oss. The consumer faces a tradeoff. A greater range of transmissions, that is, a higher value of h, increases the average amount of data transmitted. However, increasing the range also can increase information loss if the upper limit of the range h exceeds network capacity K. To verify that the consumer will choose some amount of information loss for any positive and finite cost g, differentiate the consumer's expected utility with respect to h and evaluate the marginal expected utility at h = K. Thus, we obtain which is positive because u(Q) is an increasing function of the size of the trans- mission. Thus, the consumer will choose a transmission range h* > K that solves Pricing Network Services U'(h*, K) =0.16 The consumer's choice of transmission range depends on the level of available capacity, h* = h*(K). The consumer will tolerate less information loss the greater the cost of error g. However, the consumer still prefers some information loss because it is always worthwhile to increase the average transmission. Suppose that transmission capacity is obtained at cost c(K). The efficient level of capacity reflects the fact that the consumer tolerates some amount of information loss. The efficient level of capacity maximizes the consumer's net expected benefit given that the range of transmission levels depends on capacity, h*(K). Thus, K solves haxkU(h*(K),K)-c(K). The efficient level of capacity satisfies the condition The left-hand side of equation (47) is the marginal cost of information loss times the likelihood of information loss. The right-hand side of equation (47) is the marginal cost of capacity. The efficiency condition (47) provides guidance on the pricing of capacity when there is the possibility of information loss. The consumer purchases capacity K from the network firm at a cost per unit P. Suppose further that the network firm takes the price p as a given and supplies capacity up to the point where the marginal cost of capacity equals the price. Then the efficiency condition (47) defines the ma