Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division

This paper analyzes a sequential game of coalition formation when the division of the coalitional surplus is fixed and the payoffs are defined relative to the whole coalition structure. Gains from cooperation are represented by a valuation which maps coalition structures into payoff vectors. I show that any core stable coalition structure can be attained as a stationary perfect equilibrium of the game. If stationary perfect equilibria may fail to exist in general games, a simple condition is provided under which they exist in symmetric games. Furthermore, symmetric stationary perfect equilibria of symmetric games generate a coalition structure which is generically unique up to a permutation of the players. A general method for the characterization of equilibria in symmetric games is proposed and applied to the formation of cartels in oligopolies and coalitions in symmetric majority games. Journal of Economic Literature Classification Numbers : C78, C71. © 1996 Academic Press, Inc.