Chongmin Kimand Hyukseung Shin
Abstract: The purpose of this paper is to analyze the welfare implication of endogenous formation of coalitions among firms producing goods that have complementary as well as substitute characteristics. We consider an economic environment where three goods are necessary for a composite good and composite goods are substitutes to each other. We find the socially efficient coalition and study whether the private incentives coincides with the social incentive. We provide a sufficient condition under which the welfare maximizing coalition structure can be achieved as an equilibrium, that is, we show that the welfare maximizing coalition is a stable Nash coalition structure.