Coalition Formation, Bargaining and Investments in Networks with Externalities: Analysis of the Eurasian Gas Supply Network

Ikonnikova, Svetlana (2005): Coalition Formation, Bargaining and Investments in Networks with Externalities: Analysis of the Eurasian Gas Supply Network.

Abstract

We present a new methodology to study how upstream (e.g. producers) and downstream (e.g. transiters) players form coalitions, bargain over joint profit sharing and invest. Within coalitions players combine resources, coalitions compete on a market. Profit of each coalition depends on the cooperation among the outside players. Hence, we consider a game with externalities. To find the equilibrium coalition structure and the expected payoffs, we use the solution proposed by Maskin (2003). Payoffs reflect the bargaining power and depend on capacities of players. We show, how investment options available to players matter.

We apply the study to analyze the Eurasian gas supply network. Russia and Turkmenistan - producers and Ukraine, Belorus, Azerbaijan, Iran - transiters form coalitions to supply gas and bargain over profit sharing. Besides, the players invest in pipelines. We derive the bargaining power of the countries from the architecture of the network and calculate the strategic value of the different pipeline projects.

• Item Type: MPRA Paper
• Institution: Humboldt University of Berlin
• Language: English
• Keywords: Partition Function; Coalitional Bargaining; Coalition Formation; Externalities; Gas Supply
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C71 - Cooperative Games

References

Maskin, Erik (2003), Coalitional Bargaining with Externalities, Keynote lecture for the European Economic Association Conference 2003

Stole, Lars & Zwiebel, Jeff (1996), Organizational design and technology choice under intra-firm bargaining, American Economic Review 86, 195-222

Stern, Jonathan P (2001), Traditionalists versus the new economy: competing agendas for European gas markets to 2020, The Royal Institute of International Affairs