Cost allocation in spanning network enterprises with stochastic connection costs

Abstract

This paper considers the problem of network formation and cost allocation that arises when customers need to be connected to a single service provider through a (communication) network. The cost of a connection consists of both the construction costs and the maintenance costs. Since the latter costs are unknown ex ante connection costs are represented by random variables. It is shown how an ‘optimal’ network is determined and that the core of the corresponding stochastic spanning tree game is non-empty. A two stage Bird allocation is defined and shown to be a core allocation of stochastic spanning tree games.