seminal article published some five years ago, antitrust scholar Joe Brodley joined two respected economists in applying the game theory practiced in mainstream economics to critique the dominant view in antitrust that predatory pricing is economically implausible if not irrational, a view mired in static price theory. (3) Neither of these two efforts has had widespread influence in the federal courts. As this essay was being written, a WestLaw search returned only one federal court citation to the Brodley article. Arthur's influence, though not explicit, can be seen in the Justice Department's monopolization case against Microsoft. (4)

Third and finally, game theory has made a doctrinally cloaked foray into the Supreme Court's antitrust analysis. The vehicle was Justice Harry Blackmun's controversial opinion for the Court in Eastman Kodak Co. v. Image Technical Services, Inc. (5) It is controversial, of course, because the Court held that aftermarkets for Kodak copier parts and repair could themselves be relevant markets, subjecting Kodak to potential antitrust liability for monopolization. Here, game theory's entry into antitrust analysis was cloaked in the doctrinal dress of section 2 of the Sherman Act even though the theory's logic and the Court's analysis actually fit more comfortably, as I show below, into section 1's unfashionable doctrine of interdependent conscious parallelism. Indeed, looking past this doctrinal cross-dressing opens the timeworn writ of interdependent conscious parallelism to a powerful new logic--game theory--that promises to outfit the old writ in new dress that might be called strategic parallel conduct.

Attempts to understand and evaluate strategic behavior are not entirely new to antitrust policy or...

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