This paper develops some important concepts with respect to networks and compatibility. We note that the familiar concept of complementarity lies at the heart of the concept of compatibility. We further note the distinction between two-way networks (e.g., telephones, railroads, the Internet) and one-way networks (e.g., ATMs, television, distribution and service networks). In the former, additional customers usually yield direct externalities to other customers; in the latter the externalities are indirect, through increases in the number of varieties (and lower prices) of components. Most industries involve vertically related components and thus are conceptually similar to one-way networks. Accordingly, our analysis of networks has broad applicability to many industrial frameworks. We proceed by exploring the implications of networks and compatibility for antitrust and regulatory policy in three areas: mergers, joint ventures, and vertical restraints.

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Stern School of Business, New York, NY 10012, tel. (212) 998-0864, (212) 998-0880 fax (212) 995-4218, e-mail: neconomi@stern.nyu.edu, www: http://www.stern.nyu.edu/networks/

We thank the participants of the NBER Summer Workshop and of the Telecommunications Policy Research Conference for their comments and suggestions.

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