Consider an environment with widespread externalities, and suppose that binding agreements
can be written. We study coalition formation in such a setting. Our analysis proceeds
by defining on a partition function an extensive-form bargaining game. We establish
the existence of a stationary subgame perfect equilibrium for such a game. Our main
results are concerned with the characterization of equilibrium coalition structures.
We develop an algorithm that generates (under certain conditions) an equilibrium
coalition structure. Our characterization results are especially sharp for symmetric
partition functions. In particular, we provide a uniqueness theorem and apply our
results to a Cournot oligopoly.