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Cooperative Games

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Now ยท ๐ŸŽฏ Learning Objectives

Cooperative Games

๐ŸŽฏ Learning Objectives

  • Distinguish cooperative from non-cooperative games
  • Define coalitional games with transferable utility
  • Compute the Shapley value and understand its axioms
  • Find and interpret the core of a game
  • Understand the relationship between core and Shapley value

10.1 Intuition: Binding Agreements

In cooperative games, players can form binding agreements โ€” contracts enforceable by a third party. The question isn't "what will happen?" but "which coalitions will form and how will they split the gains?"
๐Ÿ”‘ Key Insight: Cooperative game theory asks: given that players can commit to any agreement, which payoffs are stable and fair? Real-world examples:
  • Business partnerships: How to split profits among co-founders
  • Cost allocation: How to divide joint costs among departments
  • Voting power: How much power does each member of a committee have?

10.2 Formal Definition

A coalitional game (with transferable utility) is a pair (N,v)(N, v):
  • N={1,2,โ€ฆ,n}N = \{1, 2, \dots, n\} โ€” set of players
  • v:2Nโ†’Rv: 2^N \to \mathbb{R} โ€” characteristic function, where v(S)v(S) is the total value coalition SS can generate Properties:
  • v(โˆ…)=0v(\emptyset) = 0 (empty coalition generates nothing)
  • Superadditivity: v(SโˆชT)โ‰ฅv(S)+v(T)v(S \cup T) \geq v(S) + v(T) for disjoint S,TS, T (merging coalitions don't destroy value)

10.3 The Shapley Value

Idea: What is a fair way to distribute the total value v(N)v(N) among players? A player's contribution depends on when they join the coalition โ€” first movers add more, latecomers add less. The Shapley value averages over all possible orders.

Formula

ฯ•i(N,v)=โˆ‘SโІNโˆ–{i}โˆฃSโˆฃ!ย (nโˆ’โˆฃSโˆฃโˆ’1)!n![v(Sโˆช{i})โˆ’v(S)]\phi_i(N, v) = \sum_{S \subseteq N \setminus \{i\}} \frac{|S|! \ (n - |S| - 1)!}{n!} \left[ v(S \cup \{i\}) - v(S) \right]
Where:
  • SS is a coalition that does not include ii
  • v(Sโˆช{i})โˆ’v(S)v(S \cup \{i\}) - v(S) is ii's marginal contribution to coalition SS
  • The weight โˆฃSโˆฃ!(nโˆ’โˆฃSโˆฃโˆ’1)!n!\frac{|S|! (n-|S|-1)!}{n!} is the probability of joining SS in a random permutation

Shapley Value Axioms

AxiomMeaning
Efficiencyโˆ‘iฯ•i=v(N)\sum_i \phi_i = v(N) โ€” total value is fully distributed
SymmetryIf ii and jj have identical marginal contributions, ฯ•i=ฯ•j\phi_i = \phi_j
Dummy playerIf ii adds nothing to any coalition, ฯ•i=0\phi_i = 0
AdditivityFor two games vv and ww , ฯ•i(v+w)=ฯ•i(v)+ฯ•i(w)\phi_i(v+w) = \phi_i(v) + \phi_i(w)

Example: Three-Player Game

v(1)=v(2)=v(3)=0v(1) = v(2) = v(3) = 0, v(12)=60v(12) = 60, v(13)=40v(13) = 40, v(23)=30v(23) = 30, v(123)=90v(123) = 90 Computing ฯ•1\phi_1: | SS | โˆฅSโˆฅ\|S\| | v(Sโˆช{1})โˆ’v(S)v(S \cup \{1\}) - v(S) | Weight | Contribution | |-----|-------|--------------------------|--------|-------------| | โˆ…\emptyset | 0 | v(1)โˆ’0=0v(1) - 0 = 0 | 0!2!3!=13\frac{0!2!}{3!} = \frac{1}{3} | 0 | | {2}\{2\} | 1 | v(12)โˆ’v(2)=60โˆ’0=60v(12) - v(2) = 60 - 0 = 60 | 1!1!3!=16\frac{1!1!}{3!} = \frac{1}{6} | 10 | | {3}\{3\} | 1 | v(13)โˆ’v(3)=40โˆ’0=40v(13) - v(3) = 40 - 0 = 40 | 1!1!3!=16\frac{1!1!}{3!} = \frac{1}{6} | 6.67 | | {2,3}\{2,3\} | 2 | v(123)โˆ’v(23)=90โˆ’30=60v(123) - v(23) = 90 - 30 = 60 | 2!0!3!=13\frac{2!0!}{3!} = \frac{1}{3} | 20 | ฯ•1=0+10+6.67+20=36.67\phi_1 = 0 + 10 + 6.67 + 20 = 36.67 Similarly: ฯ•2=31.67\phi_2 = 31.67, ฯ•3=21.67\phi_3 = 21.67 Check: 36.67+31.67+21.67โ‰ˆ90=v(123)36.67 + 31.67 + 21.67 \approx 90 = v(123) โœ“

10.4 The Core

Idea: An allocation (x1,โ€ฆ,xn)(x_1, \dots, x_n) is in the core if no coalition can do better by leaving the grand coalition.

