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MODULE 4
Game Theory

LEARNING OBJECTIVES
After completing this supplement, students will be able to:

1. Understand the principles of zero-sum, two-person

games.
2. Analyze pure strategy games and use dominance to
reduce the size of a game.
3. Solve mixed strategy games when there is no saddle
point.

SUPPLEMENT OUTLINE
M4.1 Introduction
M4.2 Language of Games
M4.3 The Minimax Criterion
M4.4 Pure Strategy Games
M4.5 Mixed Strategy Games
M4.6 Dominance

Summary • Glossary • Solved Problems • Self-Test • Discussion Questions and Problems • Bibliography
Appendix M4.1: Game Theory with QM for Windows

M4-1
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M4-2 MODULE 4 • GAME THEORY

M4.1 Introduction
As discussed in Chapter 1, competition can be an important decision-making factor. The strate-
gies taken by other organizations or individuals can dramatically affect the outcome of our
decisions. In the automobile industry, for example, the strategies of competitors to introduce cer-
tain models with certain features can dramatically affect the profitability of other carmakers.
Today, business cannot make important decisions without considering what other organizations
or individuals are doing or might do.
Game theory is one way to consider the impact of the strategies of others on our strategies
and outcomes. A game is a contest involving two or more decision makers, each of whom wants
to win. Game theory is the study of how optimal strategies are formulated in conflict.
The study of game theory dates back to 1944, when John von Neumann and Oscar Morgen-
stern published their classic book, Theory of Games and Economic Behavior.1 Since then, game
theory has been used by army generals to plan war strategies, by union negotiators and managers
in collective bargaining, and by businesses of all types to determine the best strategies given a
competitive business environment.
Game theory continues to be important today. In 1994, John Harsanui, John Nash, and
Reinhard Selten jointly received the Nobel Prize in Economics from the Royal Swedish
Academy of Sciences.2 In their classic work, these individuals developed the notion of
noncooperative game theory. After the work of John von Neumann, Nash developed the con-
cepts of the Nash equilibrium and the Nash bargaining problem, which are the cornerstones of
modern game theory.
Game models are classified by the number of players, the sum of all payoffs, and the number
of strategies employed. Due to the mathematical complexity of game theory, we limit the analy-
sis in this module to games that are two person and zero sum. A two-person game is one in
which only two parties can play—as in the case of a union and a company in a bargaining
In a zero-sum game, what is session. For simplicity, X and Y represent the two game players. Zero sum means that the sum of
gained by one player is lost by losses for one player must equal the sum of gains for the other player. Thus, if X wins 20 points
the other. or dollars, Y loses 20 points or dollars. With any zero-sum game, the sum of the gains for one
player is always equal to the sum of the losses for the other player. When you sum the gains and
losses for both players, the result is zero—hence the name zero-sum games.

M4.2 Language of Games

To introduce the notation used in game theory, let us consider a simple game. Suppose there are
only two lighting fixture stores, X and Y, in Urbana, Illinois. (This is called a duopoly.) The
respective market shares have been stable up until now, but the situation may change. The
daughter of the owner of store X has just completed her MBA and has developed two distinct
advertising strategies, one using radio spots and the other newspaper ads. Upon hearing this, the
owner of store Y also proceeds to prepare radio and newspaper ads.
The 2 * 2 payoff matrix in Table M4.1 shows what will happen to current market shares if
both stores begin advertising. By convention, payoffs are shown only for the first game player, X
in this case. Y’s payoffs will just be the negative of each number. For this game, there are only
two strategies being used by each player. If store Y had a third strategy, we would be dealing
with a 2 * 3 payoff matrix.

