The Formation of Cooperatives: A Game‐Theoretic Approach with Implications for Cooperative Finance, Decision Making, and Stability

Abstract This paper departs from the traditional organization‐oriented approach to cooperative analysis. It exploits cooperation's functional similarity to vertical integration to examine individuals' incentives to form cooperatives. A model of formation of a purchasing cooperative is presented and developed as an n ‐person game with the core as a solution concept. Core existence is examined for both single‐ and multiple‐cooperative configurations, and cooperative finance methods are examined relative to finding core‐compatible allocation rules. The results provide insight into a cooperative's equilibrium output, stability, decision making, financing methods, and choice of open or restricted membership.