without a proportional increase in the materials used to construct the pipeline. Telecommunications companies can use larger-volume conduits at lower unit costs. (4) As Adam Smith pointed out with his famous pin factory example, economies of scale result from specialization and division of labor. Telecommunications companies and other network companies employ many specialized and skilled personnel in design, management, operations, and maintenance activities. 3. Multiproduct Cost Functions Because a network typically provides many services, it will have a multiproduct cost function. Such cost functions generally are not separable in outputs. Thus, it is not possible to identify the total cost of any individual service or any subset of services. Any allocation of costs to specific services is necessarily arbitrary. Regulatory or accounting procedures that perform such cost allocations are easily altered to obtain wildly differing results and thus cannot serve as an effective guide to policy. A useful benchmark for analyzing multiproduct cost functions is the standalone cost of a product, A firm's technology is said to be nonjoint if and only if it can be written as the sum of the standalone costs (Hall 1973; Van den Heuvel 1986). This is unlikely to be the case for firms in network industries because the network services are likely to be interconnected technologically, resulting in a nonseparable cost function. Another important aspect of the multiproduct cost function is the incremental cost of each product j, where eQ=(Q1,Q2,.... Qj). The concepts of standalone cost and incremental cost can be extended to apply to sets of products. Thus, SACS(Qs) and ICS(Q) apply to the set of products Qs, that is, all Qj where j is in S. Let Sand Tbe disjoint sets of products. Then the network cost function exhibits economies of scope if the total of the standalone costs of each group of products exceeds the total cost: SACs(Qs) +SACT(QT)>C(Qs+ QT). This is called an economy of scope because the network firm realizes economies 