Impact of equity and equality on stability and collusion in a decentralized network

Abstract

We develop a noncooperative game theoretic model to examine network performance and stability related implications of allocation mechanisms that endogenously balance equity vis-a-vis equality, and hence, the degree of collusion among the network firms in a decentralized setting. We obtain the structural results and bounds for our model parameters in this regard by focusing on two important factors: (i) synergy between the firms, and (ii) the number of network firms. Our contribution to the existing literature is threefold in showing that: (i) perfect equality among the network firms can be suboptimal, (ii) explicit cooperation among the firms is not always necessary for the efficient network performance, and (iii) the network firms do not completely collude, and yet, network stability can be enhanced. By particularly modeling a two-tier network, we exhibit our results in a decentralized setting and highlight the role of a coordinating agent in enhancing competitiveness of the network firms. We demonstrate that inefficiencies and instability of decentralization can be eliminated by incorporating an additional degree of freedom in the network formation game. Our model and the structural results are applicable to networks such as producers’ cooperatives, cartels, exclusive production facilities, industrial clusters, joint production and research facilities, etc., wherein the conflicts of equity–equality and degree of collusion are predominant.