t only are such claims problematic as a theoretical matter; as noted in Chapter 4, they also appear to be essentially devoid of any empirical support. Thus, there appears to be little justification for the belief that basing access rates on actual market transactions would lead to inefficient outcomes. On the contrary, basic economic principles indi- cate that market-based pricing represents the most appropriate way for ratemaking authorities to ensure that access rates are set at levels that promote both alloca- tive and dynamic efficiency. Two fundamental transformations - the emergence of platform competition and the shift to access regulation - have made direct, facilities-based competition feasible. As a result, the only plausible explanation for failing to implement market-based access rates, that the absence of technological substitutes made market-based pricing impossible, has been drained of its vitality. Our discussion raises the critical question: what determines the boundaries of a network? This is closely related to the question of the boundaries of the firm. The answer was first given by Nobel laureate Ronald Coase and is the foundation for the New Institutional Economics. The Coasian theory of the firm in the presence of transaction costs can be specialized to address the boundaries of networks. Access and the shape of networks depend on organizational costs and market transaction costs. Network connections are external to the firm and take the form of access when the organizational cost of managing the connection as part of a network are greater than market transaction costs. Network connections are internal to the Networks in Telecommunications firm when the organizational costs of managing the connection as part of a network are less than market transaction costs. In the absence of regulatory distortions, transaction costs affect the extent to which companies that own networks are vertically integrated. Of course, retail access for final customers is a product of the network, SO networks do not 