 network owners to experiment with different institutional arrangements. Nor is local telephone service the only prominent instance in which communi- cations networks have relied on flat-rate pricing. Consider the terms under which the Internet backbones exchange traffic. Backbones that are able to meet minimum traffic volumes exchange traffic through a system known as peering, under which the backbones do not charge each other for terminating traffic. In other words, top-tier backbones employ a pricing system that is equivalent to bill-and-keep systems for reciprocal compensation for terminating local telephone calls. Backbones unable to meet these minimum volume requirements enter into transit arrangements, under which they pay other backbones to terminate their traffic (Kende 2000). Backbones too small to peer with top-tier backbones have begun to avoid paying transit costs by entering into secondary peering arrangements with one another, which has helped to create a richer, less hierarchical set of interconnection arrange- ments that has weakened the dominant position of the top-tier backbones. In addition, the development of a practice known as multihoming, in which middle- mile providers interconnect with more than one backbone, has reduced the market power of core backbone providers still further (Besen et al. 2001). This brief analysis reveals how transaction cost considerations have caused backbone providers to enter into a wide diversity of pricing arrangements, including many that do not depend on usage. The FCC has taken the existence of peering as an indication that flat-rate pricing regimes may at times prove economical (FCC Networks in Telecommunications 2001c). At the same time, the fact that backbones limit peering to other backbones of similar size does suggest the existence of circumstances under which the preferred pricing regime will be more usage-sensitive. These examples have prompted the FCC to soften its traditional hostility toward flat-rate pricing and to initiate a number of proceeding