Network Effects
Legal Implications of Network Economic Effects Mark A. Lemley & David McGowan Network Effects: one consumer’s value for a good increases when another consumer has a compatible good (this includes both networks of like goods and goods compatible with a network) Metcalfe’s Law: for computers, the value of participation on a network grows exponentially with the size of a network How should network effects be treated in legal considerations (more generally: how should the law integrate outside theories and evidence) Major Conclusions: 1) Law is perhaps uniquely susceptible to fads imported from other doctrines 2) The implications of Network effect should be recognized in the different factual, economic and legal context in which the theory is being examined within 3) While the network effect may bring to light certain aspects of economic reality, how the law reacts to this economic reality depends on the goals of the particular legal doctrine in question 4) If and when network effects are to be taken into legal consideration, the authors suggest that the most appropriate legal accommodation would be one that least intrudes on existing legal doctrine (in other words, courts should seek to solve network problems using the narrowest possible legal theory) Network theory on a continuum Actual networks ààààà virtual networks ààààà simple positive feedback phenomena Network Effects as a Legal Argument Antitrust: United States v.