Strategic Formation of Homogeneous Bargaining Networks

Abstract

We analyze a model of strategic network formation prior to a Manea (2011) bargaining game: ex-ante homogeneous players form costly undirected links, anticipating expected equilibrium payoffs from the subsequent network bargaining. Assuming patient players, we provide a complete characterization of generically pairwise stable networks: specific unions of separated pairs, odd circles, and isolated players constitute this class. We also show that many other structures, such as larger trees or unbalanced bipartite networks, cannot be pairwise stable at all. As an important implication, this reveals that the diversity of possible bargaining outcomes is substantially narrowed down, provided that the underlying network is (generically) pairwise stable.

Keywords: Bargaining, Network Formation, Noncooperative Games

JEL Classification: C72, C78, D85