Common Cost Allocations and Game Theory: A New Approach

Abstract

Some game theoretical solutions (Shapley value, nucleolus, and so on) are proposed as allocation schemes in common costs allocation. Game theoretical solutions have desired properties compared with the conventional allocation scheme based on some allocation bases. Many authors consider that cooperative game solutions, which might be rather complex and difficult to formulate than the conventional method, become new allocation schemes. But it seems that the conventional allocation scheme is widespread in practice. A new approach to common costs allocation is proposed to examine this reason.

We examine three simple models under the proposed approach. They are formulated with the two-person game and describe the allocation practice appropriately. The results obtained from these models indicate that the conventional allocation method does not have serious problems in two models but have difficulties in one model. Whether the conventional allocation method has difficulties or not in the common costs allocation setting depends on the information each department has. Therefore it is important to identify the situation where the common costs allocation is necessary when the conventional allocation method is used as an allocation scheme.