An Axiomatic Approach to the Allocation of a Fixed Cost Through Prices

We study the allocation of fixed costs to the outputs of a multiproduct firm. First we allocate short-run fixed costs through A-S prices which allocate the long-run costs. Long-run cost functions do not generally contain a fixed cost component. We show what part of the A-S prices associated with the long-run cost is allocated to the fixed cost and what part is allocated to the variable cost of the short-run costs. Second, in those cases in which the fixed costs must be allocated directly, we alter the axioms characterizing A-S prices slightly to accommodate cost functions which have a fixed cost component and derive an allocation mechanism characterized by these axioms for cost functions including those with a fixed cost component