1J. von Neumann and O. Morgenstern. Theory of Games and Economic Behavior. Princeton, NJ: Princeton University

Press, 1944.
2Rita Koselka. “The Games Businesses Play,” Forbes (November 7, 1994): 12.
Z00_REND1011_11_SE_MOD4 PP3.QXD 2/21/11 12:49 PM Page M4-3

M4.3 THE MINIMAX CRITERION M4-3

TABLE M4.1
GAME PLAYER Y’s STRATEGIES
Store X’s Payoff Matrix
Y1 Y2
(Use radio) (Use newspaper)
X1
GAME (Use radio) 3 5
PLAYER X’S
X2
STRATEGIES
(Use newspaper) 1 -2

A positive number in Table M4.1 means that X wins and Y loses. A negative number means
that Y wins and X loses. It is obvious from the table that the game favors competitor X, since all
values are positive except one. If the game had favored player Y, the values in the table would
have been negative. In other words, the game in Table M4.1 is biased against Y. However, since
Y must play the game, he or she will play to minimize total losses. To do this, Player Y would
use the minimax criterion, our next topic.

Game Outcomes

STORE X’s STORE Y’s OUTCOME (% CHANGE

STRATEGY STRATEGY IN MARKET SHARE)
X1 (use radio) Y1 (use radio) X wins 3
and Y loses 3
X1 (use radio) Y2 (use newspaper) X wins 5
and Y loses 5
X2 (use newspaper) Y1 (use radio) X wins 1
and Y loses 1
X2 (use newspaper) Y2 (use newspaper) X loses 2
and Y wins 2

M4.3 The Minimax Criterion

A player using the minimax For two-person, zero-sum games, there is a logical approach to finding the solution: In a zero-
criterion will select the strategy sum game, each person should choose the strategy that minimizes the maximum loss, called the
that minimizes the maximum minimax criterion. This is identical to maximizing one’s minimum gains, so for one player, this
possible loss. could be called the maximin criterion.
Let us use the example in Table M4.1 to illustrate the minimax criterion. This is a two-
person zero-sum game with the strategies for player Y given as the columns of the table. The
The upper value of the game is values are gains for player X and losses for player Y. Player Y is looking at a maximum loss of 3
equal to the minimum of the if strategy Y1 is selected and a maximum loss of 5 if strategy Y2 is selected. Thus, Player Y should
maximum values in the columns. select strategy Y1, which results in a maximum loss of 3 (the minimum of the maximum possible
losses). This is called the upper value of the game. Table M4.2 illustrates this minimax
approach.
The lower value of the game is In considering the maximin strategy for player X (whose strategies correspond to the rows
equal to the maximum of the of the table), let us look at the minimum payoff for each row. The payoffs are +3 for strategy X1
minimum values in the rows. and -2 for strategy X2. The maximum of these minimums is +3, which means strategy X1, will
be selected. This value 1+32 is called the lower value of the game.
If the upper and lower values of a game are the same, this number is called the value of
the game, and an equilibrium or saddle point condition exists. For the game presented in
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M4-4 MODULE 4 • GAME THEORY

TABLE M4.2
SADDLE POINT
Minimax Solution
Y1 Y2 Minimum
X1 3 5 3
Maximum of minimums
X2 1 -2 ⴚ2
Maximum 3 5

Minimum of maximums

An equilibrium or saddle point Table M4.2, the value of the game is 3 because this is the value for both the upper and lower
condition exists if the upper values. The value of the game is the average or expected game outcome if the game is played an
value of the game is equal to the infinite number of times.
lower value of the game. This is In implementing the minimax strategy, player Y will find the maximum value in each col-
called the value of the game. umn and select the minimum of these maximums. In implementing the maximin strategy, player
X will find the minimum value in each row and select the maximum of these minimums. When
a saddle point is present, this approach will result in pure strategies for each player. Otherwise,
the solution to the game will involve mixed strategies. These concepts are discussed in the fol-
lowing sections.

