Cost allocation, demand revelation, and core implementation

This paper proposes an efficient mechanism for setting access charges to pu blic facilities and publicly regulated monopolies. Traditional approaches t o the cost allocation or regulated pricing problem generally require full i nformation about demands that in practice may not be known to the regulator . We propose a simple demand revelation mechanism in which potential custom ers 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 th em, 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 s et of all such distributions constitutes a new solution concept for coopera tive 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 allocati ons. (C) 1998 Published by Elsevier Science B.V. All rights reserved.