Local consolidation of link-type infrastructures

A simple link formation game is developed and analyzed for the situation where there are three local governments (nodes) in one-dimensional space. Each node provides its own links to connect to its neighboring nodes aiming at minimizing the link-formation cost while satisfying local demand for connection to other nodes. The inefficiency of equilibrium link-consolidation is clarified. The intervention by central government with ´cooperative rule´ by which links must be consolidated through bargaining by the both-end nodes is considered and its effects on efficiency is analyzed. It is shown that the intervention can achieve (but not all the case) the socially optimum consolidation level.