Networks of collaboration in oligopoly

In an oligopoly, prior to choosing quantities/prices, each ̄rm has an opportunity to form pair-wise collaborative links with other ̄rms. These pair-wise links lower costs of production of the ̄rms which form a link. The collection of pair-wise links de ̄nes a collaboration network. We study stable and e±cient networks under di®erent types of market competition. We ̄nd that except under extreme competition, a la Bertrand, ̄rms have an incentive to collaborate with their competitors to lower costs of production. We ̄nd that two simple architectures, the complete network, where every ̄rm has a collaboration link with every other ̄rm, and the network with a dominant group, which contains a large number of completely connected ̄rms and several isolated ̄rms, are stable under di®erent market conditions. We also observe that stable networks are often e±cient from a social point of view. ¤Econometric Institute, Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands. Email: [email protected] yDepartment of Economics, 624 Funger Hall, George Washington University, 2201 G Street N.W., Washington D.C. 20052, USA. E-mail: [email protected] We thank Francis Bloch, Jan Boone, Bhaskar Dutta, Mathew Jackson, Patrick Legros, Jose Luis Moraga, Debraj Ray, Pauline Rutsaert, Fernando Vega-Redondo, and Rajiv Vohra for helpful comments. This paper has been presented at Alicante, Delhi School of Economics, ECARE (Brussels), Erasmus, ISI (Delhi), George Washington University and the Conference on Networks, Groups, and Coalitions (Manresa). We thank the participants for their comments.