Ending in 2002, the lengthy anti-trust case against Microsoft illuminated current economic theories on imperfect competition and transaction costs, which involve game theory to analyze the behavior of companies. In classical economics, companies operating in a perfectly competitive environment have no influence over the price, which is determined entirely by market factors. Most industries are not perfectly competitive though, and many companies can affect the market price to at least some degree. This is where game theory comes in.

The game theory model of transaction cost economics is a game of chicken, where neither player wants to yield to the other and the worst possible outcome for both players is to not yield. It is similar to a prisoner’s dilemma because it both players are tempted to deviate from the Nash equilibrium of both yielding, resulting in a non-Pareto optimal equilibrium. On the other hand, this type of game is the opposite of a coordination game because it is not mutually beneficial to play the same strategy. Instead of working together as in a coordination game, the players are rivals, trying to make the other player to yield to maximize their payoff. This chicken game can be used to analyze the bargaining costs involved between all suppliers and customers in a given economy. In the framework of this course, the buyers and sellers can be viewed as nodes, while the transactions can be viewed as the edges that connect these nodes. Contracts are often drawn up to formalize these relationships between buyers and sellers.

In many cases, corporations, such as Microsoft, are able to take advantage of certain conditions and use strategies, such as exclusivity contract clauses, to create a monopolistic environment that hinders competition and hurts consumers. This economy theory on imperfect competition spurred the Clinton administration to pursue anti-trust cases against major corporations such as Microsoft. Some economists are opposed to what they see as an overzealous movement to prosecute anti-trust cases, though. Ron Joskow of M.I.T asserts that such a policy “is likely to lead to poor legal rules and remedies.” Economist Ronald Coase pioneered the field of transaction cost economics, suggesting that companies exist in order to reduce transition costs. He explains how companies can often reduce transaction costs and improve efficiency by having all the transactions performed by the same group. Through vertical integration, a company can many times limit some of the bargaining costs and negative externalities associated with the transactional game of chicken.

Joskow concedes that anti-trust proponents are correct about the harm of imperfect competition in certain situations. But he also warns of the dangers of a wide-ranging anti-trust policy. “This approach reflects the inaccurate assumption that organizational design does not matter for economic performance and that restructuring complex firms is a ‘piece of cake’ without the need for careful analysis or any significant economic consequences.”

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