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Mathematical Social Sciences 51 (2006) 162 170 www.elsevier.

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Coalition-proof Nash equilibria and cores in a strategic pure exchange game of bads
Toshiyuki Hirai a, Takuya Masuzawa a, Mikio Nakayama b,*
a

Graduate School of Economics, Keio University, 2-15-45 Mita, Tokyo 108-8345, Japan b Department of Economics, Keio University, 2-15-45 Mita, Tokyo 108-8345, Japan

Received 1 January 2005; received in revised form 1 May 2005; accepted 1 September 2005 Available online 11 November 2005

Abstract We present an example of a strategic game in which the major solutions allowing coalitions always exist. Specifically, we consider the pure exchange game due to Scarf [Scarf, H.E., 1971. On the existence of a cooperative solution for a general class of n-person games. Journal of Economic Theory 3, 169181] with all the commodities being replaced by bads. It is shown that the coalition-proof Nash equilibrium describes the behavior with every player dumping all the initial bads onto just one next player unilaterally. On the other hand, the a -core also exists and coincides with the b -core without any convexity assumptions. If, in particular, the bads are of one type, any coalition-proof Nash equilibrium reduces to a strong Nash equilibrium; and every player retaining all the initial bads is in the a -core if and only if the distribution of the initial bads is moderate without too dbigT players. D 2005 Elsevier B.V. All rights reserved.
Keywords: Coalition-proof Nash equilibria; Strong Nash equilibria; a -Core; b -Core JEL classification: C72; C71

1. Introduction As is well-known, the strong Nash equilibrium in strategic games is a solution concept defined to be a strategy profile at which no coalition has a deviation. Also, the coalitionproof Nash equilibrium due to Bernheim et al. (1987) is a refined concept of the Nash equilibrium without credible deviations; namely, without deviations that can be regarded not

*Corresponding author. Fax: +81 3 5427 1578. E-mail address: nakayama@econ.keio.ac.jp (M. Nakayama). 0165-4896/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.mathsocsci.2005.09.004

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to trigger further subcoalitional deviations. This of course implies that the strong Nash equilibrium is a special case of the coalition-proof Nash equilibrium. On the other hand, the a -core and its subset, the b -core, are also well-known solution concepts in strategic games with coalitions. These solutions involving coalitions are, however, generally hard to obtain except for the a core of a game with certain convexity assumptions. In the literature, several attempts have been made to obtain coalition-proof Nash equilibria. For example, allowing correlated strategies, Moreno and Wooders (1996) found a sufficient condition via the iterated elimination of dominated strategies. Milgrom and Roberts (1996) considered a game with strategic complementarity and formulated a sufficient condition in terms of monotone externalities. Konishi et al. (1997), Kukushkin (1997) and Yi (1999) presented existence results in games each with a specific structure. We do not, however, deal with the general existence problem in this paper; instead, we shall present an example of a strategic game that always has coalition-proof Nash equilibria without any special assumptions and, moreover, has the nonempty a -core that coincides with the b -core without any convexity assumptions. Specifically, we consider the pure exchange game due to Scarf (1971) with all the commodities being replaced by bads. This game is not contained in the classes considered by the authors cited above; but, may be viewed as a general, strategic version of the garbage disposal TU game discussed by Shapley and Shubik (1969), so that we might call the game the strategic garbage disposal game. It will be shown that at any Nash equilibrium, every player dumps all the initial holding of bads onto the other players. Interestingly, given any permutation r of all players i = 1, . . ., n , the strategy profile such that, for each i with n + 1 u 1, player r (i ) dumps all the bads onto the player r (i + 1) plays a key role. In fact, such a strategy profile is shown to be coalition-proof unless it is weakly dominated by a strategy profile of the same form under a different permutation. No other strategy profile is coalition-proof. On the other hand, the a -core is directly shown to be nonempty using the above strategy profile under r and, moreover, is shown to coincide with the b -core. We will also show that the a -NTU game derived from the strategic garbage game is balanced without any convexity assumption. If, in particular, the bads can be treated as a single garbage, any coalition-proof Nash equilibrium reduces to a strong Nash equilibrium. This is a remarkable result, since strong Nash equilibria are generally hard to obtain. The a -core, on the other hand, can describe just opposite behavior, namely, every player retaining the initial amount of the single garbage is in the a -core if and only if the distribution of the initial holding of garbage is moderate without too dbigT players. This result is in a sharp contrast to that of Shapley and Shubik (1969) with an empty TU core. In the next section, we state definitions of solutions considered in this paper. Then, the garbage disposal game is investigated with results mentioned above. 2. The strategic game The game in strategic form is a tuple G = (N , {X i }i aN , {v i }i aN ), where N = {1, . . ., n } is the set of players, X i is the set of strategies of i a N , and v i is the pay-off function of i a N . Any nonempty subset S p N will be called a coalition, and the singleton {i } will be sometimes identified with i .

