Formation of Coalition Structures as a Non-Cooperative Game

Abstract

Traditionally social sciences are interested in structuring people in multiple groups based on their individual preferences. This paper suggests an approach to this problem in the framework of a noncooperative game theory.

Definition of a suggested finite game includes a family of nested simultaneous non-cooperative finite games with intra- and inter-coalition externalities. In this family, games differ by the size of maximum coalition, partitions and by coalition structure formation rules.

A result of every game consists of partition of players into coalitions and a payoff profile for every player. Every game in the family has an equilibrium in mixed strategies with possibly more than one coalition. The results of the game differ from those conventionally discussed in cooperative game theory, e.g. the Shapley value, strong Nash, coalition-proof equilibrium, core, kernel, nucleolus.

We discuss the following applications of the new game: cooperation as an allocation in one coalition, Bayesian games, stochastic games and construction of a non-cooperative criterion of coalition structure stability for studying focal points.

Keywords: Non-Cooperative Game, Nash Equilibrium, Cooperative Games, Focal Point

JEL Classification: C71, C72, C73