In this chapter you will be introduced to the basic concepts and models that help to explain some important features of the economy of communication networks. That economy is diversifying and growing rapidly. It includes the markets for communication services, on-line alternatives to traditional markets, markets for information goods that did not exist before, and the market for networking equipment. This chapter is limited to the market for communication services.

Like the study of other economic commodities, the study of the communication services markets focuses on characteristics of supply and demand and on their interaction in the market.

The most important supply factors are the technology of network elements (communication links and switches) and the management rules that can be used to control these elements so that the network supplies the communication services that users want. The technology of network elements is described in Chapters 11 and 12, while Chapters 8 and 9 are devoted to a study of network control. A more complete study of supply should include an assessment of costs: the capital costs of network elements (hardware and software) and operating costs (maintenance, depreciation, administration). We cannot discuss costs quantitatively because they are not published in the open literature.

As the costs of communication and computing hardware decline each year, operating costs become relatively more important. These costs may lock customers to a particular hardware or software manufacturer or service provider, because customers can face high administrative and training costs should they switch to a different...