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Given a game G and a strategy profile xaX : jiaN X i , coalition S p N is said to have a deviation y S a X S : jiaS X i at x if vi y S ; x N qS Nvi x 8iaS : Here, ( y S , x N \ S ) a X denotes the strategy profile in which player i chooses y i if i a S , and x i if i a N\S . The strong Nash equilibrium of a game G is a strategy profile x * a X at which no coalition has a deviation. Coalition S is said to have a credible deviation y S a X S at x if y S is a deviation at x and there exists no subcoalition T q S of S that has a credible deviation at ( y S , x N \ S ). Note here the recursion in the definition: each singleton coalition has a credible deviation if it has a deviation, each two-person coalition has a credible deviation if it has a deviation at which no player of the two has a deviation, and so on. A strategy profile x * a X is then called a coalition-proof Nash equilibrium if there exists no coalition S p N which has a credible deviation at x *. It is not difficult to check the equivalence of this definition and the original one given by Bernheim et al. (1987). Let U (X ) be the set of payoff vectors m defined by U X maRn jaxaX 8iaN vi xzmi : Then, the a -core of a game G is the set of payoff vectors m a U (X ) for which no coalition S p N is strictly a -effective ; that is, no S p N has a strategy y S a X S such that for all x a X , 8iaS : v i y S ; x N qS N m i On the other hand, the b -core is the set of payoff vectors m a U (X ) for which no coalition S p N is strictly b -effective; that is, no S p N can, for any given x a X , choose a strategy y S a X S such that 8iaS : v i y S ; x N qS N m i It is clear by definition that the b -core is a subset of the a -core. For a nonempty proper subset S q N , strategy profile x S a X S is a dominant strategy of S if for all z a X and y S a X S , 8iaS : vi x S ;z N qS zvi y S ;z N qS If coalition S has a dominant strategy, any payoff vector for which S is strictly b -effective is also strictly a -effective with the dominant strategy. Hence, the a -core coincides with the b -core if every nonempty proper coalition S has a dominant strategy. We can show that in the strategic garbage disposal game, every nonempty proper coalition does have a dominant strategy. 3. Garbage disposal game The garbage disposal game G is a version of the pure exchange game discussed by Scarf (1971), but with the opposite preferences for all players because the garbage are dbadsT. Formally, the garbage disposal game G is defined as follows: ! N = {1, . . ., n } n P m ij i i ! X i xi xi1 ; N ; xin aRm j jaN x b g, where b aR qf0g is the initial endowment m ij of bads of player i to be dumped, and x aR means the units to be dumped by player i a N onto player j a N .

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P  ji ! vi x u i x , where x = (x 1, . . ., x n ) a X , and u i is a strictly decreasing utility jaN function of i for all i a N . The pure exchange game of goods is a game G in which, for all i a N , the utility function u i is strictly increasing, and the vector of bads b i is replaced with that of goods w i . Before proceeding to the analysis of the exchange of bads, we list below several results on the pure exchange of goods, each of which is well known, or can be proved immediately. Let x 0 a X be the strategy profile indicating no exchange at all so that x 0ii = w i for all i a N .Then: 1. The strategy profile x 0 is the only Nash equilibrium, is the only dominant strategy equilibrium, and moreover, is the only coalition-proof Nash equilibrium. 2. Assume for all i a N that u i is continuous. Then, the strategy profile x 0 is the only strong Nash equilibrium if and only if x 0 generates a weakly Pareto efficient state. 3. Assume for all i a N that u i is continuous and quasiconcave. Then, the a -core is nonempty and coincides with the b -core. The first result says in particular that any coalition will always fail in making agreement on trade because of a deviation by a single player. The second result indicates that the strong Nash equilibrium exists only in the exceptional case. The third fact is a direct consequence of Scarf (1971), and also discussed in Mas-Colell (1987). The exchange of bads, on the other hand, yields new interesting behavior that may be contrasted with these facts in the exchange of goods. In the garbage disposal game, every nonempty proper subset S of N has a strategy profile x S a X S such that x ij = 0 for all i , j a S . This is a dominant strategy of S due to the monotonicity of u i , since any other y S a X S would make someone in S worse off for each given z N \ S a X N \ S . Note that if x S is a dominant strategy of S , then for any subset T p S , x T is a dominant strategy of T. Initially, we state immediate properties of the game which are counterparts of the pure exchange of goods. Proposition 1. In the garbage disposal game G: 1. Strategy profile x a X is a Nash equilibrium if and only if x ii = 0 for all i a N. 2. Any Nash equilibrium is a dominant strategy equilibrium. Proof. 1. Straightforward from the strict monotonicity of u i . 2. Since x ii = 0 is a dominant strategy of player i , the result follows. 5

Let r : {1, 2, . . ., n } Y N be a permutation, and let c (r ) a X be the strategy profile defined as follows. crriri1 bri ; and crrij 0 for all j p ri 1;

where it is understood that n + 1 u 1. That is, in this strategy profile c (r ), player r (i ) dumps all the initial bads onto player r (i + 1) for i = 1, 2, . . ., n . The profile c (r ) plays a crucial role as shown below.

