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Commons with increasing marginal costs: random priority versus average cost

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  • HervÈ CrËs
  • HervÈ Moulin

Abstract

Indivisible units are produced with increasing marginal costs. Under "average cost", each user pays average cost. Under "random priority", users are randomly ordered (without bias) and successively offered to buy at the true marginal cost. Both average cost (AC) and random priority (RP) inefficiently overproduce. RP tends to overproduce less, but which game collects more surplus depends much on the demand configuration. We show that a key to compare the welfare properties of the two mechanisms is the "crowding factor", i.e., the number of potential users over the number of units of output users can afford: The more crowded the commons, the more RP outperforms AC. In the quadratic cost case, beyond the "threshold value" of 2.4 for the crowding factor, RP strongly outperforms AC; beneath it AC only mildly outperforms RP. Thus the RP mechanism manages crowded commons better than AC. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 3 (08)
Pages: 1097-1115

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:3:p:1097-1115

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  1. Moulin, Herve & Cres, Moulin, 2000. "Scheduling with Opting Out: Improving upon Random Priority," Working Papers 2000-03, Rice University, Department of Economics.
  2. H. Scott Gordon, 1954. "The Economic Theory of a Common-Property Resource: The Fishery," Journal of Political Economy, University of Chicago Press, vol. 62, pages 124.
  3. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
  4. Shapley, Lloyd S & Shubik, Martin, 1969. "Pure Competition, Coalitional Power, and Fair Division," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(3), pages 337-62, October.
  5. Moulin Herve & Shenker Scott, 1994. "Average Cost Pricing versus Serial Cost Sharing: An Axiomatic Comparison," Journal of Economic Theory, Elsevier, vol. 64(1), pages 178-201, October.
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Cited by:
  1. Moulin, Hervé, 2010. "An efficient and almost budget balanced cost sharing method," Games and Economic Behavior, Elsevier, vol. 70(1), pages 107-131, September.
  2. Hervé Moulin, 2008. "The price of anarchy of serial, average and incremental cost sharing," Economic Theory, Springer, vol. 36(3), pages 379-405, September.
  3. Moulin, Herve, 2001. "Three Solutions to a Simple Commons Problem," Working Papers 2001-05, Rice University, Department of Economics.

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