Networks of collaboration in oligopoly

In an oligopoly, prior to competing in the market, firms have an opportunity to form pair-wise collaborative links with other firms. These pair-wise links involve a commitment of resources and lead to lower costs of production of the collaborating firms. We study the incentives of firms to form links and the architecture of the resulting collaboration network. We find that incentives to form links are intimately related to the nature of market competition. Our analysis also suggests that collaborations are used by firms to generate competitive advantage and that strategically stable networks are often asymmetric, with some firms having many links while others have few links or are isolated. Specifically, we show that networks with the dominant group architecture, stars, and inter-linked stars are stable. We also present some results on the architecture of socially efficient networks. (C) 2003 Elsevier Science (USA). All rights reserved.