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Solution Concepts in Cooperative Game Theory

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Solution Concepts in Cooperative Game Theory 1 A. Stolwijk Solution Concepts in Cooperative Game Theory Master’s Thesis, defended on October 12, 2010 Thesis Advisor: dr. F.M. Spieksma Mathematisch Instituut, Universiteit Leiden 2 Contents 1 Introduction 7 1.1 BackgroundandAims ................................. 7 1.2 Outline .......................................... 8 2 The Model: Some Basic Concepts 9 2.1 CharacteristicFunction .............................. ... 9 2.2 Solution Space: Transferable and Non-Transferable Utilities . .......... 11 2.3 EquivalencebetweenGames. ... 12 2.4 PropertiesofSolutions............................... ... 14 3 Comparing Imputations 15 3.1 StrongDomination................................... 15 3.1.1 Properties of Strong Domination . 17 3.2 WeakDomination .................................... 19 3.2.1 Properties of Weak Domination . 20 3.3 DualDomination..................................... 22 3.3.1 Properties of Dual Domination . 23 4 The Core 25 4.1 TheCore ......................................... 25 4.2 TheDualCore ...................................... 27 4.2.1 ComparingtheCorewiththeDualCore. 29 4.2.2 Strong ǫ-Core................................... 30 5 Nash Equilibria 33 5.1 Strict Nash Equilibria . 33 5.2 Weak Nash Equilibria . 36 3 4 CONTENTS 6 Stable Sets 39 6.1 DefinitionofStableSets ............................... .. 39 6.2 Stability in A′ ....................................... 40 6.3 ConstructionofStronglyStableSets . ...... 41 6.3.1 Explanation of the Strongly Stable Set: The Standard of Behavior in the 3-personzero-sumgame ............................. 45 6.4 TheUnionofStableSets ............................... 49 6.5 ConclusionofChapter6 ............................... .. 49 7 Variants on Strongly Stable Set 51 7.1 InterpretingStronglyStableSets . ...... 51 7.2 Partially Stable Sets . 53 7.2.1 The Existence Proof of Partially Stable Sets . ... 54 7.3 StrictlyStableSets.................................. .. 56 7.4 WeaklyStableSets................................... 59 7.4.1 Differences with Strongly Stable Sets . .. 60 7.4.2 Questions on Weakly Stable Sets . 61 8 The Nucleolus 63 8.1 DefiningtheNucleolus................................. 63 8.2 ComputingtheNucleolus ............................... 65 8.3 ExamplesofNucleoli.................................. 66 8.4 InterpretationoftheNucleolus . ..... 67 9 Variants on the Nucleolus 69 9.1 TheWeightedNucleolus ................................ 69 9.2 Interpretation of the Weighted Nucleolus . ....... 70 9.3 DefiningtheDualNucleolus............................. .. 70 10 The Shapley Value 73 10.1 Definition of the Shapley Value . ... 73 10.2 Nash Equilibrium vs. Shapley Value . .. 76 11 Special Classes of Games 77 11.1CompositeGames ................................... 77 11.2ConvexGames ..................................... 82 CONTENTS 5 12 Three Questions 87 12.1 Game with a Unique Non-Convex Strongly Stable Set . ...... 87 12.2 GameWithnoStronglyStableSet . ... 89 12.3 The Game with No Strongly Stable Set and an Empty Core . ...... 93 12.4 AFinalRemarkonSpecialGames . ... 98 13 Concluding Remarks 99 6 CONTENTS Chapter 1 Introduction 1.1 Background and Aims In Game Theory situations are studied in which multiple people each strive to achieve his or her goal. Thereby it is assumed that all participants behave rationally. An important characteristic of games is that the actions of one person have influence on the outcomes of other people in the game and vice versa. Because of these interdependencies, Robert Aumann, who received a Noble award for his contributions to Game Theory in 2005, suggested that Interactive Decision Theory would be a better name for the discipline called ’Game Theory’. From its definition it follows that game theory can be applied to all situations where peoples’ actions are both utility maximizing and interdependent. The major applications of game theory are to economics, political science, tactical and strategic military problems, evolutionary biology and computer science. According to Aumann (1987) there are also important connections with accounting, statistics, the foundations of mathematics, social psychology and branches of philosophy. In this thesis I will investigate a particular set of game theoretic problems: namely those in which people who participate in the game, can cooperate with each other to compel a certain solution. In politics they can form coalitions, in the economy they can form cartels. This branch of game theory is called Cooperative Game Theory. In Cooperative Game Theory we are interested in what players can achieve by cooperation. We look at all feasible outcomes where players can make binding commitments. We assume that there is some mechanism which enforces