Sequential Formation of Coalitions through Bilateral Agreements

• Authors: Nicolás Porteiro, David Pérez-Castrillo and Inés Macho-Stadler.
• BSE Working Paper: 84 | September 15
• Keywords: Coalition formation , bilateral agreements , cournot
• JEL codes: C72, D62, D40
• Coalition formation
• bilateral agreements
• cournot

We study a sequential protocol of endogenous coalition formation based on a process of bilateral agreements among the players. We apply the game to a Cournot environment with linear demand and constant average costs. We show that the final outcome of any Subgame Perfect Equilibrium of the game is the grand coalition, provided the initial number of firms is high enough and they are sufficiently patient.