tion costs imposed by the last unit consumed. In this way, usage-sensitive pricing aligns incentives by bringing private costs into line with the true social costs consuming an additional unit. 7 As a theoretical matter, usage-sensitive pricing has thus been regarded as a critical mechanism for promoting the efficient allocation of resources. 2. The Impact of Transaction Costs on the Choice between Flat-Rate and Usage-Sensitive Pricing The preference for usage-sensitive pricing suggested by the theoretical literature on club goods is subject to a number of limiting assumptions and conditions. Many 7 Within each club, each member will calibrate his or her consumption until the utility they derive is equal. There may initially be some variation in per capita utility across clubs, with some clubs being more crowded than others. Assuming that mobility across clubs is possible, people in high-congestion clubs will seek to shift to low-congestion clubs until utility is equalized across all clubs. Furthermore, club goods theory posits the existence of an optimal club size. On one hand, increasing club size benefits members by allowing them to amortize the overhead costs needed to establish the club and to enforce exclusion over a larger membership base. On the other hand, any increase in membership causes congestion costs to rise. Clubs thus add members until the benefits of spreading costs over an additional member no longer exceed the marginal increase in congestion costs, at which point they will stop adding new members. Assuming free entry, any remaining individuals refused membership in existing clubs remain free to form new clubs. The result is an equilibrium in which the optimal number of clubs exist and in which each club member consumes the optimal amount of club services (Buchanan 1965). Subsequent work has confirmed this result regardless of whether the market structure is monopolistic, oligopolistic, or competitive (Calem and Spulber 1984; MacKie-Mason and Varian 1995a). Networks in Telecommunications of the