Coalition Formation and Potential Games

In this paper we study the formation of coalition structures in situations described by a cooperative game. Players choose independently which coalition they want to join. The payoffs to the players are determined by an allocation rule on the underlying game and the coalition structure that results from the strategies of the players according to some formation rule. We study two well-known coalition structure formation rules. We show that for both formation rules there exists a unique component efficient allocation rule that results in a potential game and study the coalition structures resulting from potential maximizing strategy profiles.