Hold–Up, Multilateral Bargaining, and StrategicInvestment:The Eurasian Supply Chain for Natural Gas

We analyze how investment into the pipeline system supplying Russian natural gas to WesternEurope is distorted for strategic reasons. We use a two stage multilateral bargaining game amongheterogenous players, some lacking the ability to make long-term commitments. At the first stagethe players negotiate contracts over access rights and investment. At the second stage investmentcost are sunk, capacities are given and the players bargain about the sharing of rents from previousinvestment. Our qualitative and quantitative analysis predicts excess capacities in equilibrium andexplains overinvestment on some tracks and underinvestment on others as an attempt to createcountervailing power.