A Network Formation Model in Strategic Form

Abstract

In the current chapter, which is based on Dutta et al. (1998), we study strategic-form games of network formation. Like in chapter 6, we model situations in which the eventual distribution of payoffs is determined in two distinct stages. In the first stage players form links and in the second stage players negotiate over the division of the payoff, given the network that has been formed in the first stage. We model the first stage, the process of network formation, as a game in strategic form, in which players’ choices whether or not to form links are made simultaneously rather than sequentially. Like in the previous chapter, we do not model the second stage explicitly but use an exogenously given allocation rule to determine the payoffs to the players once a network has been formed. However, rather than focusing solely on the Myerson value, we consider a more general class of allocation rules which includes the Myerson value.