Definition

An imputation x=(x1,โ€ฆ,xn)x = (x_1, \dots, x_n) is in the core if:
  1. Efficiency: โˆ‘iโˆˆNxi=v(N)\sum_{i \in N} x_i = v(N)
  2. Coalitional rationality: โˆ‘iโˆˆSxiโ‰ฅv(S)\sum_{i \in S} x_i \geq v(S) for all SโІNS \subseteq N

Example: Three-Player Game

Core conditions:
  • x1+x2+x3=90x_1 + x_2 + x_3 = 90
  • x1โ‰ฅ0,x2โ‰ฅ0,x3โ‰ฅ0x_1 \geq 0, x_2 \geq 0, x_3 \geq 0
  • x1+x2โ‰ฅ60x_1 + x_2 \geq 60
  • x1+x3โ‰ฅ40x_1 + x_3 \geq 40
  • x2+x3โ‰ฅ30x_2 + x_3 \geq 30 From x1+x2โ‰ฅ60x_1 + x_2 \geq 60 and x1+x2+x3=90x_1 + x_2 + x_3 = 90: x3โ‰ค30x_3 \leq 30 From x1+x3โ‰ฅ40x_1 + x_3 \geq 40: x2โ‰ค50x_2 \leq 50 From x2+x3โ‰ฅ30x_2 + x_3 \geq 30: x1โ‰ค60x_1 \leq 60 Core: {(x1,x2,x3):xiโ‰ฅ0,x1+x2โ‰ฅ60,x1+x3โ‰ฅ40,x2+x3โ‰ฅ30,x1+x2+x3=90}\{(x_1, x_2, x_3): x_i \geq 0, x_1 + x_2 \geq 60, x_1 + x_3 \geq 40, x_2 + x_3 \geq 30, x_1 + x_2 + x_3 = 90\}

Core vs. Shapley Value

AspectCoreShapley Value
FocusStabilityFairness
UniquenessMay be empty or largeAlways unique
ComputationLP feasibilityFormula
AxiomaticCoalitional rationalitySymmetry, additivity

10.5 Simple Games and Voting Power

A simple game is a coalitional game where v(S)โˆˆ{0,1}v(S) \in \{0, 1\} โ€” a coalition either wins or loses. Weighted voting: Each player ii has weight wiw_i, and a coalition wins if total weight โ‰ฅQ\geq Q (quota). Shapley-Shubik Power Index: The Shapley value of a simple game measures voting power โ€” the probability of being the "pivotal" member.

Example: UN Security Council

  • 5 permanent members (veto power)
  • 10 rotating members
  • 9 votes needed to pass The Shapley-Shubik index shows permanent members have vastly more power than rotating members.

๐Ÿ“Š Formula Summary

ConceptFormula
Shapley value$\phi_i = \sum_{S \subseteq N \setminus {i}} \frac{
Core conditionโˆ‘iโˆˆSxiโ‰ฅv(S)ย โˆ€SโІN\sum_{i \in S} x_i \geq v(S) \ \forall S \subseteq N

โœ… Practice Questions

Q1: In a 2-player game with v(1)=5v(1)=5, v(2)=3v(2)=3, v(12)=12v(12)=12, find the Shapley value for each player.
Solution
Order (1,2): P1 adds 5 (v(1)-0), P2 adds 7 (v(12)-v(1)) Order (2,1): P2 adds 3 (v(2)-0), P1 adds 9 (v(12)-v(2))
ฯ•1=5+92=7\phi_1 = \frac{5 + 9}{2} = 7 ฯ•2=7+32=5\phi_2 = \frac{7 + 3}{2} = 5
Check: 7+5=12=v(12)7 + 5 = 12 = v(12) โœ“ Q2: For the same game, find the core. Solution
x1+x2=12x_1 + x_2 = 12, x1โ‰ฅ5x_1 \geq 5, x2โ‰ฅ3x_2 \geq 3 Core: {(x1,x2):x1โ‰ฅ5,x2โ‰ฅ3,x1+x2=12}\{(x_1, x_2): x_1 \geq 5, x_2 \geq 3, x_1 + x_2 = 12\} This is the line segment from (5,7) to (9,3). Q3: True or False: The Shapley value is always in the core. Solution
False. The Shapley value may fall outside the core. In the three-player example above, ฯ•=(36.67,31.67,21.67)\phi = (36.67, 31.67, 21.67). Check x1+x2=68.33โ‰ฅ60x_1 + x_2 = 68.33 \geq 60 โœ“, x1+x3=58.33โ‰ฅ40x_1 + x_3 = 58.33 \geq 40 โœ“, x2+x3=53.33โ‰ฅ30x_2 + x_3 = 53.33 \geq 30 โœ“. But this is not always the case โ€” Shapley value can violate coalitional rationality for some games. Join Discord PreviousMechanism Design DeepNextVoting Power
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