A One-Stage Model of Network Formation and Payoff Division

Abstract

In this chapter, which is based on Slikker and van den Nouweland (2001), we study a model of network formation in which players bargain over the formation of links and the division of the payoffs simultaneously. This makes the model very different from those in previous chapters, where network-formation and bargaining over payoff division occurred in two sequential stages. We introduce the one-stage model of network formation and payoff division in section 9.1. Because bargaining over payoffs in this model occurs while bargaining over network formation and not after it, we cannot use an allocation rule to model the payoff division once a network has been formed, like we did before. The one-stage model of network formation and payoff division will generate predictions about the networks formed as well as about the payoffs of the players. We analyze both the networks and the payoffs that result according to several equilibrium concepts. In section 9.2 we analyze Nash equilibria, in section 9.3 strong Nash equilibria, and in section 9.4 coalition-proof Nash equilibria.