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5 - Group Formation: The Interaction of Increasing Returns and Preferences Diversity

Published online by Cambridge University Press:  02 February 2010

Gabrielle Demange
Affiliation:
DELTA, Paris
Myrna Wooders
Affiliation:
University of Warwick
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Summary

Introduction

In a large range of political and economic situations a group of individuals sharing common interests can pursue them more efficiently through a coordinated action. Returns to coordinated action explain why decisions are conducted within organized groups. Most often also, individuals differ in some aspects. The diversity in individual tastes hampers a full exploitation of coordination and encourages the splitting of society into smaller self-sufficient groups. The main purpose of this chapter is to analyze group formation under these two opposite forces: increasing returns to size and to coordination on the one hand and heterogeneity of preferences on the other. In particular, we try to understand which kind of competition among groups allows for an efficient and stable organization. Competition among firms under increasing returns to scale and competition among large communities are two prominent domains of application.

Most often there is a tension between the exploitation of the potential gains to collective action and the introduction of some form of competition among groups. To illustrate this tension, consider an industry in which the exploitation of increasing returns to scale calls for a small number of active firms, each one serving a large set of customers. As a result, competition between active firms is softened. The proponents of contestable markets argue that the perfect freedom of entry and exit in the industry introduces a very strong competitive force, which promotes efficiency (Baumol, Panzer, and Willig 1982).

Type
Chapter
Information
Group Formation in Economics
Networks, Clubs, and Coalitions
, pp. 171 - 208
Publisher: Cambridge University Press
Print publication year: 2005

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