In this paper, we analyze the incentives of an incumbent and an entrant to migrate from an "old" technology to a "new" technology, and discuss how the terms of wholesale access affect this migration. We show that a higher access charge on the legacy network pushes the entrant firm to invest more, but has an ambiguous effect on the incumbent's investments, due to two conflicting effects: the wholesale revenue effect, and the business migration effect. If both the old and the new infrastructures are subject to ex-ante access regulation, we also find that the two access charges are positively correlated.

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The nature of competition in local access telecommunications networks is shaped by the "build-or-buy" decisions of the competitive local exchange carriers (CLECs). Facility-based competition takes place when a CLEC "builds" its own infrastructure (e.g., wireless local loop, cable network, fiber-optic network, satellite network), whereas service-based competition takes place when a CLEC "buys" some network elements from the incumbent local exchange carrier (ILEC). Two main ways to achieve servicebased competition are resale and local-loop unbundling. 1 A serious concern with mandatory local-loop unbundling is that it may undermine incentives for facility-based competition. 2 In order to achieve transition to facility-based competition, Jerry A. Hausman and J. Gregory Sidak (2004) suggest that regulators allow the prices for fixed unbundled elements to increase over time, while Thomas Jorde et al. (2000) suggest that mandatory unbundling should sunset after the passage of two years or upon the entry of a facility-based competitor.In this paper, we challenge the implicit assumption behind sunset clauses, 3 namely that the ILEC would either deny unbundling or charge too high a price for its network elements in the absence of regulation. We do this by analyzing an unregulated ILEC's decision regarding unbundling in an unregulated environment. 4 We make the realistic assumption that the cost of building the facility declines over time. In a dynamic setting we show that an unregulated incumbent sets a rental path for its local loop, which delays facility-based entry, compared to the case in which there is no unbundling. The equilibrium rental path set by the unregulated incumbent is prohibitively high at the initial phases when there is no effective threat of facility-based entry, and it is decreasing over time during later phases following the rise of the entrant's opportunity cost of leasing lines. We argue that neither allowing higher prices for unbundled elements over time nor setting a sunset clause would suffice to induce facility-based competition. The ILECs that initially resist unbundling requirements will tend to charge attractive access prices (relative to the CLECs' alternatives) for their infrastructure, which become less essential over time. Therefore, the appropriate policy for regulators is to commit to ban unbundled access when facilitybased entry becomes feasible and socially desirable.