Cost allocation, demand revelation, and core implementation

This paper proposes an efficient mechanism for setting access charges to public facilities and publicly regulated monopolies. Traditional approaches to the cost allocation or regulated pricing problem generally require full information about demands that in practice may not be known to the regulator. We propose a simple demand revelation mechanism in which potential customers bid to be served and the regulator accepts a set of bids that maximizes revenues net of costs. In a strong Nash equilibrium, the mechanism reveals the efficient set of customers to serve and covers the costs of serving them, possibly with a surplus for the producer. Surplus is distributed among consumers so that no subgroup subsidizes another, and there exists no other subsidy-free distribution that is Pareto superior for the consumers. The set of all such distributions constitutes a new solution concept for cooperative games, called the extended core that is nonempty and contains the core. When the game is monotone increasing and convex, the extended core is the same as the core, and the mechanism implements precisely the core allocations. (C) 1998 Published by Elsevier Science B.V. All rights reserved.