ial networks contributes to an understand- ing of international trade in work by Rauch (1999, 2001) and others. The formal study of the structure of business networks also includes models of the organization of markets, referred to as market microstructure, as examined by Spulber (1996, 1999, 2002b) and Lucking-Reilly and Spulber (2001). Intermediaries reduce transaction costs for buyers and sellers by establishing networks. Intermediaries provide network economies by replacing the transaction costs of direct buyer-seller contacts with indirect hub-and-spoke contacts. In con- trast, when many buyers and sellers must interact directly, they encounter search costs and high costs of exchanging information. Imagine if customers shopping at a grocery store had to contact all the manufacturers and distributors that supply the store to obtain price and product information. By establishing a centralized net- work of suppliers and providing the products to customers, the grocery store takes on many of these transaction costs, performing the task more efficiently than indi- vidual customers could ever do. The store provides price and product information through its advertising and store displays. The store interacts with each of its sup- pliers on behalf of its many customers. The comparison between an intermediary network and directed exchange is represented in Figure 1.1. A wholesale distributor lowers transaction costs for retailers and manufacturers. By serving networks of retailers, the wholesaler creates convenience for manufactur- ers. The wholesaler interacts with each of its retailers on behalf of the manufacturers it serves. For example, pharmaceutical wholesalers provide medicines to networks of pharmacies, doctors, and hospitals. They obtain pharmaceuticals from networks of manufacturers. These networks save greatly on communication costs, in com- parison with extensive direct contacts between individual retail pharmacies and manufacturers. 3 See Dutta and Jackson (2003) for a collection of key articles in this