PRELIl1INARY DRAFT NOT FOR CIRCULATION ON THE STABILITY OF EFFICIENT NETWORKS: Integration and Fragmentation in Communication and Transportation Networks*

Stability of efficient networks is studied by applying cooperative game theory to a three-node system. Conditions are sought which ensure the existence of a core to the corresponding welfare game. I depart from existing literature by examining three cases that capture features common to communication and transportation industries: (i) nonseparable economies of network integration, (ii) realistic restrictions on price structure, and (iii) imperfect substitutability among alternate routes. Each feature shifts the strategic balance between the incumbent network and potential entrants. I derive conditions under which entry is profitable. * Presented at ORSA/TIMS Conference, Denver, October 1988 and Fifth World Conference on Transportation Research, Yokohama, Japan,July 1989. The views expressed in this paper are my own and should not be attributed to GTE Corporation nor any of its subsidiaries.