Dynamic network formation with farsighted players and limited capacities

Abstract

We investigate a T-stage dynamic network formation game with linear-quadratic payoffs. Players interact through network which they create as a result of their actions. We study two versions of the dynamic game and provide the equilibrium analysis. First, we assume that players sequentially propose links to others with whom they want to connect and choose the levels of contribution for their links. The players have limited total contributions or capacities for forming links at every stage which can differ among players and over time. They cannot delete links, but the principle of natural elimination of links with no contribution is adopted. Next, we assume that the players simultaneously and independently propose links to other players and have overall limited capacities for the whole game, and not for each stage. This means that every player can redistribute the capacity not only over links, but also over time. The equilibrium concept for the first version of the dynamic game is subgame perfect equilibrium, while it is the Nash equilibrium in open-loop strategies for the second version. Both models are illustrated with numerical examples.