The Economics of Networks*


Nicholas Economides**

Revised September 1995


We analyze the salient features of networks and point out the similarities between the economic structure of networks and the structure of vertically related industries. The analysis focuses on positive consumption and production externalities, commonly called network externalities. We discuss their sources and their effects on pricing and market structure. We distinguish between results that do not depend on the underlying industry microstructure (the "macro" approach) and those that do (the "micro" approach). We analyze the issues of compatibility, coordination to technical standards, interconnection and interoperability, and their effects on pricing and quality of services and on the value of network links in various ownership structures. We also briefly discuss the issue of interconnection fees for bottleneck facilities.

International Journal of Industrial Organization vol. 14, no. 6, pp. 673-699 (October 1996).

* Plenary session address, E.A.R.I.E. conference, Chania, Greece, September 1994. I thank Larry White for helpful comments.

** Stern School of Business, New York, NY 10012, tel. (212) 998-0864, fax (212) 995-4218, e-mail:, www:

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