The Stability and the Formation of Coalition Structures in Normal Form TU Games

More economists are interested in analyzing situations in which cooperative behavior within a coalition coexists with strategic behavior across the coalitions. The underlying equilibrium is defined as the hybrid solution with a distribution rule (HSDR), which could contribute to these studies to the same extent that Nash equilibrium does to strategic behavior. The paper also defines the stable coalition structure, which extends the ideas in Thrall and Lucas (1963), Shenoy (1979) and Hart and Kurz (1983) to normal form TU games. These extensions not only make earlier results applicable to oligopoly markets but also provide insights on the refinement of Nash equilibria. Sufficient conditions for the existence of HSDR are provided, and three models of endogenizing coalition structure are constructed (JEL#: C62, C71, C72).