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An Axiomatic Approach to the Allocation of a Fixed Cost Through Prices

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  • Leonard J. Mirman

Abstract

We study the allocation of fixed costs to the outputs of a multiproduct firm. First we allocate short-run fixed costs through A-S prices which allocate the long-run costs. Long-run cost functions do not generally contain a fixed cost component. We show what part of the A-S prices associated with the long-run cost is allocated to the fixed cost and what part is allocated to the variable cost of the short-run costs. Second, in those cases in which the fixed costs must be allocated directly, we alter the axioms characterizing A-S prices slightly to accommodate cost functions which have a fixed cost component and derive an allocation mechanism characterized by these axioms for cost functions including those with a fixed cost component
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  • Leonard J. Mirman, 1981. "An Axiomatic Approach to the Allocation of a Fixed Cost Through Prices," Discussion Papers 468, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:468
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    References listed on IDEAS

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    1. Samet, Dov & Tauman, Yair, 1982. "The Determination of Marginal Cost Prices under a Set of Axioms," Econometrica, Econometric Society, vol. 50(4), pages 895-909, July.
    2. Ronald R. Braeutigam, 1980. "An Analysis of Fully Distributed Cost Pricing in Regulated Industries," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 182-196, Spring.
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    1. Louis Anthony Cox, 1984. "Probability of Causation and the Attributable Proportion Risk," Risk Analysis, John Wiley & Sons, vol. 4(3), pages 221-230, September.
    2. David Encaoua & Michel Moreaux, 1987. "L'analyse théorique des problèmes de tarification et d'allocation des coûts dans les télécommunications," Revue Économique, Programme National Persée, vol. 38(2), pages 375-414.
    3. Evangelinos, Christos, 2013. "Infrastrukturpreise: Eine normativ-theoretische Analyse," Discussion Papers 1/2013, Technische Universität Dresden, "Friedrich List" Faculty of Transport and Traffic Sciences, Institute of Transport and Economics.
    4. Antonio Villar, 1994. "Existence and efficiency of equilibrium in economics with increasing returns to scale: an exposition," Investigaciones Economicas, Fundación SEPI, vol. 18(2), pages 205-243, May.
    5. James R. Hines, Jr., 1990. "The Transfer Pricing Problem: Where the Profits Are," NBER Working Papers 3538, National Bureau of Economic Research, Inc.
    6. Raymond Hartman & David Wheeler & Manjula Singh, 1997. "The cost of air pollution abatement," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 759-774.
    7. María Angeles García Valiñas, 2004. "Eficiencia y equidad en el diseño de precios óptimos para bienes y servicios públicos," Hacienda Pública Española / Review of Public Economics, IEF, vol. 168(1), pages 95-119, march.
    8. Castano-Pardo, Alberto & Garcia-Diaz, Alberto, 1995. "Highway cost allocation: An application of the theory of nonatomic games," Transportation Research Part A: Policy and Practice, Elsevier, vol. 29(3), pages 187-203, May.
    9. Tehrani Nejad Moghaddam, Alireza, 2010. "Allocating the CO2 emissions of an oil refinery with Aumann-Shapley prices: Comment," Energy Economics, Elsevier, vol. 32(1), pages 243-255, January.
    10. Bogetoft, Peter & Hougaard, Jens Leth & Smilgins, Aleksandrs, 2016. "Applied cost allocation: The DEA–Aumann–Shapley approach," European Journal of Operational Research, Elsevier, vol. 254(2), pages 667-678.
    11. Hartman, Raymond & Wheeler, David & Singh, Manjula, 1994. "The cost of air pollution abatement," Policy Research Working Paper Series 1398, The World Bank.
    12. Avraham Beja & Israel Zang, 1986. "Internal Pricing and Cost Allocation for Efficient Decentralized Control," Discussion Papers 703, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    13. Otero, Jesus & Waddams Price, Catherine, 2001. "Incumbent and entrant response to regulated competition: signaling with accounting costs and market prices2," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 209-223.

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