quire imposing a form of peak-load pricing in which the usage charge at any particular moment varied with the network elements being used and the level of demand being placed on those elements (Boiteux 1949; Steiner 1957; Williamson 1966). Thus, as a theoretical matter, economic efficiency would require that prices vary with each local exchange, from one moment to the next, and in different portions of the network, depending on the particular level of network demand (Kahn and Shew 1987). As a practical matter, however, the inability to make such minute adjustments prevents networks from charging prices that are users can shift to alternative providers of network services, adopting a flat-rate price will cause the customer base to consist solely of a small group of intensive users with a high tolerance for congestion (MacKie-Mason and Varian 1995a). 10 This situation contrasts with the rate practice of much of the rest of the world, which generally employs usage-based pricing for local telephone service. 11 Mathewson and Quirin (1972); Mitchell (1978); Selwyn (1981); Crew and Dansby (1982); Griffin and Mayor (1987); Kahn and Shew (1987). MacKie-Mason and Varian (1995b); Telepath (1998). Networks in Telecommunications precisely calibrated toward actual usage. Instead, network owners typically divide the day into peak and off-peak periods and charge uniform prices during those periods that exceed the true congestion costs of the lower-volume segments of the period and that fall short of the true congestion costs of the higher-volume segments of the period. Variations in demand within those periods inevitably lead to some degree of economic inefficiency, because the uniformity of prices during the period will deter efficient calls during the low-volume segments of the period and will not deter inefficient calls during the high-volume segments of the period. The welfare losses created by these imperfections in the pricing regime become another source of inefficiency that offsets the welfare benefits of usage-sensitive