M4.4 Pure Strategy Games

When a saddle point is present, the strategy each player should follow will always be the same
A pure strategy exists whenever a regardless of the other player’s strategy. This is called a pure strategy. A saddle point is a situa-
saddle point is present. tion in which both players are facing pure strategies.
Using minimax criterion, we saw that the game in Table M4.2 had a saddle point and thus is
an example of a pure strategy game. It is beneficial for player X and for player Y to always
choose one strategy. Simple logic would lead us to this same conclusion. Player X will always
select X1, since the payoffs for X1 are better than the payoffs for X2, regardless of what player Y
does. Knowing that player X will select X1, player Y will always select strategy Y1 and only lose
3 rather than 5. Note that the saddle point in this example, 3, is the largest number in its column
and the smallest number in its row. This is true of all saddle points.
Another example of a pure strategy game is shown in Table M4.3. Notice that the value 6 is
the lowest number in its row and the highest number in its column. Thus, it is a saddle point and
indicates that strategy X1 will be selected by player X and strategy Y2 will be selected by player Y.
The value of this game is 6.

TABLE M4.3
PLAYER Y’s STRATEGIES
Example of a Pure
Strategy Game Minimum
row number
Y1 Y2 T

PLAYER X’s X1 10 6 6
STRATEGIES
X2 - 12 2 - 12
Maximum column number : 10 6
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M4.5 MIXED STRATEGY GAMES M4-5

IN ACTION Game Theory in the Brewing Business

C ompanies that understand the principles and importance of

game theory can often select the best competitive strategies.
Similarly, when Miller first decided to market Miller Lite, with
the slogan “tastes great—less filling,” Anheuser-Busch had two
possible gaming strategies: to develop its own low-calorie beer or
Companies that don’t can face financial loss or even bankruptcy. to criticize Miller in its advertising for producing a watered-down
The successful and unsuccessful selection of competitive gaming beer. The strategy it selected was to criticize Miller in its advertis-
strategies can be seen in most industries, including the brewing ing. The strategy didn’t work, Miller gained significant market
industry. share, and Anheuser-Busch was forced to come out with its own
In the 1970s, Schlitz was the second-largest brewer in the low-calorie beer—Bud Light.
United States. With its slogan “the beer that made Milwaukee Today, Anheuser-Busch, Miller, Coors, and other large beer
famous,” Schlitz was chasing after the leader in beer sales, manufacturers face new games and new competitors that pro-
Anheuser-Busch, maker of Budweiser. Schlitz could either keep its duce micro-brews, dry beer, and ice beer. Although it is too early
current production output or attempt to produce more beer to to tell what the large beer makers will do and how successful
compete with Anheuser-Busch. It decided to get more beer to the their strategies will be, it appears that their strategy will be to du-
market in a shorter amount of time. In order to accomplish this, plicate what these smaller brewers are doing. What is clear, how-
Schlitz selected a strategy of distributing “immature” beer. The ever, is that a knowledge of the fundamentals of game theory can
result was cloudy beer that often contained a slimy suspension. make a big difference.
The beer and Schlitz’s market share and profitability went down
the drain. Anheuser-Busch, Miller, and Coors became the market Source: Philip Van Munching. “American Brewing, Unreal,” The Economist
leaders. (September, 4, 1977): 24.

M4.5 Mixed Strategy Games

When there is no saddle point, players will play each strategy for a certain percentage of the
In a mixed strategy game, time. This is called a mixed strategy game. The most common way to solve a mixed strategy
each player should optimize game is to use the expected gain or loss approach. The goal of this approach is for a player to
the expected gain. play each strategy a particular percentage of the time so that the expected value of the game does
not depend upon what the opponent does. This will only occur if the expected value of each
strategy is the same.
Consider the game shown in Table M4.4. There is no saddle point, so this will be a mixed
strategy game. Player Y must determine the percentage of the time to play strategy Y1 and the
percentage of the time to play strategy Y2. Let P be the percentage of time that player Y chooses
strategy Y1 and 1 - P be the percentage of time that player Y chooses strategy Y2. We must
weight the payoffs by these percentages to compute the expected gain for each of the different
strategies that player X may choose.
For example, if player X chooses strategy X1, then P percent of the time the payoff for Y
will be 4, and 1 - P percent of the time the payoff will be 2, as shown in Table M4.5. Similarly,
if player X chooses strategy X2, then P percent of the time the payoff for Y will be 1, and 1 - P
percent of the time the payoff will be 10. If these expected values are the same,

