GAME THEORY CHAPTER THREE

25/04/2023 GAME THEORY 1

INTRODUCTION TO N-PERSON GAME THEORY

In many competitive situations, there are more than two

competitors. With this in mind, we now turn our attention to
games with three or more players. Let N {1, 2, . . . , n} be the
set of players. Any game with n players is an n-person game.

25/04/2023 GAME THEORY 2

CONT’D
For our purposes, an n-person game is specified by the
game’s characteristic function. For each subset S of N, the
characteristic function v of a game gives the amount v(S)
that the members of S can be sure of receiving if they act
together and form a coalition. Thus, v(S) can be determined
by calculating the amount that members of S can get
without any help from players who are not in S.
The characteristics function must satisfy the superadditivity

25/04/2023 GAME THEORY 3

CONT’D
Here are many solution concepts for n-person games. A solution
concept should indicate the reward that each player will
receive. More formally, let x = {x1, x2, . . . , xn} be a vector
such that player i receives a reward xi. We call such a vector a
reward vector. A reward vector x = (x1, x2, . . . , xn) is not a
reasonable candidate for a solution unless x satisfies

If x satisfies both the individual and group rationality, we say

that x is an imputation
25/04/2023 GAME THEORY 4
 EXAMPLE: THE DRUG GAME
Joe Willie has invented a new drug. Joe cannot manufacture the drug
himself, but he can sell the drug’s formula to Company 2 or Company
3. The lucky company will split a $1 million profit with Joe Willie.
Find the characteristic function for this game.
Solution
Letting Joe Willie be player 1, Company 2 be player 2, and
Company 3 be player 3, we find the characteristic function for this
game to be:
Empty v(v({ }) = v({1}) = v({2}) = v({3}) = v({2, 3}) = 0
coalition
v({1, 2}) = v({1, 3}) = v({1, 2, 3}) = $1,000,000
Grand
25/04/2023 coalition GAME THEORY 5
EXERCISE
Player 1 owns a piece of land and values the land at $10,000.
Player 2 is a subdivider who can develop the land and increase
its worth to $20,000. Player 3 is a subdivider who can develop
the land and increase its worth to $30,000. There are no other
prospective buyers. Find the characteristic function for this
game.

25/04/2023 GAME THEORY 6

THE CORE OF AN N PERSON GAME
An important solution concept for an n-person game is the core.
Before defining this, we must define the concept of domination.
Given an imputation x = (x1, x2, . . . , xn), we say that the
imputation y = (y1, y2, . . . , yn) dominates x through a
coalition S (written y > sx) if

25/04/2023 GAME THEORY 7

CONT’D
Thus, if y > sx, then x should not be considered a possible
solution to the game, because the players in S can object to the
rewards given by x and enforce their objection by banding
together and thereby receiving the rewards given by y
[because members of S can surely receive an amount equal to
v(S)].
The founders of game theory, John von Neumann and Oskar
Morgenstern, argued that a reasonable solution concept for an
n-person game was the set of all undominated imputations.

25/04/2023 GAME THEORY 8

EXAMPLE
Consider a three-person game with the following characteristic
function:
v({v({ }) = v({1}) = v({2}) = v({3}) = 0,
v({1, 2}) = 0.1, v({1, 3}) = 0.2, v({2, 3}) = 0.2, v({1, 2, 3}) = 1
Let x = (0.05, 0.90, 0.05) and y = (0.10, 0.80, 0.10).
Show that y > {1,3}x

25/04/2023 GAME THEORY 9

CONT’D
First, note that both x and y are imputations. Next, observe that
with the imputation y, players 1 and 3 both receive more than
they receive with x. Also, y gives the players in {1, 3} a total of
0.10 + 0.10 = 0.20. Because 0.20 does not exceed v({1, 3})
= 0.20, it is reasonable to assume that players 1 and 3 can
band together and receive a total reward of 0.20. Thus,
players 1 and 3 will never allow the rewards given by x to
occur.

25/04/2023 GAME THEORY 10

CONT’D
Determine the core of an n-person game.

Theorem 1 states that an imputation x is in the core (that x is

undominated) if and only if for every coalition S, the total of
the rewards received by the players in S (according to x) is at
least as large as v(S).
25/04/2023 GAME THEORY 11
FIND THE CORE OF THE DRUG GAME
For this game, x = (x1, x2, x3) will be an imputation if and only if
x1 ≥ 0 (1)
x2 ≥ 0 (2)
x3 ≥ 0 (3)
x1+ x2 + x3 = $1,000,000 (4)
Theorem 1 shows that x = (x1, x2, x3) will be in the core if and only if x1, x2,
and x3 satisfy (1)–(4) and the following inequalities:
x1 + x2 ≥ $ 1,000,000 (5)
x1 + x3 ≥ $ 1,000,000 (6)
x2 + x3 ≥ $ 0 (7)
x1 + x2 + x3 ≥$1,000,000 (8)

