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Games in the Eurasian gas supply network: Multinational bargaining, Strategic investment, and Hold-up

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  • Ikonnikova, Svetlana

Abstract

The paper analyzes multilateral relations and distortions of investments in the Eurasian gas network, supplying gas from countries of the Former Soviet Union to Western Europe. We use a two stage model of endogenous coalition formation to study cooperation among gas producers and transiters, some lacking the ability to make long-term commitments. In the first stage, the players cooperate to invest in pipelines and contract the sharing of rents. In the second stage, players form supply chains and bargain over supply profit sharing. Since competing supply chains can be formed, cooperation involves externalities. Our quantitative analysis predicts overinvestment as well as underinvestment in the network as an attempt to create countervailing power. Among other things we explain why Russia invests in the expensive pipeline through the Baltic sea and why Caspian gas producers are eager to build expensive bypasses around Russia.

Suggested Citation

  • Ikonnikova, Svetlana, 2007. "Games in the Eurasian gas supply network: Multinational bargaining, Strategic investment, and Hold-up," MPRA Paper 17852, University Library of Munich, Germany, revised Nov 2008.
    • Handle: RePEc:pra:mprapa:17852
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    References listed on IDEAS

    as
    1. Lars A. Stole & Jeffrey Zwiebel, 1996. "Intra-firm Bargaining under Non-binding Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(3), pages 375-410.
    2. Rajan, Roby, 1989. "Endogenous Coalition Formation in Cooperative Oligopolies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 863-876, November.
    3. Ilya Segal, 2003. "Collusion, Exclusion, and Inclusion in Random-Order Bargaining," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 439-460.
    4. Yi, Sang-Seung & Shin, Hyukseung, 2000. "Endogenous formation of research coalitions with spillovers," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 229-256, February.
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    More about this item

    Keywords

    strategic investment; hold-up; coalitional bargaining; gas supply; externalities;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General

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