these commitments. The method of game theory consists of the construction of models or methodologies that can in principle be applied to a wide variety of abstract interactive situations. In theory most situations of interactive decision making have many outcomes, often infinitely many. For example if, say, three persons have to share a cake or to accomplish a certain task, a great variety of outcomes can be defined. Or, if political parties try to form a majority coalition, the number of potential outcomes, in the form of the set of compromises, is sheer unlimited. However, not all outcomes are rational or equally plausible. By defining so called solution concepts, cooperative game theory tries to characterize the set of outcomes that are, seen from a viewpoint of rationality, interesting. In this thesis I will describe and discuss the main solution concepts that have, in the course of time, been proposed by different game theorists. In the discussion I will also point at the relations between the different concepts and their limitations. 7 8 CHAPTER 1. INTRODUCTION 1.2 Outline After this introductory chapter, Chapter 2 starts with a general description of the model of a cooperative game. The discussion is mainly limited to the basic concepts, e.g the characteristic function and the solution space, and some general properties of a cooperative game. The solution space of a model usually consists of more points or payoffs. These are also called imputations. Chapter 3 investigates the relation between different imputations. Starting point is the preference relation as defined by Van Neumann and Morgenstern. This preference relation makes it possible to compare outcomes in a logical way. I also define two other variants on the Von Neumann Morgenstern preference relation. In Chapter 4, I look into more detail in the most general solution concept of a cooperative game namely the Core. Imputations in the Core have the attractive property that they are not domi- nated. With the weaker forms of the preference relation, I define a new kind of Core, the Dual Core. The Core and the Dual Core and their relations are also discussed here. Chapter 5 is devoted to the Nash equilibrium. Although the Nash equilibrium is basically a solution concept of a non-cooperative game, I define a variant to cooperative games. Stable Sets are the subject of Chapters 6 and 7. Stable Sets were introduced by Von Neumann and Morgenstern. It appears that solutions in a Stable Set have some nice properties. Chapter 6 starts with a general introduction of the concept. Contrary to the (Dual) Core and Nash Equilibria, Stable Sets are difficult to find. For a three person zero sum game it will be shown how they can be constructed. Chapter 7 is an extension of chapter 6. Successively properties of Partially Stable Sets, Strictly Stable Sets and Weakly Stable Sets will be investigated. The Chapter ends with a conjecture. Unfortunately, I have not succeeded in proving the conjecture. The Core, the Nash equilibrium and Stable Sets are solution concepts which have, from a rational point of view, the property to be stable in some sense. The Nucleolus and the Shapley Value, which I discuss in Chapters 8, 9 and 10, are mainly motivated by some sense of fairness. The idea behind the Nucleolus, the subject of Chapter 8, is to make the least happy coalition of players of a game as happy as possible. In Chapter 9 I slightly adjust the Nucleolus by assuming that coalitions are already given (decided). Chapter 10 is devoted to the Shapley Value. The basic idea behind the Shapley Value is to share the payoff of a game according to the relative importance of the individual players of the game. Chapter 11 discusses some special classes of games, respectively: composite games and convex games. The discussion add to a better understanding of the various concepts introduced in the earlier chapters. The thesis ends with Chapters 12 and 13. In Chapter 12 three existence questions with respect to Stable Sets are discussed and Chapter 13 contains some concluding remarks. Chapter 2 The Model: Some Basic Concepts In this thesis we will look at a certain type of games: games in which a mechanism is available that can enforce agreements between players. These games are called cooperative games. A problem is how to characterize these games. If we look for example at the following weighted majority game1 [5; 2, 3, 4], we see that this game is in a sense the same game as the weighted majority game [2; 1, 1, 1]. In both games, any two parties can always have a majority. So the utility of the votes of every player is in both games the same. In this chapter we define a function which gives the utility or the payoff of a coalition. Every cooperative game can be described by such a function. 2.1 Characteristic Function To characterize a cooperative game with n-players,
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