Nash networks with heterogeneous links

Abstract

A non-cooperative model of network formation is developed. Link formation is one-sided. Information flow is two-way. The model builds on the work of Bala and Goyal who permit links to fail with a certain common probability. In our model the probability of failure can be different for different links. The set of networks which are Nash for suitably chosen model parameters consists of all essential networks. We specifically investigate Nash networks that are connected, super-connected, or stars. Efficiency, Pareto-optimality, and existence issues are discussed through examples. Three alternative model specifications are explored to address potential shortcomings. © 2005 Elsevier B.V. All rights reserved.