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Games in the Eurasian gas supply network: Multinational bargaining, Strategic investment, and Hold-up

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  • Ikonnikova, Svetlana

Abstract

The paper analyzes multilateral relations and distortions of investments in the Eurasian gas network, supplying gas from countries of the Former Soviet Union to Western Europe. We use a two stage model of endogenous coalition formation to study cooperation among gas producers and transiters, some lacking the ability to make long-term commitments. In the first stage, the players cooperate to invest in pipelines and contract the sharing of rents. In the second stage, players form supply chains and bargain over supply profit sharing. Since competing supply chains can be formed, cooperation involves externalities. Our quantitative analysis predicts overinvestment as well as underinvestment in the network as an attempt to create countervailing power. Among other things we explain why Russia invests in the expensive pipeline through the Baltic sea and why Caspian gas producers are eager to build expensive bypasses around Russia.

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File URL: http://mpra.ub.uni-muenchen.de/17852/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17852.

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Date of creation: 2007
Date of revision: Nov 2008
Handle: RePEc:pra:mprapa:17852

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Related research

Keywords: strategic investment; hold-up; coalitional bargaining; gas supply; externalities;

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  1. Yi, Sang-Seung & Shin, Hyukseung, 2000. "Endogenous formation of research coalitions with spillovers," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 229-256, February.
  2. Ilya Segal, 2003. "Collusion, Exclusion, and Inclusion in Random-Order Bargaining," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 439-460.
  3. Rajan, Roby, 1989. "Endogenous Coalition Formation in Cooperative Oligopolies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 863-76, November.
  4. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
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