Utility functions on indivisible goods

Some branches of economics and game theory deal with indivisible goods, discrete items that can be
traded only as a whole. For example, in combinatorial auctions there is a finite set of items, and every agent
can buy a subset of the items, but an item cannot be divided among two or more agents.

It is usually assumed that every agent assigns subjective utility to every subset of the items. This can be
represented in one of two ways:

An ordinal utility preference relation, usually marked by . The fact that an agent prefers a
set to a set is written . If the agent only weakly prefers (i.e. either prefers or is
indifferent between and ) then this is written .
A cardinal utility function, usually denoted by . The utility an agent gets from a set is
written . Cardinal utility functions are often normalized such that , where is
the empty set.

A cardinal utility function implies a preference relation: implies and

implies . Utility functions can have several properties.[1]

Monotonicity
Monotonicity means that an agent always (weakly) prefers to have extra items. Formally:

For a preference relation: implies .

For a utility function: implies (i.e. u is a monotone function).

Monotonicity is equivalent to the free disposal assumption: if an agent may always discard unwanted items,
then extra items can never decrease the utility.

Additivity
Additivity (also called linearity or modularity) means that "the whole is equal to the Additive utility
sum of its parts." That is, the utility of a set of items is the sum of the utilities of each
item separately. This property is relevant only for cardinal utility functions. It says
that for every set of items, 0

apple 5
hat 7

apple and hat 12

assuming that . In other words, is an additive function. An equivalent
definition is: for any sets of items and ,
An additive utility function is characteristic of independent goods. For example, an apple and a hat are
considered independent: the utility a person receives from having an apple is the same whether or not he
has a hat, and vice versa. A typical utility function for this case is given at the right.

Submodularity and supermodularity

Submodularity means that "the whole is not more than the sum of its parts (and Submodular utility
may be less)." Formally, for all sets and ,

In other words, is a submodular set function. apple 5

bread 7
An equivalent property is diminishing marginal utility, which means that for any
sets and with , and every :[2] apple and bread 9

A submodular utility function is characteristic of substitute goods. For example, an apple and a bread loaf
can be considered substitutes: the utility a person receives from eating an apple is smaller if he has already
ate bread (and vice versa), since he is less hungry in that case. A typical utility function for this case is given
at the right.

Supermodularity is the opposite of submodularity: it means that "the whole is not

less than the sum of its parts (and may be more)". Formally, for all sets and , Supermodular utility

0
In other words, is a supermodular set function. apple 5

An equivalent property is increasing marginal utility, which means that for all sets knife 7
and with , and every : apple and knife 15

A supermoduler utility function is characteristic of complementary goods. For example, an apple and a
knife can be considered complementary: the utility a person receives from an apple is larger if he already
has a knife (and vice versa), since it is easier to eat an apple after cutting it with a knife. A possible utility
function for this case is given at the right.

A utility function is additive if and only if it is both submodular and supermodular.

Subadditivity and superadditivity

Subadditivity means that for every pair of disjoint sets

In other words, is a subadditive set function.

Assuming is non-negative, every submodular function
is subadditive. However, there are non-negative subadditive Subadditive but not submodular
functions that are not submodular. For example, assume that
there are 3 identical items, , and Z, and the utility
0
depends only on their quantity. The table on the right
describes a utility function that is subadditive but not X or Y or Z 2
submodular, since X,Y or Y,Z or Z,X 3
 X,Y,Z 5

Superadditivity means that for every pair of disjoint sets

Superadditive but not supermodular

0
In other words, is a superadditive set function. X or Y or Z 1

Assuming is non-positive, every supermodular X,Y or Y,Z or Z,X 3

function is superadditive. However, there are non-negative X,Y,Z 4
superadditive functions that are not supermodular. For
example, assume that there are 3 identical items, , and
Z, and the utility depends only on their quantity. The table on the right describes a utility function that is
non-negative and superadditive but not supermodular, since

A utility function with is said to be additive if and only if it is both superadditive and subadditive.

With the typical assumption that , every submodular function is subadditive and every
supermodular function is superadditive. Without any assumption on the utility from the empty set, these
relations do not hold.

In particular, if a submodular function is not subadditive, then must be negative. For example,
suppose there are two items, , with , and . This
utility function is submodular and supermodular and non-negative except on the empty set, but is not
subadditive, since

Also, if a supermodular function is not superadditive, then must be positive. Suppose instead that
. This utility function is non-negative, supermodular, and
submodular, but is not superadditive, since

Unit demand
Unit demand (UD) means that the agent only wants a single good. If the agent gets Unit demand utility
two or more goods, he uses the one of them that gives him the highest utility, and
discards the rest. Formally:
0
For a preference relation: for every set there is a subset with
cardinality , such that . apple 5

For a utility function: For every set :[3] pear 7

apple and pear 7

A unit-demand function is an extreme case of a submodular function. It is characteristic of goods that are
pure substitutes. For example, if there are an apple and a pear, and an agent wants to eat a single fruit, then
his utility function is unit-demand, as exemplified in the table at the right.

Gross substitutes
Gross substitutes (GS) means that the agents regards the items as
substitute goods or independent goods but not complementary
goods. There are many formal definitions to this property, all of
which are equivalent.

Every UD valuation is GS, but the opposite is not true.

Every GS valuation is submodular, but the opposite is not
true.
An illustration of the containment
See Gross substitutes (indivisible items) for more details. relations between common classes
of utility functions.
Hence the following relations hold between the classes:

See diagram on the right.

Aggregates of utility functions

A utility function describes the happiness of an individual. Often, we need a function that describes the
happiness of an entire society. Such a function is called a social welfare function, and it is usually an
aggregate function of two or more utility functions. If the individual utility functions are additive, then the
following is true for the aggregate functions:

Example
Aggregate values of functions
Property on {a}, {b} and {a,b}
function
f g h aggregate(f,g,h)

Sum Additive 1,3; 4 3,1; 4 4,4; 8

Average Additive 1,3; 4 3,1; 4 2,2; 4

Minimum Super-additive 1,3; 4 3,1; 4 1,1; 4

Maximum Sub-additive 1,3; 4 3,1; 4 3,3; 4

1,3; 4 3,1; 4 1,1; 2 1,1; 4

Median neither
1,3; 4 3,1; 4 3,3; 6 3,3; 4

See also
Utility functions on divisible goods
 Single-minded agent

References
1. Gul, F.; Stacchetti, E. (1999). "Walrasian Equilibrium with Gross Substitutes". Journal of
Economic Theory. 87: 95–124. doi:10.1006/jeth.1999.2531 (https://doi.org/10.1006%2Fjeth.
1999.2531).
2. Moulin, Hervé (1991). Axioms of cooperative decision making. Cambridge England New
York: Cambridge University Press. ISBN 9780521424585.
3. Koopmans, T. C.; Beckmann, M. (1957). "Assignment Problems and the Location of
Economic Activities" (http://cowles.yale.edu/sites/default/files/files/pub/d00/d0004.pdf)
(PDF). Econometrica. 25 (1): 53–76. doi:10.2307/1907742 (https://doi.org/10.2307%2F1907
742). JSTOR 1907742 (https://www.jstor.org/stable/1907742).

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