Cooperative Game Theory

(N-Person Games)
N-Person Coalitional Games

… Payoffs can usually be increased by forming coalitions.

… A subset of players coordinate their strategies to maximize the total
payoff of coalition members.

… Additional payoff can be shared appropriately among

coalition partners.
… Important questions:
… What coalitions are likely to be formed?
… Are they stable? What are the conditions of stability?
… What is the worst case payoff for a coalition?
… How can the coalition maximize this worst case?
… How to share the payoffs resulting from cooperation?
•Important questions:
… What coalitions are likely to be formed?
… Are they stable? What are the conditions of stability?
… What is the worst case payoff for a coalition?
… How can the coalition maximize this worst case?
… How to share the payoffs resulting from cooperation?
Coalitions and Coalition Structures

… Coalition:
… a set of players who decide to cooperate and coordinate their
strategies.
… Singleton Coalition:
… A player playing independently without entering any coalition.
… Coalition Structure: A possible combination of coalitions.
(A), (B), (C) (AB), (C) (AC), (B) (BC), (A) (ABC)
… Grand Coalition:
… When all players decide to cooperate and coordinate their
strategies according to some understanding.
… Solution Set:
… Set of coalition structures that yield the maximum possible
total payoff to all players.
… What is the worst case payoff for a coalition?
… How can the coalition maximize this worst case?

Characteristic Function
• The function describes how much collective payoff a set of
players can gain by forming a coalition
• The characteristics function of an n-person game assigns to
each subset S of players the maximum value v(S) that
coalition S can guarantee itself by coordinating the strategies
of its members, no matter what other players do.
Land Development Game: Characteristic Function

… Player 1 owns a piece of land with value of $10,000.

… Player 2 is interested in collaborating with Player 1 over this
land and can develop the land increase its value to $20,000.
… Player 3 is also interested in in collaborating with Player 1 over
this land and can develop the land increase its value to $30,000.
Characteristic Function:
Any coalition that does not contain player 1 has a worth of $0.
v(Ø) = 0, v({2}) = 0, v({3}) = 0, v({2,3}) = 0
v({1}) = 10000, v({1,2}) = 20000
v({1,3}) = 30000, v({1,2,3}) = 30000
Ice-Cream Game: Characteristic Function

A: 6$ B: 4$
C: 3$

w = 500 w = 750 w = 1000

Cost = $7 Cost = $9 Cost = $11

Characteristic Function:
v(Ø) = v({A}) = v({B}) = v({C}) = 0
v({A, B}) = 750, v({A, C}) = 750, v({B, C}) = 500
v({A, B, C}) = 1000
A Voting Game: Characteristic Function

… Consider that the Parliament of a certain Nation has four

political parties 1, 2, 3, 4 with 45, 25, 15, 12 members
respectively. To pass any bill, at least 51 votes are
required.
This situation could be modeled as:
N = {1, 2, 3, 4}
Characteristic Function:
v(Ø) = 0,
v({1}) = 0, v({2}) = 0, v({3}) = 0, v({4}) = 0
v({1,2}) = v({1,3}) = v({1,4}) = v({1,2,3}) = v({1,2,4}) =
v({1,3,4}) = v({2,3,4}) = v({1,2,3,4}) = 1,
v({2,3}) = v({2,4}) = v({3,4}) = 0
Recall Three Person Games

Player 2

P Q

Player 3 Player 3

X Y X Y

Pla A 6, 6, 6 7, 7, 1 7, 1, 7 0, 0, 0
yer
1 B 0, 0, 0 4, 4, 4 4, 4, 4 1, 7, 7
Three Person Games: Characteristic Function
Player 2
P Q
Player 3 Player 3
X Y X Y
Pla A 6, 6, 6 7, 7, 1 7, 1, 7 0, 0, 0
yer
1 B 0, 0, 0 4, 4, 4 4, 4, 4 1, 7, 7
Characteristic Function:
v(1) max(0,0) = 0
v(2) max(0,0) = 0
v(3) max(0,0) = 0
v(1,2) AP, AQ, BP, BQ min(12,14), min(8,0), min(0,8), min(8,8) max(12,0,0,8) = 12
v(1,3) AX, AY, BX, BY min(12,14), min(8,0), min(0,8), min(8,8) max(12,0,0,8) = 12
v(2,3) PX, PY, QX, QY min(12,0), min(8,8), min(8,8), min(0,14) max(0,8,8,0) = 8
v(1,2,3) max(18,15,15,0,0,12,12,15) = 18
Network Flow Game: Characteristic Function
Consider the following capacitated network where an arrow represents an
existing pipeline. Each pipeline is owned by a different player (1, 2, 3, 4, 5). Each
pipeline is annotated as (owner) : (capacity). The surplus v(C) for coalition C is
the amount of oil it can pump from source to sink.

Source Sink

Characteristic Function:
v(Ø) = 0, v({1}) = 0, v({2}) = 0, v({3}) = 0, v({4}) = 0, v({5}) = 0
v({1, 2}) = 2, v({4, 5}) = 3, all other v({a, b}) = 0
v({1, 3, 5}) = 2, v({1, 2, 3}) = 2
v({1, 3, 4, 5}) = 5 = v({1, 2, 4, 5}), v({1, 2, 3, 5}) = 4
v({1, 2, 3, 4, 5}) = 7, and so forth…
A Bankruptcy Game

Find the characteristic function.

Characteristic Function:
Characteristic Function is usually Superadditive

Superadditivity

v(S∪T) ≥ v(S) + v(T) if S∩T = φ

… The value of two coalitions will be no less than the sum of
their individual values.
… By forming a coalition they can never be worse-off than
playing individually.
… Implies that the grand coalition has the highest payoff
Inessential game
… A game is inessential if
v(S∪T) = v(S) + v(T) ∀ S,T
How to share the payoffs resulting from cooperation?

Imputations : Sharing the Payoffs

(meaningful for the games with transferable utility (TU) )

… Two-player cooperative game: each player keeps

his/her payoff.
… In a coalitional game it is important to decide how
the total winnings be shared among its members.
… The ‘reasonable’ share outs of the rewards are called
Imputations.
 ☺ Game: Find the Imputation ☺

… Three Players: A, B, C

1. Characteristic Function:
v(A) = v(B) = v(C) =0
v(AB) =100, v(AC) = 200, v(BC) = 300
v(ABC) =400.
2. Characteristic Function:
v(A) = v(B) = v(C) =0
v(AB) =0, v(AC) = 0, v(BC) = 400
v(ABC) =400.

Find the Imputation in both the cases and submit.