Premium
Cost allocation of capacity investment games
Author(s) -
Chen Xin,
Chen Zhisong
Publication year - 2013
Publication title -
naval research logistics (nrl)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.665
H-Index - 68
eISSN - 1520-6750
pISSN - 0894-069X
DOI - 10.1002/nav.21549
Subject(s) - outsourcing , time horizon , cost allocation , business , profit (economics) , production (economics) , investment (military) , incentive , microeconomics , core (optical fiber) , game theory , industrial organization , operations research , computer science , economics , marketing , finance , mathematics , telecommunications , accounting , politics , political science , law
Consider a manufacturer serving a set of retail stores each of which faces deterministic demands in a finite planning horizon. At the beginning of the planning horizon, the production capacity of the manufacturer is built, followed by production, outsourcing to third party manufacturers if necessary and distribution to the retail stores. Because the retail stores are usually managed by different managers who act as independent profit centers, it is desirable that the total cost is divided among the retail stores so that their incentives can be appropriately captured and thus efficient operations can be achieved. Under various conditions, we prove that there is a fair allocation of costs among the retail stores in the sense that no subset of retail stores subsidizes others, or equivalently, the resulting capacity investment game has a nonempty core, that is, the capacity investment game is a balanced game. In addition, our proof provides a mechanism to compute a fair cost allocation. © 2013 Wiley Periodicals, Inc. Naval Research Logistics 60: 512–523, 2013