4.7 Article

A cost allocation problem arising in hub-spoke network systems

Journal

EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
Volume 160, Issue 3, Pages 821-838

Publisher

ELSEVIER
DOI: 10.1016/j.ejor.2003.05.002

Keywords

game theory; cost allocation; hub-spoke network system; non-excludability; core allocation; telecommunication network

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This paper studies a cost allocation problem arising from hub-spoke network systems. When a large-scale network is to be constructed jointly by several agents, both the optimal network design and the fair allocation of its cost are essential issues. We formulate this problem as a cooperative game and analyze the core allocation, which is a widely used solution concept. The core of this game is not necessarily non-empty as shown by an example. A reasonable scheme is to allocate the cost proportional to the flow that an agent generates. We show that, if the demand across the system has a block structure and the fixed cost is high, this cost allocation scheme belongs to the core. Numerical experiments are given with real telecommunication traffic data in order to illustrate the usefulness of our analytical findings. (C) 2003 Elsevier B.V. All rights reserved.

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