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The evolution of a global network: a game of coalition formation

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  • Chichilnisky, Graciela

Abstract

The paper explores the evolution of global networks. Examples include networks which process cross-border securities trades: CEDEL, Euroclear, and FITEL. I formalize a network market with many users: due to fixed costs the supply is downward slopping, and due to externalities the demand is upward slopping. Using game theory and dynamic stochastic analysis I show how the network evolves. I introduce the concept of critical mass, define a stochastic process of coalition formation, and specify the long run properties of the resulting network markets, including dynamics and stability properties, and the number of stable configurations. I explain the formation of coalitions of users when the players are heterogeneous: there exist clusters of players which produce more externalities to each other that they do the rest: e.g. global custodians. The gains from distinguishing such clusters are surprisingly large: the probability of success of the network "star-up" increases exponentially with decreases in the cluster size.

Suggested Citation

  • Chichilnisky, Graciela, 1995. "The evolution of a global network: a game of coalition formation," MPRA Paper 8487, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:8487
    as

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    File URL: https://mpra.ub.uni-muenchen.de/8487/1/MPRA_paper_8487.pdf
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    References listed on IDEAS

    as
    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    2. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    3. Shmuel S. Oren & Stephen A. Smith, 1981. "Critical Mass and Tariff Structure in Electronic Communications Markets," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 467-487, Autumn.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    global networks; global markets; global custodians; coalition; network game; critical mass;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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