rket-clearing price of capacity p*, This is represented in Figure 3.15. At the market-clearing price of capacity p*, there is still information loss because the consumer chooses a range of transmission in excess of the amount of capacity that is purchased, h*(K*) > K*. The consumer's demand for capacity reflects the consumer's loss of benefits from truncated transmission as well as the cost of information loss. The market-clearing price gives the correct signal to both the firm and the consumer because the efficiency condition is satisfied. The idea that individuals tolerate some level of costly information loss is behind the use of statistical multiplexing. Suppose that there are multiple individuals who 16 The first-order condition simplifies to Networks in Telecommunications C'(K) (u'(K) Figure 3.15. The supply and demand for network capacity with a price-taking network firm and a price-taking consumer. receive network services. The capacity constraint is then An advantage of sharing capacity is that less capacity is needed to provide com- munications services than if each individual has a separate dedicated capacity. If different users may have peaks at different times, total capacity needs are less than would be required by adding up peak usages. This is simply an illustration of risk pooling. If capacity needs are independently distributed, or even better, negatively correlated, then the combined capacity requirements are lower than they would be with separate networks. To illustrate the implications of shared capacity, consider the basic case of two consumers. Suppose that the range of transmission requirements for both consumers is the unit interval, 1. Also, suppose that transmission requirements are uniformly distributed for both consumers. Thus, the range of combined transmissions is between zero and two. Suppose further that the capacity of the network exceeds the maximum needs of either consumer but is less than the maximum of the combined needs: 1<K<2. Pricing Network Services By standard arguments,