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Game Theory and Cost Allocation Problems

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  • S. H. Tijs

    (Department of Mathematics, University of Nijmegen, Toernooiveld, 6525 ED Nijmegen, The Netherlands)

  • T. S. H. Driessen

    (Department of Applied Mathematics, Twente University of Technology, 7500 AE Enschede, The Netherlands)

Abstract

Problems of allocating joint costs in a reasonable way arise in many practical situations where people decide to work together to save costs. Cost allocation methods based on game theoretical concepts take into account the strategic aspects of cost allocation situations. We give a survey of cost allocation methods based on the nucleolus and the Shapley value, and introduce also a new one, the so-called cost gap allocation method which is based on the \tau -value. It is shown that for some large subclasses of cost allocation problems this new cost allocation method coincides with old separable cost methods proposed in the thirties by the Tennessee Valley Authority and also with the separable costs-remaining benefits (SCRB) method. Properties of this cost gap allocation method are also treated.

Suggested Citation

  • S. H. Tijs & T. S. H. Driessen, 1986. "Game Theory and Cost Allocation Problems," Management Science, INFORMS, vol. 32(8), pages 1015-1028, August.
  • Handle: RePEc:inm:ormnsc:v:32:y:1986:i:8:p:1015-1028
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    File URL: http://dx.doi.org/10.1287/mnsc.32.8.1015
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    References listed on IDEAS

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    1. Ian I. Mitroff, 1972. "The Myth of Objectivity OR Why Science Needs a New Psychology of Science," Management Science, INFORMS, vol. 18(10), pages 613-618, June.
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    Keywords

    cost allocation method;

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