  We investigate the impact of coalition formation on the efficiency of Cournot
games where producers face uncertainties. In particular, we study a market
model where firms must determine their output before an uncertain production
capacity is realized. In contrast to standard Cournot models, we show that the
game is not efficient when there are many small firms. Instead, producers tend
to act conservatively to hedge against their risks. We show that in the
presence of uncertainty, the game becomes efficient when firms are allowed to
take advantage of diversity to form groups of certain sizes. We characterize
the tradeoff between market power and uncertainty reduction as a function of
group size. In particular, we compare the welfare and output obtained with
coalitional competition, with the same benchmarks when output is controlled by
a single system operator. We show when there are $N$ firms present, competition
between groups of size $\Omega(\sqrt{N})$ results in equilibria that are
socially optimal in terms of welfare and groups of size $\Omega(N^{2/3})$ are
socially optimal in terms of production. We also extend our results to the case
of uncertain demand by establishing an equivalency between Cournot oligopoly
and Cournot Oligopsony. We demonstrate our results with real data from
electricity markets with significant wind power penetration.
