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So taking this to the extreme, an infinite number of devices can be connected and their connectivity is based upon the collison algorithm in the router. OK.
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You jumped to a conclusion here. Turns out, it's quicksand... gotta watch that.
20-25 devices would be a marginally functional network segment. 10 is more realistic. 4 if they are IP cameras.
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based upon the collison algorithm in the router
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The algorithm is in TCP/IP.
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Do all wireless routers output the same power, or can one adjust this on some routers and not others?
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First thing: 802.11 is intentionally low powered. How could you keep a LOCAL Area Network LOCAL with high power? The whole point is, I use channel 6, my neighbor uses channel 9, and his other neighbor uses channel 6 again. We don't interfere because we all use low power.
28mW - 15 dBm - is a typical home router power output. But the radio is a transceiver - it both transmits and receives. If you stuck a 1 watt power amp on there, you would bestow the blessings of your transmitter on the whole block. But you would not be able to receive better, so you would be generating useless radio frequency energy, polluting the whole neighborhod, for no benefit.
Adjusting output power: All radio transmitters emit power on frequencies other than the intended frequencies. The manufacturer designed and tested the radio to emit power within certain limits. Exceed those limits, the transmitter "splatters" - gets into neighboring channels and completely different radio services. The clown up the street with the linear on his CB messing up your TV.
Legal unmodified off-the-shelf routers will be set up to a power level that keeps the radio in the good graces of the FCC. There are radios that can be enhanced with third-part software. This software can be used to increase the output of your router. The thing is, doubling the power gets you a 40% increase in range, but doubles the energy going through the radio. Too much extra heat for not a lot more sizzle.
Best practices in the world of radio is: Use the best antenna you can, then more power. Putting more power into less antenna is like putting a Porsche engine in a Trabant.