chnologies, such as enhancements in fiber optic facilities. In addition, the efficient configuration of the network is likely to change with substantial increases in capacity. For example, traffic can be consolidated in trunk lines to take advantage of scale economies. This requires the creating of additional hubs and trunk lines. Changing the level of service provided by the network changes not only the total costs, C(Q), but also the underlying mix of cost-minimizing inputs, because a different mix of inputs is associated with different output levels. In turn, the underlying output and input mix changes the engineering specifications of Economic Effects of Regulating Access to Networks Sortation Sortation Transmission Distribution Distribution Final customers Final customers Figure 5.4 The three stages of production of a network firm: transmission, sortation, and distribution. the network, which can result in changes in the architecture of the network, as discussed in Chapter 3. Conversely, if wholesale access shifts total demand down relative to initial demand, the system can operate with less capacity. If the wholesale services are identical, this will reduce capacity utilization and reduce congestion. If wholesale services are distinctly different, there may still be a need to reconfigure the network. Capacity shortages can develop at specific locations in the network that may require configuration. It is useful to consider the vertical structure of telecommunications. The oper- ations of network firms in telecommunications have a three-part vertical structure consisting of three stages of production: (1) transmission, (2) sortation, and (3) dis- tribution. This vertical structure corresponds to what network engineers refer to as service layers. The three stages of production in a telecommunications network are evident in postal systems (Sidak and Spulber 1996). The transmission stage in a postal system is the long-distance transportation of large mail shipments that links postal regions. The sortation stage