Unsystematic risk and coalition formation in product markets

We study the conjecture that increasing market volatility leads to larger coalitions in an oligopoly. Here, coalition formation decisions are made in a noncooperative game by risk averse firms. They use a sequential offer-counter-offer procedure initiated by Selten and Rubinstein. We find that the conjecture generally fails in a small oligopoly whose firms play a unanimity game, but it is validated in an oligopoly that allows open membership. However, it is valid in a small oligopoly if market volatility is sufficiently high, whatever the rule of membership. (C) 2002 Elsevier Science B.V. All rights reserved.