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

Graciela Chichilnisky

MPRA Paper from University Library of Munich, Germany

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.

Keywords: global networks; global markets; global custodians; coalition; network game; critical mass (search for similar items in EconPapers)
JEL-codes: D85 F3 (search for similar items in EconPapers)
Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:8487

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