Endogenous Formation of Joint Ventures with Efficiency Gains

This paper studies stable structures of efficiency-enhancing joint ventures among symmetric firms. Efficiency gains that accrue to a joint venture are assumed to increase with its size. The socially efficient industry-wide joint venture is the stable outcome when membership of a joint venture is open to outside firms, but typically not when membership can be restricted. Members of a large joint venture want to restrict membership for strategic reasons -- e.g., in order to keep rival firms' costs high. Side payments among firms do not eliminate the strategic incentives of members of a large joint venture to limit membership.