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The Effect of Probabilistic Demands on the Structure of Cost Functions

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  • Duncan, Gregory M

Abstract

Firms that provide capacity to meet randomly fluctuating demand typically will not be producing on the efficient frontier of their production possibilities sets. Consequently, the standard dual theory of cost and production is inapplicable. This article provides an alternative that leaves most of the theory intact provided that firms are viewed as producing the probability of providing services rather than an explicitly produced output. As an application we show that for a telecommunications firm facing a network externality it is quite possible to find something that looks like negative marginal cost. Copyright 1990 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 3 (1990)
Issue (Month): 3 (September)
Pages: 211-20

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Handle: RePEc:kap:jrisku:v:3:y:1990:i:3:p:211-20

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Web page: http://www.springerlink.com/link.asp?id=100299

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Cited by:
  1. Tovar, Beatriz & Wall, Alan, 2014. "The impact of demand uncertainty on port infrastructure costs: Useful information for regulators?," Transport Policy, Elsevier, vol. 33(C), pages 176-183.
  2. Wilson, Wesley W. & Zhou, Yimin, 2001. "Telecommunications deregulation and subadditive costs: Are local telephone monopolies unnatural?," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 909-930, May.
  3. C. A. Knox Lovell & Ana Rodr�guez-�lvarez & Alan Wall, 2009. "The effects of stochastic demand and expense preference behaviour on public hospital costs and excess capacity," Health Economics, John Wiley & Sons, Ltd., vol. 18(2), pages 227-235.
  4. Martin Gaynor & Gerard F. Anderson, 1995. "Uncertain Demand, The Structure of Hospital Costs, and the Cost of EmptyHospital Beds," NBER Working Papers 4460, National Bureau of Economic Research, Inc.
  5. Alvaro Almeida & Joana Cima, 2013. "Demand Uncertainty and Hospital Costs: an Application to Portuguese NHS Hospitals," FEP Working Papers 499, Universidade do Porto, Faculdade de Economia do Porto.
  6. Ana Rodríguez-Álvarez & David Roibás-Alonso & Alan Wall, 2013. "The response of decentralized health services to demand uncertainty and the role of political parties in the Spanish public health system," Journal of Productivity Analysis, Springer, vol. 40(3), pages 357-365, December.
  7. Baker, Laurence C. & Phibbs, Ciaran S. & Guarino, Cassandra & Supina, Dylan & Reynolds, James L., 2004. "Within-year variation in hospital utilization and its implications for hospital costs," Journal of Health Economics, Elsevier, vol. 23(1), pages 191-211, January.

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