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What could be the reason that my application would work much better at a fixed 1 or 2mbs vs.11mbs?

The app is 802.11b, good LOS,and good RSSI. The clients on the devices move vertically back and fourth in a straight line from the main AP antenna. When the clients are closest to AP the RSSI is -30 and furthest about -60 so good RSSI.
Every time I set the client rate to auto they start working fine at 11mbs but then eventfully start havening many reties,scale down data rate and eventually my data times out.

When I am fixed at 1 or 2mbs, this does not happen and the application works fine. I would like to eventually push more data and go to a higher rate.

Are the STAs moving when they have the rate shift?
If so, the movement could be changing the polarization of the STAs antenae and resulting in weaker signal strength and lower data rate use. Also, have you checked out the area with a spectrum analysis tool? There could be non 802.11 noise in the area.

Try setting the basic data rate to 1Mbs with 2, 5.5, and 11Mbs as supported, although this is for b rates the same logic can be used for A/G, 6Mbs basic 9, 12, and so one supported.