TABLE M4.4
PLAYER Y’s STRATEGIES
Game Table for Mixed
Strategy Game Y1 Y2
PLAYER X’s X1 4 2
STRATEGIES
X2 1 10
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M4-6 MODULE 4 • GAME THEORY

TABLE M4.5
Y1 Y2
Game Table for Mixed
P 1 - P Expected gain
Strategy Game with
Percentages (P, Q) X1 Q 4 2 4P ⴙ 2(1 ⴚ P)
Shown X2 1 - Q 1 10 1P ⴙ 10(1 ⴚ P)
Expected gain 4Q ⴙ 1(1 ⴚ Q) 2Q ⴙ 10(1 ⴚ Q)

then the expected value for player Y will not depend on the strategy chosen by X. Therefore, to
solve this, we set these two expected values equal, as follows:
4P + 211 - P2 = 1P + 1011 - P2
Solving this for P, we have
P = 8>11
and
1 - P = 1 - 8>11 = 3>11
Thus, 8>11 and 3>11 indicate how often player Y will choose strategies Y1 and Y2 respectively. The
expected value computed with these percentages is
1P + 1011 - P2 = 118>112 + 1013>112 = 38
>11 = 3.46
Performing a similar analysis for player X, we let Q be the percentage of the time that strat-
egy X1 is played and 1 - Q be the percentage of the time that strategy X2 is played. Using these,
we compute the expected gain shown in Table M4.5. We set these equal, as follows:
4Q + 111 - Q2 = 2Q + 1011 - Q2
Solving for Q, we get
Q = 9>11
and
1 - Q = 2>11
Thus, 9>11 and 2>11 indicate how often player X will choose strategies X1 and X2 respectively. The
expected gains with these probabilities will also be 38>11, or 3.46.

IN ACTION Using Game Theory to Shape Strategy at General Motors

G ame theory often assumes that one player or company must

lose for another to win. In the auto industry, car companies typi-
Motors (GM) developed a new credit card that allowed people to
apply 5% of their purchases to a new GM vehicle, up to $500 per
year, with a maximum of $3,500. The credit card program re-
cally compete by offering rebates and price cuts. This allows one placed other incentive programs offered by GM. Changing the
company to gain market share at the expense of other car com- game helped bring profitability back to GM. In addition, it also
panies. Although this win–lose strategy works in the short term, helped other car manufacturers who no longer had to compete
competitors quickly follow the same strategy. The result is lower on price cuts and rebates. In this case, the new game resulted in
margins and profitability. Indeed, many customers wait until a re- a win–win situation with GM. Prices, margins, and profitability in-
bate or price cut is offered before buying a new car. The short- creased for GM and for some of its competitors.
term win–lose strategy turns into a long-term lose–lose result.
By changing the game itself, it is possible to find strategies Source: Adam Brandenburger, et al. “The Right Game: Use Game Theory to
that can benefit all competitors. This was the case when General Shape Strategy,” Harvard Business Renew (July-August 1995): 57.
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SUMMARY M4-7

M4.6 Dominance
The principle of dominance can be used to reduce the size of games by eliminating strategies
that would never be played. A strategy for a player is said to be dominated if the player can al-
ways do as well or better playing another strategy. Any dominated strategy can be eliminated
from the game. In other words, a strategy can be eliminated if all its game’s outcomes are the
same or worse than the corresponding game outcomes of another strategy.
Using the principle of dominance, we reduce the size of the following game:

Y1 Y2
X1 4 3
X2 2 20
X3 1 1

In this game, X3 will never be played because X can always do better by playing X1 or X2. The
new game is

Y1 Y2
X1 4 3
X2 2 20

Here is another example:

