Abstract
This paper analyzes incentives of oligopolistic firms to form strategic alliances and the effects of the endogenously derived alliance structure on product market competition. A three-stage-game is considered: in the first stage firms decide about forming strategic alliances, in the second stage each alliance designs a strategic contract, and in the third stage alliance members and outsiders compete in the product market. It is shown how contractual terms about transfer prices and profit sharing in a production joint venture for an intermediate product may serve as an appropriate commitment device. Profits of alliance members and outsiders under different alliance structures are then determined. Based on this profit structure, the alliance formation process is analyzed. In a linear Cournot oligopoly with at most five firms only one alliance forms and industry output is reduced. With more than five firms an alliance structure with at least two alliances results (if an equilibrium of the alliance formation game exists) and in this case competition is enhanced.
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