Mechanisms for Coalition Formation and Cost Sharing in an Electronic Marketplace

Abstract

In this paper we study the mechanism design problem of coalition formation and cost sharing in an electronic marketplace, where buyers can form coalitions to take advantage of discounts based on volume. The desirable mechanism properties include stability(in the core) and incentive compatibility with good efficiency, concepts from the perspectives of cooperative game theory and non-cooperative game theory. We analyze the problem from both these perspectives and establish relationships between the solution concepts. We also present a group of reasonable mechanisms that are derived from the two perspectives. Empirical results show positive correlation between stability and incentive compatibility(efficiency). The mechanism which shares the coalition cost in an egalitarian way is the best in terms of both stability and incentive compatibility.