Y1 Y2 Y3 Y4
X1 -5 4 6 -3
X2 -2 6 2 -20

In this game, Y would never play Y2 and Y3 because Y could always do better playing Y1 or Y4.
The new game is

Y1 Y4
X1 -5 -3
X2 -2 - 20

Summary
Game theory is the study of how optimal strategies are formu- Depending on the actual payoffs in the game and the size
lated in conflict. Because of the mathematical complexities of of the game, a number of solution techniques can be used. In a
game theory, this module is limited to two-person and zero- pure strategy game, strategies for the players can be obtained
sum games. A two-person game allows only two people or two without making any calculations. When there is not a pure
groups to be involved in the game. Zero sum means that the strategy, also called a saddle point, for both players, it is neces-
sum of the losses for one player must equal the sum of the sary to use other techniques, such as the mixed strategy
gains for the other player. The overall sum of the losses and approach, dominance, and a computer solution for games
gains for both players, in other words, must be zero. larger than 2 * 2.
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M4-8 MODULE 4 • GAME THEORY

Glossary
Dominance A procedure that is used to reduce the size of Pure Strategy A game in which both players will always
the game. play just one strategy.
Minimax Criterion A criterion that minimizes one’s maxi- Saddle Point Game A game that has a pure strategy.
mum losses. This is another way of solving a pure strategy Two-Person Game A game that has only two players.
game. Value of the Game The expected winnings of the game if
Mixed Strategy Game A game in which the optimal the game is played a large number of times.
strategy for both players involves playing more than one Zero-Sum Game A game in which the losses for one player
strategy over time. Each strategy is played a given percent- equal the gains for the other player.
age of the time.

Solved Problems

Solved Problem M4-1

George Massic (player X) faces the following game. Using dominance, reduce the size of the game, if
possible.

Y1 Y2
X1 6 5
X2 20 23
X3 15 11

Solution
After carefully analyzing the game, George realizes that he will never play strategy X1. The best out-
come for this strategy (6) is worse than the worst outcome for the other two strategies. In addition,
George would never play strategy X3, for the same reason. Thus, George will always play strategy X2.
Given this situation, player Y would always play strategy Y1 to minimize her losses. This is a pure strat-
egy game with George playing X2 and person Y playing strategy Y1. The value of the game for this prob-
lem is the outcome of these two strategies, which is 20.

Solved Problem M4-2

Using the solution procedure for a mixed strategy game, solve the following game:

Y1 Y2
X1 4 2
X2 0 10

Solution
This game can be solved by setting up the mixed strategy table and developing the appropriate equations:

Y1 Y2
P 1 - P Expected gain
X1 Q 4 2 4P ⴙ 2(1 ⴚ P)
X1 1 - Q 1 10 0P ⴙ 10(1 ⴚ P)
Expected gain 4Q ⴙ 0(1 ⴚ Q) 2Q ⴙ 10(1 ⴚ Q)
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DISCUSSION QUESTIONS AND PROBLEMS M4-9

The equations for Q are

4Q + 011 - Q2 = 2Q + 1011 - Q2
4Q = 2Q + 10 - 10Q
12Q = 10 or Q = 10>12 and 1 - Q = 2>12
The equations for P are
4P + 211 - P2 = 0P + 1011 - P2
4P + 2 - 2P = 10 - 10P
12P = 8 or P = 8>12 and 1 - P = 4>12

