Working Papers, Institute of Mathematical Economics 467
In this paper, we study a standard Cournot model where firms are able to form bilateral collaboration agreements which lower marginal cost. While a static analysis of such a model can be found in Goyal and Joshi , we introduce an evolutionary model. Stable networks (in the static sense) exhibit the dominant group architecture and can be characterized with respect to the size of the group. However, in contrast to Goyal and Joshi , we find that the group size of connected firms in stochastically stable networks is generically unique and monotonically decreasing in cost of link formation. Further, there exists a lower bound on the group size of connected firms such that a non-empty network can be stochastically stable.