ver the transaction costs associated with external provision exceed the costs of monitoring and coordinating the function internally. Transaction costs thus affect whether vertical integration of merchant activ- ities increases efficiency or whether delegating retail activities to the network's competitors is preferable. Wholesale access compelled by regulators corresponds to vertical divestiture of some of the network firm's retail merchant activities. To examine whether such an arrangement is cost-efficient requires consideration of the transaction costs that the network firm encounters when it deals with an inde- pendent retailer or distributor. These transaction costs must be compared with the organizational costs the firm would incur if it were vertically integrated and carried out its own retail activities. These transaction costs and organizational costs are notoriously difficult to measure, but it is worthwhile examining what drives such costs. Most firms, whether manufacturers or service providers, must choose between these two alternatives: contracting with independent distributors versus providing one's own distribution. Economic Effects of Regulating Access to Networks Historically, firms that operate telecommunications networks, whether for local or long-distance services or some combination of the two, share an important economic feature. These firms have tended to be vertically integrated. They provide retail services directly to customers, they operate internal processes that correspond to wholesale services, and they are manufacturers of network services by operation of the network. Before the breakup of the Bell System in 1984, AT&T went even further into vertical integration upstream, not only providing both local and long- distance services, but manufacturing customer premises equipment and its own networking equipment through its Western Electric unit. Even further upstream, AT&T conducted extensive R&D through its renowned Bell Laboratories. One explanation for the full vertical integration 