Allocating a fixed cost as a reduction of outputs in a non-cooperative decision-making environment: A data envelopment analysis approach

Qing Feng and Zhibin Wu

Journal of the Operational Research Society, 2023, vol. 74, issue 6, 1507-1519

Abstract: The fixed cost generated from constructing a common platform by all units needs to be allocated among these units in a reasonable way in many management practices. As market information is often incomplete, data envelopment analysis (DEA) approaches have been successfully used in fixed cost allocation problems. The fixed cost was treated as an input measure in previous studies. However, it has no effect on the original inputs and outputs when making the allocation decision after an operating cycle. In this case, it can be regarded as a reduction of outputs rather than an input. This paper developed a new DEA approach based fixed cost allocation model in a decentralized decision-making environment that treats the fixed cost as a reduction of outputs. Unlike the existing approaches addressing efficiencies, the proposed model considers the cost itself in the allocation process. An iterative procedure is then presented to derive the average game cost allocation scheme. A classical numerical example from the prior literature is given to show the applicability of the proposed model. The simulation results show that the developed approach can obtain a unique allocation scheme.

Date: 2023
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DOI: 10.1080/01605682.2022.2096505

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