etail access and the price of mandated access must be such that the demand for capacity is rationed. This means that the new price of retail access p** and the price of mandated access p* must allocate capacity. This requires that total demand for capacity, including retail demand and access demand, must equal network capacity: D(p**,p*)+A(p**,p)k Because there are two prices, the condition does not specify what the two prices should be. Rather, it determines combinations of the two prices that ration retail and wholesale access to the network firm's capacity. The model is illustrated in Figure 5.2 for the situation in which total demand is increased by wholesale access. The possible solutions are similar to those discussed with respect to retail access. The first solution is the expansion of network capacity. The fact that the addition of capacity takes time to add may render capacity adjustments infeasible as a short-run solution. The second solution is to adjust the price of retail access to give incentives for consumers to reduce demand along the demand curve. This also requires adjustment of the regulated price of wholesale access to ration the demand for capacity. This is likely the most efficient solution, at least in the short run, when network capacity is fixed. However, to the extent that retail and wholesale access Economic Effects of Regulating Access to Networks D0(p) D(p) + A(p) D(p*) + A(p*) Figure 5.2. Excess demand for capacity as a result of wholesale access. rates are both regulated, as is often the case with telecommunications networks, this solution will be foreclosed. The only solution that may be feasible in the short run is to reduce demand for network capacity by degrading quality of service, either in terms of reliability or by reducing the variety of services available to the network. In other words, mandating access must necessarily be accompanied by one of the compensating adjustments identified above: higher prices, greater capacity, or reduced services. Our focus in this section is 