Pairwise Stability in Weighted Network Formation Games: Selection and Computation

This paper is concerned with the selection and computation of pairwise stable networks when agents have differentiable and concave utility functions. We show that a pairwise stable network can be obtained by finding a Nash equilibrium of a noncooperative game played by the nodes and links in the network. Based on this observation, we introduce a logarithmic tracing procedure and a path-following algorithm for network formation games. We apply the algorithm to several models in the literature and make comparisons with two existing algorithms: a path-following algorithm based on the linear tracing procedure (LinTP) and a decompose and exhaustive search method (DaE). Numerical results indicate that the proposed method is more than four times as efficient as LinTP. Although DaE demonstrates exceptional efficiency for small-scale problems, our method outperforms it significantly for large-scale problems, where DaE may fail to find a solution. We also show that the decomposition technique of DaE can be used to further accelerate our algorithm for a special class of problems.