with the number of potential trading partners, for the usual reason that search costs are high and more traders can mean greater diversity and greater costs of finding a good match. If these costs increase rapidly, they can outweigh the benefits of having more members, SO that there can be diminishing returns to larger networks. The intensity and quality of meetings may be better at a small party than at a large gathering, for example. However, with many people connected to a network, there are returns to mechanisms that reduce search costs. If such mechanisms exhibit economies of scale, this can restore the benefits of larger networks. For example, with many people connected to a telephone network, there are benefits from telephone directories. With many people on the Internet, there are benefits from establishing search engines. However, these are subtle concepts that are very different from the idea of simply squaring the number of people with access to a network. Some economists contend that network economic effects can give rise to a kind of externality that can be a source of market failure (Katz and Shapiro 1985). This Networks in Telecommunications view draws on the fact that an individual subscriber's decision to join a network creates benefits for those who have already joined the network. These arguments assume that subscribers cannot coordinate their adoption decisions. These argu- ments are also based on the notion that the network firm and its subscribers cannot internalize the benefits from network effects in the terms of their transactions. New subscribers' assumed inability to capture all of the benefits generated by their adoption decisions arguably creates a wedge between private and social benefit that may cause subscribers to forego joining a network even though the social benefits of doing SO would exceed the costs. The concept of network externality thus sug- gests that network industries may be uniquely susceptible to market failures that prevent the price mechanism from playing its usual 