 is Because a consumer demands less if the nearest product is farther away, it is straightforward to demonstrate that total demand is increasing in the number of products, D(p,m2)>D(p, m1), m2 m1. This implies that demand for network capacity is increasing in the number of substitute products. 19 For a given level of capacity, the market-clearing price of network capacity will be greater with more substitute products. This is illustrated in Figure 3.17. Suppose that distinct networks are needed to provide substitute services. For example, a mobile network provides the convenience of mobility whereas a fiber- optic data network provides greater transmission capacity. The benefits of multiple networks on the demand side must be traded off against the costs of operating multiple networks. Suppose that networks have economies of scale as represented by the cost function c(K) = C + cK, where C is the fixed cost of establishing and operating network capacity and C is the marginal cost of capacity. Clearly, 19 Differentiating D(p, m) with respect to m, we t/(2m)) / m. Thus, aD(p, m)/a m > 0 because Q(p+tr) is a decreasing function of r. Pricing Network Services D(p, m2) D(p,m1) Figure 3.17. The market-clearing price of network capacity is greater with more substitute products, m2 m m . with unlimited economies of scale, the least-cost configuration is a single network without any variety of services. This situation corresponds to anecdotal character- izations of the Bell System, which provided a standardized service and benefited to some extent from economies of scale. However, multiple networks provide benefits to consumers because they prefer product variety. The total benefits to consumers when network services are priced at pand there are m networks equal (52) B(p, Clearly, a price increase reduces total consumer benefits.20 Increased product variety increases total consumer benefits, because each consumer is nearer to his or her most preferred product.21 20 The effect of a price increase on consumer benefits is equ