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Membership Rule and Strategic Alliances: An Experimental Approach

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Abstract

Recently, new game theoretic approaches have been suggested that address the emergence of inter-firm collaborative agreements (strategic alliances) that are situated between standard market transactions of unrelated companies and their integration by means of mergers and acquisitions. This paper experimentally investigates the interdependence between two membership rules and the endogenously emerging interfirm collaborative structures. In the implemented frameworks, the formation of coalitions between competing firms is modelled as a two-stage non-cooperative game. On a first stage firms form collaborative coalitions in order to decrease their marginal costs of production. Consecutively, firms compete on the market. More precisely, we look at the coalition formation models of Bloch [RAND Journal of Economics, 26, 1995; Games and Economic Behavior, 14, 1996] who applies an exclusive membership rule and contrast it with a setting in which an open membership rule such as suggested in Yi [RAND Journal of Economics, 29, 1998] prevails. While in the former setting a firm can enter into a coalition only if all existing members of the coalition agree, in the latter setting a firm does not need the consent of anybody to join a coalition. In addition to comparing the behavior under the regimes of the two mentioned membership rules, we compare these baseline settings to others into which we introduce coalition formation costs increasing linearly with coalition size.

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