idly developing science of networks is chronicled in a number of popular works (Watts 1999, 2003; Barabási 2002; Buchanan 2003). Economists have begun to take into account the complexity of networks. The cost model of Gasmi, Kennett, et al. (2002) reflects the architectural structure of telecommunications networks. Cost allocation in networks is examined by Bird (1976), Sharkey (1995), and Henriet and Moulin (1996). Networks have also been studied in markets for electric power, including the application of Kirchoff's laws; see for example Bohn et al. (1984) and Hogan (1992). For an introduction to the economics of networks, see Economides (1996). We also consider some principles of network design from engineering and operations research. Our analysis shows how demand interacts with the cost, capacity, geography, and directional flow of the various network components to create a theory of optimal network architecture. Then we present an economic analysis of pricing and efficient choice of network capacity. Applying the insights of graph theory to the economic and legal issues surrounding access regulation captures one of the essential qualities of networks, which is that the properties of the overall network cannot be understood solely in terms of the individual components, any more than the behavior of organisms can be understood solely in terms of individual cells. By providing a basis for analyzing how networks function as integrated systems, our theory makes possible an appreciation for how the entire network can be more Networks in Telecommunications than merely the sum of its constituent parts. The model we advance also provides insights into the complex interrelationships among network components that cause them to interact in ways that are often surprising and unpredictable. We augment the insights provided by graph theory with the economics of trans- action costs, pioneered and developed by Ronald Coase (1937). This framework allows us to analyze two other elements critical to network design and managemen