The evolution of a global network: a game of coalition formation
AbstractThe paper explores the evolution of global networks. Examples include networks which process cross-border securities trades: CEDEL, Euroclear, and FITEL. I formalize a network market with many users: due to fixed costs the supply is downward slopping, and due to externalities the demand is upward slopping. Using game theory and dynamic stochastic analysis I show how the network evolves. I introduce the concept of critical mass, define a stochastic process of coalition formation, and specify the long run properties of the resulting network markets, including dynamics and stability properties, and the number of stable configurations. I explain the formation of coalitions of users when the players are heterogeneous: there exist clusters of players which produce more externalities to each other that they do the rest: e.g. global custodians. The gains from distinguishing such clusters are surprisingly large: the probability of success of the network "star-up" increases exponentially with decreases in the cluster size.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 8487.
Date of creation: 1995
Date of revision:
global networks; global markets; global custodians; coalition; network game; critical mass;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shmuel S. Oren & Stephen A. Smith, 1981. "Critical Mass and Tariff Structure in Electronic Communications Markets," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 467-487, Autumn.
- Joseph Farrell & Garth Saloner, 1984.
"Standardization, Compatibility and Innovation,"
345, Massachusetts Institute of Technology (MIT), Department of Economics.
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