A Network Formation Model in Extensive Form

Abstract

In this chapter we consider extensive-form games of network formation. The starting point is a coalitional game that describes the profits obtainable by all possible coalitions of players. The players engage in a network-formation process to be able to coordinate their actions and realize the possible gains from cooperation. The network-formation process itself is sequential, i.e., links are formed one at a time and players observe which links are formed as the game progresses. Once a network has been formed, the players bargain over the division of the jointly obtained profits. This bargaining process is not modeled explicitly. Rather, an exogenously given allocation rule is used to describe the payoffs to the players in any of the networks that they can form. Most of the results in this chapter are obtained for network-formation games in which the allocation rule used to determine the players’ payoffs is the Myerson value.