Coalitions and Networks in Industrial Organization

Recent years have witnessed a surge of interest in the formation of coalitions and networks in Industrial Organization. Most of this interest stems from the emergence of new forms of cooperation and competition between ...rms. The development of strategic alliances, the acceleration in the creation of joint ventures and joint production and research facilities have given rise to a new strategic environment in which ...rms cooperate in some domains and compete in others. At the same time, new approaches have been developed in game theory to analyze the endogenous formation of coalitions and networks, providing simple tools which can be applied to study the formation of alliances and groups of ...rms. The objective of this paper is to provide a selective survey on recent approaches to coalition and network formation in Industrial Organization, and to o¤er a uni...ed framework in which the di¤erent approaches can be compared. While the range of cooperative agreements signed by ...rms in reality is quite large, this paper focuses on two extreme forms of cooperation – collusive agreements and cost-reducing alliances. In those two simple models, we analyze the formation of groups and networks of ...rms under various institutional arrangements. Collusive agreements cover cartels choosing quotas (as in many commodity markets), price-...xing agreements, bidding rings as well as market sharing or exclusive territories agreements. The striking feature of collusive agreements, already pointed out by Stigler (1950), is that the formation of a cartel is a public good, inducing positive externalities to ...rms outside the cartel. Hence, typically, ...rms have an incentive to free-ride on the cartels formed by other ...rms, and collusive agreements are highly unstable. However, we will see that this conclusion can only be reached under some institutional procedures of group