t: (i) a method for understanding market transactions for network services and (ii) a method for understanding the organizational governance of networks. Transaction cost economics provides a method of integrating these two components in the anal- ysis of network firms. Network firms own and operate networks to provide a wide variety of transmission and transportation services. The organizational structure and boundaries of network firms are determined by the relative costs of market transactions and organizational governance. Coase explained that firms choose their activities by comparing the costs of engaging in market transactions with the costs of internal resource allocation. For Coase, firms arise as a means of economizing on market transaction costs by internalizing those transactions within the organization. The transaction-cost approach to the economic theory of the firm emphasizes the need for vertical integration as a means of avoiding contracting costs. Network firms optimize access and network design by trading off the costs of market transactions and organizational governance. Compelled access regulations interfere with these decisions. The result will be departures from the efficient degree of vertical integration and institutional organization in network industries. Over time, there may be dynamic inefficiencies affecting investment in network capacity and research and development of network-related technology. Economic analysis indicates that efficiency would best be promoted if access to those network services were based on market value. Reliance on market-based pricing mechanisms not only tends to allocate goods to their best use; it also pro- vides the proper signals to parties who consider investing in network technologies. Rather than basing access prices on the market value of the network services pro- vided, regulators continue to employ access-pricing methodologies that focus on the cost of the inputs used to establish the physical network. Such an approach might be appropriate in an idea