ENDOGENOUS FORMATION OF JOINT VENTURES WITH EFFICIENCY GAINS

I study 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 industrywide joint venture is the stable outcome when membership of a joint ventur e is open to outside firms but typically not when membership can be re stricted 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.