This paper studies a spatial model of electronic business network formation where firms build links based on a cost-benefit analysis. Benefits result from directly and indirectly connected firms in terms of knowledge flows, which are heterogeneous: a “key-player”(e.g. a firm providing an exchange platform in a business-to-business network) provides a higher level of knowledge flows than “peripheral” firms (e.g. tier 3 suppliers in a vertically differentiated industry). For intermediate cost values of link formation, stable andefficient network structures comprise only a subset of the total set of firms, excluding peripheral firms which are most distantly located to the key player. When link formation implies a certain degree of network congestion, the stable and efficient network size issmaller than in a model with bilateral decisions upon link formation between two firms.
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Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number
Ifo Working Papers No. 22.
Find related papers by JEL classification: C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
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