Stable and Efficient Electronic Business Networks: Key Players and theDilemma of Peripheral Firms

This paper studies a spatial model of electronic business networkformation where firms build links based on a cost-benefit analysis.Benefits result from directly and indirectly connected firms in terms ofknowledge flows, which are heterogeneous: a 'key-player' (e.g. a firmproviding 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). Forintermediate cost values of link formation, stable and efficient networkstructures comprise only a subset of the total set of firms, excludingperipheral firms which are most distantly located to the key player.When link formation implies a certain degree of network congestion, thestable and efficient network size is smaller than in a model withbilateral decisions upon link formation between two firms.