Suggestions for a Game-Theoretic Approach to Public Utility Pricing and Cost Allocation

The purpose of this article is to define and discuss cross subsidization in pricing from a game-theoretic perspective. Cross subsidization may be said to exist when one group of customers pays more than they would if served by a separate firm producing exclusively for their demands. Previous game-theoretic approaches have considered primarily the properties of the cost function. This article discusses the reasons demand must be included in the analysis and suggests two possible ways of doing so. In the context of one general model, a number of sufficient conditions for the existence of subsidy-free prices are derived.