Network Issues and Payment Systems

James J. McAndrews* Networks play an integral part in the production and consumption of certain goods and services, including transportation, communications, and payment systems. A network good or service has two main characteristics: the value a person gets from the product increases as more people consume it and the technique a firm chooses to produce the product will depend on techniques chosen by other firms. For example, consider a telephone system. The greater the number of people connected by telephone lines, the greater the number of people any member of the system can call and the more he or she will enjoy belonging to that telephone network. Similarly, firms that offer phone service will produce switches and lines compatible with those of other firms that offer phone service, so that they can offer their customers the valuable service of connecting to all other parties. It is helpful to think of network components as nodes connected by links.1 Perhaps the most transparent example is a railroad system, a