14th journées Louis-André Gérard-Varet

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Cooperation, Competition and Entry in a Tullock Contest
Wouter Vergote, Gilles Grandjean, Daniela Tellone

Last modified: 2015-03-15

Abstract


We propose a model of network formation among competitors in a Tullockcontest. Agents first form their partnerships and then choose theirinvestment in the contest. By cooperating with a competitor, an agentincreases his valuation for the contested prize, but he also increases thevaluation of his rival. It is thus not obvious that competitors decide tocooperate. We find that the network formation process can act as a barrierto entry. The pairwise equilibrium networks feature a group of completelyinterconnected agents and another group of isolated agents who choose not toparticipate to the contest. We then analyze the impact of network formationon total surplus. We find that a social planner may increase the totalsurplus by reallocating links in order to increase the asymmetry betweenagents, if it does not reduce the number of participating agents.\ This isnot necessarily true if fewer contestants participate. We show that barriersto entry may either hurt total surplus as the winner of the prize does notexploit all the possible network benefits, or improve it since less rent isdissipated as competition becomes less fierce. Finally, we demonstrate thatwhen networking acts as a barrier to entry, pairwise equilibrium networksare inefficient.


Keywords


Network Formation; Tullock Contest; Participation Constraints