Strategic Cost Allocation

Esther Gal-Or ()

Journal of Industrial Economics, 1993, vol. 41, issue 4, 387-402

Abstract: Negative externalities or 'congestion'costs in the utilization of common resources introduce strategic considerations that tie cost allocation rules to competitiveness in external markets. The equilibrium rule for allocating common costs consists of 'profitability'and 'strategic' components. The profitability component dictates that the share of common costs imposed on a product should be inversely related to its relative profitability vis-a-vis other products. The strategic component dictates that the share of common costs should be modified to favor products sold in markets where strategic considerations are of relatively greater importance (i.e., oligopolistic vis-a-vis perfectly competitive markets). Copyright 1993 by Blackwell Publishing Ltd.

Date: 1993
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