Further Discussion on the Shapley Value Axioms (Optional)

If you are curious, here I explain a bit more about what I meant by adding two problems together.
Let's first look at our taxi problem. We'll represent the cost of someone getting home by the function
Cost( ). Thus Cost(A) is how much it costs for A to get home. In our problem:

Cost(A) = 6

Cost(B) = 11

Cost(AB) = 12

According to the linearity (or adding) axiom, the above game has the exact same answer as a
modified game in which A pays 6 and B pays 11 right off the bat, and we then subtract those two
amounts from the joint cost of getting A and B home. In this modified game:

Cost(A) = 6 – 6 = 0

Cost(B) = 11 – 11 = 0

Cost(AB) = 12 – (6 + 11) = –5.

Everything is perfectly symmetric, so it is obvious we should split the $5 savings: A gets back $2.50
and thus pays $6 – $2.50 = $3.50, while B pays $11 – $2.50 = $8.50. And this is exactly the split-
the-pie solution.

Now let's apply this same logic to our three-person problem.

Cost(A) = 6

Cost(B) = 11

Cost(C) = 15

Cost(AB) = 12

Cost(AC) = 17

Cost(BC) = 17

Cost(ABC) = 18

First we have A pay 6, B pay 11, and C pay 15. Then we subtract those amounts from any ride in
which A, B, and C appear. This leads to a modified game, where:

Cost(A) = 6 – 6 = 0
Cost(B) = 11 – 11 = 0

Cost(C) = 15 – 15 = 0

Cost(AB) = 12 – (6 + 11) = –5

Cost(AC) = 17 – (6 + 15) = –4

Cost(BC) = 17 – (11 + 15) = –9

Cost(ABC) = 18 – (6 + 11 + 15) = –14

Next we split the pairwise savings evenly. AB creates a savings of 5 that we split between A and B,
AC creates a savings of 4 that we split between A and C, and BC creates a savings of 9 that we split
between B and C. Adding up the changes, A paid $6 in the initial modification and then gets back
$4.50 in the second. For A, B, and C that means:

A pays 6 – (1/2)(5 + 4) = $1.50

B pays 11 – (1/2)(5 + 9) = $4.00

C pays 15 – (1/2)(4 + 9) = $8.50

But we're not quite done. Since we've allocated the savings from AB, AC, and BC to each of the
players, we have to subtract those savings out of the combined savings from ABC. The modified
cost of the triangle route is:

Cost(ABC) = –14 + (5 + 4 + 9) = 4

In other words, we had allocated 5 + 4 + 9 =18 of cost savings, but there was really only 14 to go
around. Thus we have to take back 4.

Taking into account the payments already assigned, our new game is:

Cost(A) = 0

Cost(B) = 0

Cost(C) = 0

Cost(AB) = 0

Cost(AC) = 0

Cost(BC) = 0

Cost(ABC) = 4
Everything here is perfectly symmetric, so we simply divide Cost(ABC) three ways. Thus the final
payments are:

A pays 1.5 + 4/3 = $2.83

B pays 4.0 + 4/3 = $5.33

C pays 8.5 + 4/3 = $9.83

This is exactly the same as what we found using the random order approach. What I especially like
about this way of calculating the Shapley Value is how it emphasizes the splitting-the-pie
perspective. Everyone gets an equal share of the cost savings they create. Thus A shares in the
cost savings he creates with B and C, while B shares in the cost savings he creates with A and C.
And to the extent that we double count—and the allocated savings add up to more than what
exists—we take back some of those savings, splitting the take-back equally among the parties.