25/04/2023 GAME THEORY 12

CONT’D
To determine the core, note that if x = (x1, x2, x3) is in the core, then
x1, x2, and x3 must satisfy the inequality generated by adding
together inequalities (5)–(8). Adding (5)–(8) yields 2(x1 + x2 + x3)
≥ $2,000,000, or x1 + x2 + x3 ≥ $1,000,000 (9)
By (4), x1 + x2 + x3 = $1,000,000. Thus, (5)–(7) must all be
binding.†
Simultaneously solving (5)–(7) as equalities yields x1 = $1,000,000,
x2 = $0, x3 = $0. A quick check shows that ($1,000,000, $0, $0)
does satisfy (1)–(8). In summary, the core of this game is
the imputation ($1,000,000, $0, $0). Thus, the core emphasizes the
importance of Player 1

25/04/2023 GAME THEORY 13

EXERCISE
Player 1 owns a piece of land and values the land at $10,000.
Player 2 is a subdivider who can develop the land and increase
its worth to $20,000. Player 3 is a subdivider who can develop
the land and increase its worth to $30,000. There are no other
prospective buyers. Find the characteristic function for this game.
Let x = ($19,000, $1,000, $10,000) and y = ($19,800, $100,
$10,100).
Find the core of the land development game?

25/04/2023 GAME THEORY 14

THE SHAPLEY VALUE †
Now we discuss an alternative solution concept for n-person
games, the Shapley value, which generally gives more
equitable solutions than the core. ‡
The core gives all the rewards to the game’s most important
players, however, the shapely value gives a more equitable
solution.
For any characteristic function, Lloyd Shapley showed there is a
unique reward vector x = (x1, x2, . . . , xn) satisfying the
following axioms:

25/04/2023 GAME THEORY 15

AXIOMS
Axiom 1: Relabeling of players interchanges the players’ rewards. Suppose
the Shapley value for a three-person game is x = (10, 15, 20). If we
interchange the roles of player 1 and player 3 [for example, if originally
v({1}) = 10 and v({3}) = 15, we would make v({1}) = 15 and v({3}) = 10],
then the Shapley value for the new game would be x = (20, 15, 10).
Axiom 2: This is simply group rationality
Axiom 3: If v(S - {i}) = v(S) holds for all coalitions S, then the Shapley value
has xi = 0. If player I add no value to any coalition, then player I receive a
reward of zero from the Shapley value
Axiom 4: Let x be the Shapley value vector for game v, and let y be the
Shapley value vector for the game . Then the Shapley value vector for the
game (v + ) is the vector x + y.

25/04/2023 GAME THEORY 16

THEOREM 2
Given any n-person game with the characteristic function v,
there is a unique reward vector x = (x1, x2, . . . , xn) satisfying
Axioms 1–4. The reward of the ith player (xi) is given by

2
In (1)

where │S│ is the number of players in S, and for n ≥ 1, n!

n(n -1) … 2(1) (0! = 1).
25/04/2023 GAME THEORY 17
FIND THE SHAPLEY VALUE FOR
THE DRUG GAME
To compute x1, the reward that player 1 should receive, we list
all coalitions S for which player 1 is not a member. For each of
these coalitions, we compute v(S ∪ {i}) - v(S) and p3(S) (see the
following Tables). Because player 1 adds (on average)

Table 1 Table 2

25/04/2023 GAME THEORY 18

 CONT’D

the Shapley value concept recommends that player 1 receive

a reward of
To compute the Shapley value for player 2, we require the
information in the table in the previous slide. Thus, the
Shapley value recommends a reward of

for player 2. The Shapley value must allocate a total of v({1,

2, 3}) $1,000,000 to the players, so the Shapley value will
recommend that player 3 receive $1,000,000 – x – x2 =

25/04/2023 GAME THEORY 19

CONT’D
1. Recall that the core of this game assigned $1,000,000 to
player 1 and no money to players 2 and 3. Thus, the
Shapley value treats players 2 and 3 more fairly than the
core. In general, the Shapley value provides more equitable
solutions than the core.
2. For a game with few players, it may be easier to compute
each player’s Shapley value by using the fact that player i
should receive the expected amount that she adds to the
coalition present when she arrives. For Example 11, this
method yields the computations in Table 2. Each of the six
orderings of the arrivals of the players is equally likely, so
we find that the Shapley value to each player is as follows:

25/04/2023 GAME THEORY 20

CONT’D
3. The Shapley value can be used as a measure of the power
of individual members of a political or business organization.
For example, the UN Security Council consists of five permanent
members (who have veto power over any resolution) and ten t
members. For a resolution to pass the Security Council, it must
receive at least nine votes, including the votes of all permanent
members. Assigning a value of 1 to all coalitions that can pass
a resolution and a value of 0 to all coalitions that cannot pass a
resolution defines a characteristic function. For this characteristic
function, it can be shown that the Shapley value of each
permanent member is 0.1963, and of each nonpermanent
member is 0.001865, giving 5(0.1963) + 10(0.001865) = 1.
Thus, the Shapley value indicates that 5(0.1963) = 98.15% of
the power in the Security Council resides with the permanent
members.

25/04/2023 GAME THEORY 21

CONT’D

25/04/2023 GAME THEORY 22

 END

25/04/2023 GAME THEORY 23