What coalitions will be formed?
Chapter 11 explored the cooperative decisions of an existing coalition for production and exchange. Following the logic of backward induction, this chapter addresses the prior question: what coalitions will be formed? For the purposes of this part of the book, that question has two parts: (1) within a given set of information-sharing links, some feasible coalitions may nevertheless be inconsistent. For example, a particular agent cannot both be included and excluded from a particular coalition. Thus, the first question is: which of these coalitions will form? (2) What will influence or determine the links that are formed and maintained? In addressing the first question we will again draw on ideas from cooperative game theory, in the broad tradition of the theory of the core; for the second, noncooperative game theory and random processes.
In the theory of superadditive games in coalition function form, the core of the game comprises coalitions and payoff schedules that are stable under a process of recontracting. (Chapter 8 above). It is not clear that recontracting is “cooperative” in the fullest sense, since each individual or group chooses which of two or more coalitions to affiliate with on the basis of the benefits they receive, regardless of the benefits to others. Nevertheless, (1) it is presupposed that, once the recontracting process is finished, coalitional decisions will be for mutual benefit. Perhaps recontracting could be more clearly called “contract shopping.” (2) Recontracting captures important aspects of “competition” as neoclassical economics uses the term.
Economics uses the term “competition” in a special and limited sense. Consider, as an example that contrasts with the economist’s usage, a neighborhood loan-shark who responds to competitive entry by having the competitor’s legs broken. In the non-economist’s use of the word “competitive,” the loan-shark’s action is extremely and aggressively competitive! However, the economic theory of competition assumes away any possibility of competitive threats of this sort. Similarly, a government-connected oligarch who has his competitor jailed for alleged tax evasion is not acting
“competitively” as economic theory uses the term. Economic theory allows only one sort of competitive strategy: making a better offer. In simpler economic theories a “better offer” means a cheaper price, although we recognize that in practice the offer may have nonprice dimensions as well. Perhaps it would be clearer if the phrase “competitive offering” were substituted for “competition.” In any case, the recontracting process generalizes competitive offering, as the literature on the core of a market game demonstrates (Chapter 8, section 8.2.1 above). Accordingly, stability under recontracting is extended to the class of games we now consider.