al work on the theory of the firm (1937) have demonstrated how vertical integration can reduce transaction costs. 31 Scherer and Ross (1990, pp. 523-24) note that "The mathematical conditions underlying this result are complex." Specifically, the welfare tradeoff described above turned largely on the elasticity of substitution and the elasticity of demand for the final good. Economists who have assumed that the final product market is perfectly competitive have disagreed over the range elasticities that lead to a price increase. Compare Hay (1973), Schmalensee (1973) and Warren- Boulton (1974) with Mallela and Nahata (1980) and Westfield (1981). Scholars that have modeled the final product market as oligopolistic have reached a similar disagreement. Compare Waterson (1982) with Abiru (1988). Network Regulation Basics One example is the elimination of free riding. For example, suppose that a firm manufactures a technically complicated product that requires significant presale services, such as the demonstration of the product. Telser (1960) shows that retail- ers may have the incentive to shirk in providing such services in the hope that other retailers will bear the costs of providing them. If all retailers respond to these incen- tives in the same way, the total amount of presale services will fall below efficient levels. A manufacturer facing the possibility of such free riding can either rely on a vertical contractual restraint that specifies the level of presale services that each retailer is required to offer or eliminate the incentive to free ride by granting ter- ritorial exclusivity (Mathewson and Winter 1984). Alternatively, the manufacturer can vertically integrate into distribution. All of these solutions effectively align the retailers' incentives with the manufacturers'. Another oft-cited transaction cost efficiency associated with vertical integration stems from the existence of relationship-specific investments, which exist whenever the cost of a capital asset exceeds the value of its next best use