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Lemma 2. 1. Strategy profile x a X is not coalition-proof if x p c(r) for any permutation r. 2. For any permutation r, no proper coalition S p N has a deviation at c(r). Proof. 1. Let x be a strategy profile such that x p c (r ) for any permutation r . Then there can be found a coalition S p N such that for all i a S there exists j a S with x ji p 0. Since S p N , S has a strategy y S such that y ij = 0 for all i , j a S . Then, by the strict monotonicity, we have v i y S ; x N qS N v i x 8iaS : Moreover, since y T is dominant for any T p S , no subset T p S has a deviation at ( y S , x N\S ). Hence, y S is a credible deviation at x . 2. Let r be a permutation, S p N a coalition, and y S an arbitrary strategy. Then there exits a player r (i ) such that r (i ) g S but r (i + 1) a S . Then, by the definition of c (r ),     vri1 yS ;crN qS Vuri1 bri vri1 cr: 5 We are now ready to describe the coalition-proof Nash equilibrium. Proposition 3. In the garbage disposal game G: Let r* be a permutation for which there exists no r such that vi crNvi cr4 for all iaN :

Then c(r*) is a coalition-proof Nash equilibrium. Proof. From 2 of Lemma 2, no proper coalition S p N has a deviation at c (r *). N has no credible deviation at c (r *) because vi yNvi cr4 for all iaN 5

implies that y a X admits a credible deviation due to 1 of Lemma 2.

Thus, the garbage disposal game has a coalition-proof Nash equilibrium, which is of the form c (r ) undominated by any profile of the same form. The garbage disposal game also has a nonempty a -core as follows. Proposition 4. 1. Let x a X be a strategy profile for which there is no y a X such that vi y N vi x vi xzvi cr for all iaN : If for some permutation r we have for all iaN ;

then x a X generates a payoff vector in the a-core. 2. The a-core coincides with the b-core.

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Proof. 1. By assumption, N is not strictly a -effective for the payoff vector v (x ) = (v 1(x ), . . ., v n (x )). From 2 of Lemma 2, no proper S p N has a deviation at c (r ); therefore, no S p N is strictly a effective for c (r ). Hence, no coalition is strictly a -effective for v (x ), which implies that v (x ) is in the a -core. 2. Since each proper coalition has a dominant strategy, the a -core coincides with the b -core. 5 If the coalition-proof Nash equilibrium c (r *) is not dominated by any strategy profile, this is a strong Nash equilibrium due to 2 of Lemma 2, generating a nonempty b -core. If, on the other hand, c (r *) is dominated by some strategy profile, then it is dominated by some Pareto efficient strategy profile x . In this case, too, the b -core is nonempty by this proposition. Thus, the garbage disposal game has a nonempty b -core that coincides with the a -core. This is in a sharp contrast with the TU garbage disposal game discussed in a classical paper of Shapley and Shubik (1969), in which larger coalitions are too strong to admit a nonempty core, only to generate a dgarbage warT. Even more refined properties can be obtained if bads are treated as a single garbage, that is, m = 1. Proposition 5. Suppose that m = 1. Then, in the garbage disposal game G: 1. For any permutation r , c (r ) is a strong Nash equilibrium. 2. Assume that b 1 V b 2 V: : : V b n . Then, the strategy profile x * a X such that x4ii bi 8iaN generates a payoff vector in the a-core if and only if k X bj z bk 1 k 1; N ;n 1:
j1

Proof. 1. When m = 1, N has no deviation at c (r ), since the total amount of the garbage is constant, and the utility of each player is a strictly decreasing function of the amount of the single garbage. Thus, together with 2 of Lemma 2, no coalition has a deviation at c (r ). 2. To show that the inequality is sufficient, let us take any nonempty S q N and consider first the case in which min b j z max b j :
jaS jaN qS

By assumption, then, there must exist h a S such that X b j: bh V


jaN qS

Then, for any x S a X S there can be found z N \ S a X N \ S such that ! X X vh xS ;zN qS uh x jh z jh Vuh 0 bh v h x4:
jaS jaN qS

