Bacterial outer membrane lipopolysaccharide (LPS) potently stimulates the mammalian innate immune system, and can lead to sepsis, the primary cause of death from infections. LPS is sensed by Toll-like receptor 4 (TLR4) in complex with its lipid-binding coreceptor MD-2, but subtle structural variations in LPS can profoundly modulate the response. To better understand the mechanism of LPS-induced stimulation and bacterial evasion, we have calculated the binding affinity to MD-2 of agonistic and antagonistic LPS variants including lipid A, lipid IVa, and synthetic antagonist Eritoran, and provide evidence that the coreceptor is a molecular switch that undergoes ligand-induced conformational changes to appropriately activate or inhibit the receptor complex. The plasticity of the coreceptor binding cavity is shown to be essential for distinguishing between ligands, whilst similar calculations for a model bacterial LPS bilayer reveal the "membrane-like" nature of the protein cavity. The ability to predict the activity of LPS variants should facilitate the rational design of TLR4 therapeutics.