Strategic Investment and Bargaining Power in Supply Chains: A Shapley Value Analysis of the Eurasian Gas Market

Russian natural gas is delivered to Western Europe by pipelines, running throughUkraine, Poland and other transit countries. We derive the bargaining power of thedifferent players along this supply chain endogenously from the architecture of thetransmission system and its possible extensions by applying the Shapley-Value as asolution concept for multilateral negotiations. Our calculations show that a new link,which has been deliberately design to weaken Ukraine´s strong position has in factlittle strategic value, while a direct, though very costly, access through the Baltic Seagreatly strengthens Russia. Accounting for the possibility that quasi rents from newinvestment are prone to opportunistic recontracting, we can rationalize the recentextensions to the system, as a response to Ukraine´s lack of credibility in makinglong term commitments. We also derive predictions about the likely development ofthe industry in the near future.