This paper studies a spatial model of electronic business network formation where firms build links based on a cost-benefit analysis. Benefits result from directly and indirectly connected firms in terms of knowledge flows, which are heterogeneous: a key-player(e.g. a firm providing an exchange platform in a business-to-business network) provides a higher level of knowledge flows than peripheral firms (e.g. tier 3 suppliers in a vertically differentiated industry). For intermediate cost values of link formation, stable andefficient network structures comprise only a subset of the total set of firms, excluding peripheral firms which are most distantly located to the key player. When link formation implies a certain degree of network congestion, the stable and efficient network size issmaller than in a model with bilateral decisions upon link formation between two firms.
Network formation business-to-business spatial model