Power at general equilibrium

We integrate individual power in groups into general equilibrium models with endogenous group formation. We distinguish between real power (utility gain from being in groups) and power-related parameters in group decision making, like utilitarian welfare weights in the case of welfare maximization or relative bargaining power in Nash bargaining. We find that higher “parametric power” does not necessarily translate into higher equilibrium utility or higher real power. One reason is that induced price changes may offset the group member’s increased influence and the resulting benefits. A second reason is that the group may dissolve when a group member gains too much influence, because other members can exercise the option to leave. We also show that maximal real power can be compatible with Pareto efficiency. We further identify circumstances when changes of power in one group do not impact on other groups. Finally, we establish existence of competitive equilibria, including equilibria where some individual enjoys real power.