Non-cooperative networks in oligopolies

In an oligopoly, prior to competing in the market, firms have an opportunity to pick up externalities from other firms by setting links. The links formation defines an industrial network. We study the incentives for firms to form links and the effect of this links formation on the architecture of the resulting networks. Our analysis shows that equilibrium networks differ dramatically depending on the nature of market competition (Cournot or Bertrand). More precisely, in the case of Cournot oligopoly, we should expect to see networks in which each firm obtains access to externalities of either all firms or no firm. In the case of Bertrand oligopoly, we should expect to see networks in which one firm derives benefits from externalities of all other firms while the latter get no externality. We also present some results on the architecture of socially efficient networks. (C) 2004 Elsevier B.V. All rights reserved.