Introduction

The reform of network industries represents one of the great structural transformations of the economy in the past twenty years. Vast in its scope (covering aviation, telecom, gas, electricity, railways, postal services, and so on), the reform of network industries is also exemplary in its economic content (Newbery 2000).

Previously, the unique characteristics of network industries appeared to set them apart from most other industries, deemed “competitive” (Kahn 1970–1971). The network industries notably feature: significant economies of scale or scope (extending to natural monopolies); far-reaching externalities (positive or negative) in production or consumption; and extensive vertical and horizontal integration (either under a single corporate umbrella or in the form of long-term ad hoc contracts). Within this very specific framework, the successful introduction of competitive mechanisms, substituting for administered regulation or internal corporate management hierarchies, along with the creation of open markets either up- or downstream of the formerly integrated networks, created disruptions and innovations in equal measure (Joskow and Schmalensee 1983; Baumol and Sidak 1994).

New institutional economics (NIE) suggests an analytical framework that differs from, and complements, standard economic theory (Brousseau and Glachant 2002). First, NIE construes market equilibria and prices as the result of an “institutional process for framing transactions” and fashions its analysis from the notions of transaction costs and property rights. The operation of the price mechanism is neither costless, nor instantaneous, so economic agents cannot benefit from its effects without becoming actively involved in the economic relationships which generate these market prices.