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N\S can be so chosen that This is so because u h is strictly monotone and z X X bj z jh : bh V

jaN qS

jaN qS

Hence, this S is not strictly a -effective for the payoff vector v (x *) = (v 1 (x *), . . ., v n (x *)). In the case where min b j b max b j
jaS jaN qS

holds, simply letting b h = minj aS b j , it can be shown in the same way as above that S is not strictly a -effective for v (x *). Finally, N is not strictly a -effective for v (x *), either, because v (x *) is weakly Pareto efficient. This implies that the payoff vector v (x *) is in the a -core. Conversely, suppose that
k X j1

b j b bk 1

ak af1; N ; n 1g:

Then, since bk 1 V : : : Vbn ; the coalition {k + 1, . . ., n} is strictly a -effective for v (x *), dumping all the garbage onto {1, . . ., k }. 5 A strong Nash equilibrium is generally hard to obtain; nevertheless, the garbage disposal game with m = 1 has a strong Nash equilibrium for each permutation r . Moreover, in this case, only the strong Nash equilibria are coalition-proof. The second result identifies the case in which everyone refraining from dumping the garbage outward generates a payoff vector in the a -core. The necessary and sufficient condition on b j simply states that the distribution of the initial holding of garbage is fairly moderate without too dbigT players compared to others. We have proved that the a -core of the game is nonempty by directly showing the payoff vector for which no coalition is strictly a -effective. We now show that the garbage disposal game gives rise to a balanced NTU coalitional game without any convexity assumption. Note that the pure exchange of goods requires the convexity assumption for the balance. P j For all S q N we define bS : jaS b . Let V a be the a -coalitional game; that is, the NTU coalitional game V derived through the a -notion. Then, V a is given as follows: Va S uaRn jui Vui b N qS for all iaS for all S p N ; Va N

o n at t1 ; N ; tn aRm such that n X ua R t j b N ; ui Vu i t i for all iaN


jaN

Recall that an NTU game V is balanced if for any balanced collection B , ua u V S


S aB

implies

u aV N ;

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where B is a balanced collection if it is a collection of nonempty proper subsets S q N with positive weights k S such that X kS 1 8iaN :
S aB ;S ji

Then, we have the following. Proposition 6. V a is balanced. Proof. Let B be a balanced collection and let ua \S aB Va S . Define, for all iaN ; Bi : \S ji;S aB S . Suppose that j a B i . Then, for all S aB , if i is in S then j is also in S . By the balancedness, X X kS kS 1; and for all S aB ; kS N0:
S ji;S aB S jj;S aB

Thus, B i = B j . Then, {B i : i a N } generates a partition P of N such that P B1 ; B2 ; N ; Bk with k V n . Now, define ( p i )i aN as follows: X bi for m 1; 2; N ; k ; with m 1 k for m 1 pm
iaBm1

for mgf1; 2; N ; k g: pm 0 P P i i Note that iaN p iaN b : i By the definition of B and P , for each m = 1, 2, . . ., k , there exists a coalition T aB such that Bm pT and T \ Bm1 t:

This must be so because, by construction, either B m 1 p N\T or B m 1 p T for each T aB with B m p T; but B m 1 p T for all T aB with B m p T would imply that Bm1 [ Bm aP , a contradiction. Thus, noting that u a V a (T ), we have for each m = 1, 2, . . ., k that 0 1 ! X X b j V um @ b j A um pm : um V um
jaN qT jaBm1

Furthermore, ui Vui 0 ui pi Thus u a V a (N ). 5 for igf1; 2; N ; k g:

It is somewhat surprising that the balancedness can be obtained directly by constructing a payoff vector in V a (N ) without any convexity assumption, contrary to the case of the exchange of goods. Masuzawa (2003) presented another class of strategic games generating balanced NTU games without convexity assumptions. 4. Concluding remarks In our analysis, the divisibility of bads has played no essential role. In fact, all propositions still hold true when the bads are indivisible so that strategy spaces are finite. On the other hand,

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the divisibility may be necessary in the exchange of goods. For example, the second results concerning the existence of a strong Nash equilibrium uses the divisibility of goods and the continuity of utility functions. Peleg (1998) proved that almost all of dominant strategy equilibria are coalition-proof when strategy spaces are finite. Therefore, the garbage disposal game, and the case of m = 1 in particular, provides an exceptional example with multiple dominant strategy equilibria that are not coalition-proof. In the recent literature, strategic solution concepts other than those considered in this paper have appeared. The c -core due to Chander and Tulkens (1997), and the dconjectural cooperative equilibriumT proposed by Currarini and Marini (2004), for example, are solutions defined to be alternative to the a -core, incorporating the behavior of players outside a coalition. These solutions might therefore have thrown new lights on the strategic behavior. However, our analysis shows that there is a class of strategic games for which classical solution concepts can still produce some significant results. Acknowledgements The authors are grateful to anonymous referees for their helpful comments. References
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