Formation of Bargaining Networks via Link Sharing

Abstract

This paper presents a model of bargaining networks between sellers and buyers, when some sellers are willing to share access to their local markets. Given a status quo network, game is played in two stages: in the first stage, sellers form a new network by signing two-sided contracts; in the second stage, sellers and buyers bargain for the good. We propose one period bargaining mechanism, which links to the current bargaining network literature and assignment game. Using the mechanism twice in the game, we characterize the subgame perfect equilibria with pairwise (Nash) stable agreements. When the equilibrium exists, sharing always increases total volume of trade but may diminish the total market surplus on the behalf of sellers.

In the homogeneous case, equilibrium exists when number of buyers is significantly large or market has no new entrants. Under other parametrization, equilibrium exists only in special cases. When the global market is dominated by sellers and bargaining power of sellers relative to buyers is large, surplus is divided relatively equitably. In other cases, surplus is reallocated to sellers. In the equilibrium, two-part sharing contracts endogenously control for a hold up problem and seller's defaults. It is also shown that in the special case of the model with only one monopolistic seller and no new entrants, the sharing process organizes sellers in the supply chain order with “pine tree” structure and non-trivial contracts.

Keywords: Social Networks, Oligopoly Pricing, Collusion, Market Sharing Agreements

JEL Classification: L11, L140, L120