Transferable utility

Definition

Transferable utility refers to a concept in cooperative game theory where the utility or payoff of one player can be transferred to another player without loss of value. This idea is crucial in understanding how cooperative strategies can be formulated in games, as it allows players to negotiate and share resources effectively. Transferable utility enables the formation of coalitions and influences the way players can distribute gains from cooperation.

5 Must Know Facts For Your Next Test

1. In transferable utility games, the total utility available to a group of players can be shared among them in various ways, allowing for flexibility in payoff distribution.
2. The concept assumes that the utility can be measured in a way that is comparable between players, often represented as real numbers.
3. Transferable utility plays a significant role in real-world scenarios like labor negotiations, joint ventures, and public goods provision, where resource sharing is essential.
4. Players may utilize side payments, which are payments made to other players as part of a cooperative agreement, to enhance their individual payoffs while maintaining coalition stability.
5. The existence of transferable utility can simplify the analysis of cooperative games by allowing for the focus on overall coalition values rather than individual player utilities.

Review Questions

• How does transferable utility influence the formation of coalitions in cooperative games?
  • Transferable utility allows players to negotiate the distribution of payoffs among themselves easily, making it more appealing to form coalitions. Because players can agree to share their utilities in flexible ways, they can come together to enhance their overall payoffs. The ability to transfer utility encourages collaboration as players see the potential for increased benefits when they work together rather than acting independently.
• Discuss how the characteristic function relates to the concept of transferable utility in cooperative games.
  • The characteristic function serves as a key tool in cooperative games by defining the value or payoff that each coalition can achieve. In scenarios with transferable utility, this function determines how much total utility can be shared among players within a coalition. The relationship between the characteristic function and transferable utility is crucial for understanding how different coalitions can negotiate and distribute payoffs based on their collective strength and cooperation potential.
• Evaluate the implications of transferable utility on fair distribution of payoffs among players in cooperative game settings.
  • Transferable utility significantly affects how payoffs are allocated among players in cooperative settings by introducing mechanisms for equitable distribution based on contributions and negotiations. Concepts like the Shapley value help ensure that all players receive a fair share according to their influence within coalitions. However, the flexibility that comes with transferable utility also presents challenges, as disagreements over what constitutes a fair distribution can lead to instability within coalitions, potentially impacting overall cooperation.

Related terms

Cooperative game: A type of game where players can form coalitions and make binding agreements to improve their payoffs.

Characteristic function: A function that assigns a value to each coalition in a cooperative game, representing the maximum payoff that can be achieved by that coalition.

Shapley value: A solution concept in cooperative game theory that provides a method for fairly distributing payoffs among players based on their contributions to a coalition.