Games in the Eurasian gas supply network: Multinational bargaining, Strategic investment, and Hold-up

The paper analyzes multilateral relations and distortions of investments in the Eurasian gas network, supplying gas from countries of the Former Soviet Union to Western Europe. We use a two stage model of endogenous coalition formation to study cooperation among gas producers and transiters, some lacking the ability to make long-term commitments. In the first stage, the players cooperate to invest in pipelines and contract the sharing of rents. In the second stage, players form supply chains and bargain over supply profit sharing. Since competing supply chains can be formed, cooperation involves externalities. Our quantitative analysis predicts overinvestment as well as underinvestment in the network as an attempt to create countervailing power. Among other things we explain why Russia invests in the expensive pipeline through the Baltic sea and why Caspian gas producers are eager to build expensive bypasses around Russia.