Abstract
This paper focuses on the benefits of fixed cost allocation in product mix decisions. We show that in a constrained production environment where at least one factor of production is fixed and in short supply, oligopoly firms can earn higher profits by allocating the costs of these fixed factors The higher profits occur because the use of full absorption product costs leads firms closer to mix decisions that would be made if they were able to collude. A duopoly example is presented to illustrate these profit effects, and the necessary conditions for higher absorption costing profits are developed and explained.
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