Law & Strategy (an open letter to our business law colleagues)

Dear colleagues,

We are now in the process of writing up a short paper on the subject of “Law & Strategy,” but in the meantime, we would like to share some of our tentative thoughts about this subject. First, we want to lay our cards on the table (or our “priors,” if you prefer). Because of our background in game theory and formal mathematical modelling, we use the word “strategy” differently from the way you and your business law colleagues use the word. Nevertheless, though we generally detest buzzwords, we found the framework of the legal pathways you and your colleagues have developed to be very helpful and illuminating.

With that said, however, here is how we would look at the relation between law and strategy. To begin with, we see business competition as a “game”—i.e. a strategic situation involving two or more players in which the outcome of the game depends on the choices (i.e. “strategies” in the game-theory sense of the word) made by each of the players. Furthermore, one of the key aspects of this game (business competition) are the “rules of the game”—i.e. what moves are legally permissible or not? By focusing on business as a game with rules, we see “strategy” in a different light—as a way in which the game is played. Thus, from a legal perspective, there are at least three ways a firm can play the “business competition game”:

  1. A firm can  play the game within the rules (cf. your compliance pathway).
  1. It can try to manipulate those rules to its advantage (i.e. exploiting loopholes in the rules).
  1. Or it can try to change the rules of the game (through lobbying or litigation or other means, such as bribery).

Of course, in reality, most firms will use some combination or mix of strategies, but here we are simplifying and working at a high level of generality in order to paint a picture of firm behavior.

Your colleague,

Prior Probability

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