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Bargaining Power and Value Sharing in Distribution Networks: a Cooperative Game Theory Approach

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Author Info

  • Roberto Roson

    ()
    (Department of Economics, University Of Venice Cà Foscari)

  • Franz Hubert

    (Humboldt University, Berlin)

Abstract

This paper illustrates a methodology for analyzing bargaining games on network markets, by means of numerical models that can be calibrated with real data. Economic incentives to join or to expand a network depend on how the network surplus is being distributed, which in turn depends on a variety of factors: position of each agent (e.g., a country) in a specific network, its reliability in the cooperation scheme (e.g., geo-political stability), existence of market distortions and availability of outside options (e.g., alternative energy sources). This study is aimed at presenting a game theory methodology that can be applied to real world cases, having the potential to shed light on several political economy issues. The methodology is presented and illustrated with application to a fictitious network structure. The method is based on a two-stage pro- cess: first, a network optimization model is used to generate payoff values under different coalitions and network structures; a second model is subsequently employed to identify cooperative game solutions. Any change in the network structure entails both a variation in the overall welfare level and in the distribution of surplus among agents, as it affects their relative bargaining power. Therefore, expected costs and benefits, at the aggregate as well as at the individual level, can be compared to assess the economic viability of any investment in network infrastructure. A number of model variants and extensions are also considered: changing demand, exogenous instability factors, market distortions, externalities and outside options.

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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2014:02.

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Length: 19
Date of creation: 2014
Date of revision:
Handle: RePEc:ven:wpaper:2014:02

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Related research

Keywords: Network Markets; Cooperative Games; Distribution Networks; Bargaining.;

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References

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  1. Matthew O. Jackson, 2003. "Allocation Rules for Network Games," Working Papers, Fondazione Eni Enrico Mattei 2003.51, Fondazione Eni Enrico Mattei.
  2. Hubert, Franz & Ikonnikova, Svetlana, 2009. "Investment Options and Bargaining Power the Eurasian Supply Chain for Natural Gas," MPRA Paper 17854, University Library of Munich, Germany.
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