n demand with a degradation of service. This is the only means available to bring demand and capacity back into balance. Networks can try to anticipate and guard against this problem, but that would require undertaking additional costs and altering network configuration in uneconomical ways. Retail access places another burden on network design. Because retail access gives any customer who leaves a carrier the right to return, carriers must main- tain excess capacity against the possibility that their competitors may fail and the customers of their competitors may seek access to their networks. In effect, retail access forces carriers to act as insurers of their competitors. The problem is that during the time when the customers subscribe to other networks, they make no contribution toward the costs incurred by the carrier in maintaining the standby capacity. In essence, retail access leaves network owners vulnerable to a form of free riding, in which the remaining customers pay the premium on the insurance consumed by customers residing on other networks (Sidak and Spulber 1997a). 2. Wholesale Access At first glance, the capacity effects of wholesale access would appear to be minimal. All of the traffic will continue to reside on the same network. The only difference is that the marketing functions will be transferred to another firm. Viewed in this manner, the amount of traffic on the network would appear to remain the same. On closer inspection, the situation becomes somewhat more complicated. Because total network demand depends upon the interaction of two prices, the impact of wholesale access becomes more ambiguous. To the extent that new entrants underprice the network owner, they may be able to increase demand along the demand curve. If the new entrants are able to bundle the resold services with attractive complementary services or otherwise enhance the resold services, total demand may increase. This means that the new entrants take business from the incumbent firm, but also increase the size of the mar