Group formation: The interaction of increasing returns and preferences' diversity

In a large range of political and economic situations, group formation is driven by two opposite forces : increasing returns to size and to coordination on the one hand, heterogeneity of preferences on the other. An important question is whether competitive pressures, such as described by free mobility and free entry, lead to an efficient and organization of the society into possibly several self-sufficient groups. This chapter reviews some answers to this question, positive and negative, identifies the role of some crucial features, and discusses some difficulties linked with negative externalities and adverse selection. The sustainability of an oligopoly under increasing returns to scale and competition among jurisdictions are two prominent domains of application.