Bargaining Power and Value Sharing in Distribution Networks: A Cooperative Game Theory Approach

This paper introduces a novel methodology for analyzing bargaining games on network markets, which are markets where transactions occur by means of distribution networks (e.g., gas, electric energy, water, etc.). The overall economic surplus obtained in the market is distributed among all network agents the on the basis of their bargaining power, which in turn depends on a variety of factors: position of each agent (e.g., a country) in the network, reliability in the cooperation scheme (e.g., geo-political stability), existence of market distortions and availability of outside options (e.g., alternative energy sources). The method we propose, which is illustrated here through an application to a fictitious network structure, is based on a two-stage process: first, a network optimization model is used to generate payoff values under different coalitions and network structures; second, cooperative game solutions are identified. Any change in the network structure entails both a variation in the overall welfare level and in the distribution of surplus among agents, as it affects their relative bargaining power. Therefore, expected costs and benefits, at the aggregate as well as at the individual level, can be compared to assess the economic viability of any investment in network infrastructure. A number of model variants and extensions are also considered: changing demand, exogenous instability factors, market distortions, externalities and outside options.