In game theory, the core is the set of feasible allocations that cannot be improved upon by a subset (a coalition) of the economy's agents. A coalition is said to improve upon or block a feasible allocation if the members of that coalition are better off under another feasible allocation that is identical to the first except that every member of the coalition has a different consumption bundle that is part of an aggregate consumption bundle that can be constructed from publicly available technology and the initial endowments of each consumer in the coalition.
An allocation is said to have the core property if there is no coalition that can improve upon it. The core is the set of all feasible allocations with the core property.
The idea of the core already appeared in the writings of Edgeworth (1881), at the time referred to as the contract curve. Even if von Neumann and Morgenstern considered it an interesting concept, they only worked with zero-sum games where the core is always empty. The modern definition of the core is due to Gillies.
Consider a transferable utility cooperative game where denotes the set of players and is the characteristic function. An imputation is dominated by another imputation if there exists a coalition , such that each player in prefers , formally: for all and there exists such that and can enforce (by threatening to leave the grand coalition to form ), formally: . An imputation is dominated if there exists an imputation dominating it.
When the core exists and is not empty, it is the set of imputations that are not dominated.
Consider a group of n miners, who have discovered large bars of gold. If two miners can carry one piece of gold, then the payoff of a coalition S is
If there are more than two miners and there is an even number of miners, then the core consists of the single payoff where each miner gets 1/2. If there is an odd number of miners, then the core is empty.
Mr A and Mr B are knitting gloves. The gloves are one-size-fits-all, and two gloves make a pair that they sell for EUR5. They have each made three gloves. How to share the proceeds from the sale? The problem can be described by a characteristic function form game with the following characteristic function: Each man has three gloves, that is one pair with a market value of EUR5. Together, they have 6 gloves or 3 pair, having a market value of EUR15. Since the singleton coalitions (consisting of a single man) are the only non-trivial coalitions of the game all possible distributions of this sum belong to the core, provided both men get at least EUR5, the amount they can achieve on their own. For instance (7.5, 7.5) belongs to the core, but so does (5, 10) or (9, 6).
For the moment ignore shoe sizes: a pair consists of a left and a right shoe, which can then be sold for EUR10. Consider a game with 2001 players: 1000 of them have 1 left shoe, 1001 have 1 right shoe. The core of this game is somewhat surprising: it consists of a single imputation that gives 10 to those having a (scarce) left shoe, and 0 to those owning an (oversupplied) right shoe. No coalition can block this outcome, because no left shoe owner will accept less than 10, and any imputation that pays a positive amount to any right shoe owner must pay less than 10000 in total to the other players, who can get 10000 on their own. So, there is just one imputation in the core.
The message remains the same, even if we increase the numbers as long as left shoes are scarcer. The core has been criticized for being so extremely sensitive to oversupply of one type of player.
The Walrasian equilibria of an exchange economy in a general equilibrium model, will lie in the core of the cooperation game between the agents. Graphically, and in a two-agent economy (see Edgeworth Box), the core is the set of points on the contract curve (the set of Pareto optimal allocations) lying between each of the agents' indifference curves defined at the initial endowments.
When alternatives are allocations (list of consumption bundles), it is natural to assume that any nonempty subsets of individuals can block a given allocation. When alternatives are public (such as the amount of a certain public good), however, it is more appropriate to assume that only the coalitions that are large enough can block a given alternative. The collection of such large ("winning") coalitions is called a simple game. The core of a simple game with respect to a profile of preferences is based on the idea that only winning coalitions can reject an alternative in favor of another alternative . A necessary and sufficient condition for the core to be nonempty for all profile of preferences, is provided in terms of the Nakamura number for the simple game.