Commons with increasing marginal costs: Random priority versus average cost

Hervé Crès, Hervé Moulin

Research output: Contribution to journalArticlepeer-review

Abstract

Indivisible units are produced with increasing marginal costs. Under average cost, each user pays average cost. Under random priority, users are randomly ordered (without bias) and successively offered to buy at the true marginal cost. Both average cost (AC) and random priority (RP) inefficiently overproduce. RP tends to overproduce less, but which game collects more surplus depends much on the demand configuration. We show that a key to compare the welfare properties of the two mechanisms is the crowding factor, i.e., the number of potential users over the number of units of output users can afford: The more crowded the commons, the more RP outperforms AC. In the quadratic cost case, beyond the threshold value of 2.4 for the crowding factor, RP strongly outperforms AC; beneath it AC only mildly outperforms RP. Thus the RP mechanism manages crowded commons better than AC.

Original languageEnglish (US)
Pages (from-to)1097-1115
Number of pages19
JournalInternational Economic Review
Volume44
Issue number3
DOIs
StatePublished - Aug 2003

ASJC Scopus subject areas

  • Economics and Econometrics

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