Cooperative oligopoly games with boundedly rational firms

TL;DR

This paper studies cooperative oligopoly games with boundedly rational firms, showing how cognitive constraints affect coalition stability and core existence, especially as the number of firms grows large.

Contribution

It introduces a model where firms use heuristics to predict outsiders' structures, analyzing the core's properties under these bounded rationality assumptions.

Findings

Core is non-empty with many firms.

Distribution dominance affects core subsets.

Bounded rationality influences coalition stability.

Abstract

We analyze cooperative Cournot games with boundedly rational firms. Due to cogni- tive constraints, the members of a coalition cannot accurately predict the coalitional structure of the non-members. Thus, they compute their value using simple heuris- tics. In particular, they assign various non-equilibrium probability distributions over the outsiders' set of partitions. We construct the characteristic function of a coalition in such an environment and we analyze the core of the corresponding games. We show that the core is non-empty provided the number of firms in the market is sufficiently large. Moreover, we show that if two distributions over the set of partitions are related via first-order dominance, then the core of the game under the dominated distribution is a subset of the core under the dominant distribution.