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vN < vij for all {i, j} vij < vik for all i
Is there a prediction?
• There can be complete instability
• Coase:
“If my argument is to be taken seriously, it has to be shown that the ‘grand
coalition’ is stable. It might be argued that no firm would withdraw from
this arrangement to enter into a two-party agreement since this would set
in motion a process which would lead ultimately to lower profits.”
• Non-empty core:
vN ≥ 1
2 ( v12 + v13 + v23 )
• Nash equilibrium: unilateral deviations in value demands
• Strong Nash equilibrium: group deviations in value demand
that make all members of a group strictly better off.
• Coalition-Proof Nash equilibrium: group deviations in value
demands with credible coalitions
Nash equilibrium
• If the core is non-empty, then any allocation in
the core is also a NE of the stage game.
• If the core is empty, then
– (Grand Coalition forms) If for some i, mpi ≥ 23 rˆi
then the unique NE involves ri = mpi , rj = rˆj and rk = rˆk
– (Each two agent coalition forms with equal
probability) If for all i, mpi < 23 rˆi then the unique
NE involves ri = rˆi for all i.
Proof (Example)
• In our standard example,
ri ≤ mpi
• If the core is empty,
ri ≥ mpi
With an empty core, you are guaranteed at least your marginal
contribution.
Repeated Game
• For all possible value functions, there exists δ
such that for all δ ∈[δ , 1), there exist
supergame strategies that are Coalition-Proof
Subgame Perfect with the grand coalition
forming in each period.
• If mpi < 23 rˆi for all i, then for all δ , there exist
supergame strategies that are Coalition-Proof
Subgame Perfect with the grand coalition
forming in each period.
Proof (Example)
• Note that the VNM stage game in every period is a Nash
equilibrium (and it is coalition proof). Hence, it is a sustainable
punishment.
• Can therefore sustain demands of each player being greater than
33.33 (say 40)
• Need to set up strategies that give enough value to agents so that
they cannot deviate profitably and guarantee a two player outcome.
– Suppose that two agents received only 33.3. Then one or the other
could deviate and have their two agent coalition form with certainty.
– However, one agent could receive only 33.3 as by increasing their
demand, they could not do better.
– Thus, additional constraint is that any two agents jointly receive more
than their coalitional value.
– Core-like blocking conditions continue to hold.
Conclusions
• Provide a non-cooperative means of
broadening the applicability of core theory
• Economic implications
– Empty core implies that agents receive more than
their marginal products
– Empty core allocations that are efficient are
constrained