Patient Players Fill the Core: A

Conspicuously Simple Solution to

the Empty Core Problem
Joshua S. Gans and Michael D. Ryall
University of Melbourne
Annual Australian Economic Theory Workshop,
February 2007
 Problem of the Empty Core
• Core theory looks for allocations that are
stable in the face of blocking coalitions
• The Empty Core Problem is that there may be
no such allocation
• Responses
– Can’t exist in reality
– Outside the game arrangements (integration or
contracts)
 Standard Example
• Three identical agents: 1, 2 and 3
vN ≡ v({1, 2,3}) = 120
vij ≡ v({i, j}) = 100
vi ≡ v({i}) = 0
• The core is empty:

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.”

• Folk theorem-like argument: players would realise not

agreeing to an efficient allocation would lead to
outcomes with a lower payoff.
• Why deviate and create $100 if this too will be
unstable?
 Our Model
• Model what happens in deviations carefully
– Do not presume a deviating coalition will ‘stick’
– When there is an empty core, there is always another partner
available so there is uncertainty regarding whether a coalition will
‘stick’
• Efficient outcomes
– A non-empty core is a sufficient but not necessary condition to
predict a grand coalition forming
– In a repeated game, the grand coalition forming is always an
equilibrium with sufficiently patient players
• Assumptions
– Restrict attention to 3 player case
– Usual coalitional game assumptions with single player coalitional
value set equal to 0.
 Stage Game
1. Demands: Each agent, i, simultaneously
announces a value demand: ri ∈ℜ+ with r the
set of demands.
2. Feasibility: search for coalitions, G, such that
∑ r ≤ vG
i∈G i

3. Arms-Length Consistency: amongst feasible

coalitions rule out Pareto dominated ones
Cr ≡ { G vG ≥ vG′ for all feasible G ′}
 Stage Game
4. Payoff: agent i receives
 Cr+ i Cr ≠ ∅
 ri
π i ( r ) =  Cr if
 otherwise
 0

Intuition: amongst feasible coalitions, each has

an equal chance of forming.
But … if grand coalition is feasible it will form.
 Definitions
• Marginal product: mpi ≡ vN − v jk
• Von Neumann-Morgenstern demand:
rˆi ≡ 1
2 (vij + vik − v jk )

• 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,

mpi = 20 < 23 rˆi = 23 50 = 33.33

• So the unique NE involves each player stating their
VNM demand of 50.
• If one player increases their demand, all of their
coalitions are non-feasible so they get 0 rather than
33.33
• If one player decreases their demand to enable the
grand coalition, they get 20 rather than 33.33.
 Robustness
• All the NE are coalition proof NE as well
– If two agents deviated,
• by increasing their demands they rule all coalitions out
and so earn 0.
• by decreasing their demands to allow the grand
coalition, they can do no better
– The third agent with a VNM demand can ‘block’
the others from a certain agreement.
• Strong Nash: qualified extensions
 Characterising Equilibria
Outcomes
• If the core is non-empty,

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