Coalition Formation, Bargaining and Investments in Networks with Externalities: Analysis of the Eurasian Gas Supply Network

We present a new methodology to study how upstream (e.g. producers) and downstream (e.g. transiters) players form coalitions, bargain over joint profit sharing and invest. Within coalitions players combine resources, coalitions compete on a market. Profit of each coalition depends on the cooperation among the outside players. Hence, we consider a game with externalities. To find the equilibrium coalition structure and the expected payoffs, we use the solution proposed by Maskin (2003). Payoffs reflect the bargaining power and depend on capacities of players. We show, how investment options available to players matter. We apply the study to analyze the Eurasian gas supply network. Russia and Turkmenistan - producers and Ukraine, Belorus, Azerbaijan, Iran - transiters form coalitions to supply gas and bargain over profit sharing. Besides, the players invest in pipelines. We derive the bargaining power of the countries from the architecture of the network and calculate the strategic value of the different pipeline projects.