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Reciprocal Equilibria in Link Formation Games

Author

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  • Hannu Salonen

    (Department of Economics, University of Turku)

Abstract

We study non-cooperative link formation games in which players have to decide how much to invest in relationships with other players. A link between two players is formed, if and only if both make a positive investment. The cost of forming a link can be interpreted as the opportunity cost of privacy. We analyze the existence of pure strategy equilibria and the resulting network structures with tractable specifications of utility functions. Sufficient conditions for the existence of reciprocal equilibria are given and the corresponding network structure is analyzed. Pareto optimal and strongly stable network structures are studied. It turns out that such networks are often complete.

Suggested Citation

  • Hannu Salonen, 2014. "Reciprocal Equilibria in Link Formation Games," Discussion Papers 89, Aboa Centre for Economics.
    • Handle: RePEc:tkk:dpaper:dp89
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    References listed on IDEAS

    as
    1. Hannu Salonen, 2016. "Equilibria and centrality in link formation games," International Journal of Game Theory, Springer;Game Theory Society, vol. 45(4), pages 1133-1151, November.
    2. Bloch, Francis & Dutta, Bhaskar, 2009. "Communication networks with endogenous link strength," Games and Economic Behavior, Elsevier, vol. 66(1), pages 39-56, May.
    3. Sergio Currarini & Matthew O. Jackson & Paolo Pin, 2009. "An Economic Model of Friendship: Homophily, Minorities, and Segregation," Econometrica, Econometric Society, vol. 77(4), pages 1003-1045, July.
    4. Cabrales, Antonio & Calvó-Armengol, Antoni & Zenou, Yves, 2011. "Social interactions and spillovers," Games and Economic Behavior, Elsevier, vol. 72(2), pages 339-360, June.
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    Cited by:

    1. Fershtman, Chaim & Persitz, Dotan, 2018. "Social Clubs and Social Networks," CEPR Discussion Papers 12874, C.E.P.R. Discussion Papers.
    2. Walsh, A. M., 2019. "Games on Multi-Layer Networks," Cambridge Working Papers in Economics 1954, Faculty of Economics, University of Cambridge.
    3. Norma Olaizola & Federico Valenciano, 2020. "Characterization of efficient networks in a generalized connections model with endogenous link strength," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 11(3), pages 341-367, September.
    4. Chiu Ki So, 2016. "Network Formation with Endogenous Link Strength and Decreasing Returns to Investment," Games, MDPI, Open Access Journal, vol. 7(4), pages 1-9, December.
    5. Olaizola Ortega, María Norma & Valenciano Llovera, Federico, 2019. "Characterization of efficient networks in a generalized connections model with endogenous link strength," IKERLANAK Ikerlanak;2019-112, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    6. Hannu Salonen, 2016. "Equilibria and centrality in link formation games," International Journal of Game Theory, Springer;Game Theory Society, vol. 45(4), pages 1133-1151, November.
    7. Tenev, Anastas P., 2020. "“Friends Are Thieves of Time": Heuristic Attention Sharing in Stable Friendship Networks," Research Memorandum 026, Maastricht University, Graduate School of Business and Economics (GSBE).
    8. Baumann, L., 2019. "A Model of Weighted Network Formation," Cambridge Working Papers in Economics 1961, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    link formation games; reciprocal equilibrium; complete network;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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