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Commons with Increasing Marginal Costs: Random Priority versus Average Cost

  • Moulin, Herve

    (Rice U)

  • Cres, Herve

    (HEC School of Management)

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.

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File URL: http://www.ruf.rice.edu/~econ/papers/2000papers/04Moulin.pdf
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Paper provided by Rice University, Department of Economics in its series Working Papers with number 2000-04.

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Date of creation: Sep 2000
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Handle: RePEc:ecl:riceco:2000-04
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  1. 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.
  2. Moulin, Herve & Cres, Moulin, 2000. "Scheduling with Opting Out: Improving upon Random Priority," Working Papers 2000-03, Rice University, Department of Economics.
  3. 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.
  4. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
  5. 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.
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