In response to the drastic increase in the traffic loads being served by existing cellular wireless networks, small cells are envisioned as a promising solution to extend the coverage and offload the traffic from the overburdened macrocells. However, the interference management amongst densely deployed small cells remains a technical challenge. In this paper, a neighbourhood cooperation‐based interference mitigation scheme is proposed. By forming coalitions, the transmissions of small‐cell base stations (SBSs) within the coalition are coordinated, and the co‐tier interference amongst them is thus suppressed. Considering the facts that SBSs are selfish and rational, the cooperative behaviour of the neighbourhood SBSs is formulated as a coalition game in partition form. To achieve a final stable coalition structure, the concept of recursive core is first introduced. Then a simple distributed merge‐only algorithm is proposed, and its performance, in terms of stability, convergence and complexity, is theoretically analysed. The dynamic process of the coalition formation is further investigated. Simulation results show that the proposed algorithm can improve the individual throughput of SBS by 5.6% and 27.3%, respectively, when compared with the classical and non‐cooperative cases. Copyright © 2014 John Wiley & Sons, Ltd.