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

  • Roberto Roson

    ()

    (Department of Economics, University Of Venice Cà Foscari)

  • Franz Hubert

    (Humboldt University, Berlin)

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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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2014/WP_DSE_roson_hubert_02_14.pdf
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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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  1. Franz Hubert & Onur Cobanli, 2012. "Pipeline Power," FIW Working Paper series 093, FIW.
  2. Matthew O. Jackson, 2003. "Allocation Rules for Network Games," Working Papers 1160, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Franz Hubert & Svetlana Ikonnikova, 2011. "Investment Options And Bargaining Power: The Eurasian Supply Chain For Natural Gas," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 85-116, 03.
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