Self-Test
䊉 Before taking the self-test, refer back to the learning objectives at the beginning of the supplement and the glossary at the end
of the supplement.
䊉 Use the key at the back of the book to correct your answers.
䊉 Restudy pages that correspond to any questions that you answered incorrectly or material you feel uncertain about.
1. In a two-person, zero-sum game, 5. In a two-person zero-sum game, it is determined that
a. each person has two strategies. strategy X1 dominates strategy X2. This means
b. whatever is gained by one person is lost by the other. a. strategy X1 will never be chosen.
c. all payoffs are zero. b. the payoffs for strategy X1 will be greater than or equal
d. a saddle point always exists. to the payoffs for X2.
2. A saddle point exists if c. a saddle point exists in the game.
a. the largest payoff in a column is also the smallest d. a mixed strategy must be used.
payoff in its row. 6. In a pure strategy game,
b. the smallest payoff in a column is also the largest a. each player will randomly choose the strategy to be
payoff in its row. used.
c. there are only two strategies for each player. b. each player will always select the same strategy, regard
d. there is a dominated strategy in the game. less of what the other person does.
3. If the upper and lower values of the game are the same, c. there will never be a saddle point.
a. there is no solution to the game. d. the value of the game must be computed using proba-
b. there is a mixed solution to the game. bilities.
c. a saddle point exists. 7. The solution to a mixed strategy game is based on the
d. there is a dominated strategy in the game. assumption that
4. In a mixed strategy game, a. each player wishes to maximize the long-run average
a. each player will always play just one strategy. payoff.
b. there is no saddle point. b. both players can be winners with no one experiencing
c. each player will try to maximize the maximum of all any loss.
possible payoffs. c. players act irrationally.
d. a player will play each of two strategies exactly 50% d. there is sometimes a better solution than a saddle point
of the time. solution.

Discussion Questions and Problems

Discussion Questions M4-4 Explain the concept of dominance. How is it used?
M4-1 What is a two-person, zero-sum game? M4-5 How is a saddle point found in a game?
M4-2 How do you compute the value of the game? M4-6 How do you determine whether a game is a pure
strategy game or a mixed strategy game?
M4-3 What is a pure strategy?
M4-7 What is a mixed game, and how is it solved?
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M4-10 MODULE 4 • GAME THEORY

Problems* M4-15 Shoe Town and Fancy Foot are both vying for more
share of the market. If Shoe Town does no advertis-
M4-8 Determine the strategies for X and Y, given the
ing, it will not lose any share of the market if Fancy
following game. What is the value of the game?
Foot does nothing. It will lose 2% of the market if
Fancy Foot invests $10,000 in advertising, and it
Y1 Y2
will lose 5% of the market if Fancy Foot invests
X1 2 -4 $20,000 in advertising. On the other hand, if Shoe
X2 6 10 Town invests $15,000 in advertising, it will gain 3%
of the market if Fancy Foot does nothing; it will gain
1% of the market if Fancy Foot invests $10,000 in
M4-9 What is the value of the following game and the
advertising; and it will lose 1% if Fancy Foot invests
strategies for A and B?
$20,000 in advertising.
(a) Develop a payoff table for this problem.
B1 B2 (b) Determine the various strategies using the
A1 19 20 computer.
A2 5 -4 (c) How would you determine the value of the
game?
M4-16 Assume that a 1% increase in the market means a
M4-10 Determine each player’s strategy and the value of
profit of $1,000. Resolve Problem M4-15, using
the game, given the following table:
monetary value instead of market share.
M4-17 Solve for the optimal strategies and the value of the
Y1 Y2
following game:
X1 86 42
X2 36 106 B STRATEGY STRATEGY STRATEGY
A B1 B2 B3

M4-11 What is the value of the following game? STRATEGY A1 -10 5 15

STRATEGY A2 20 2 -20
S1 S2 STRATEGY A3 6 2 6
R1 21 116 STRATEGY A4 -13 -10 44
R2 89 3 STRATEGY A5 -30 0 45
STRATEGY A6 16 -20 6
M4-12 Player A has a $1 bill and a $20 bill, and player B has
a $5 bill and a $10 bill. Each player will select a bill
from the other player without knowing what bill the M4-18 For the following two-person, zero-sum game, are
other player selected. If the total of the bills selected is there any dominated strategies? If so, eliminate any
odd, player A gets both of the two bills that were se- dominated strategy and find the value of the game.
lected, but if the total is even, player B gets both bills.
(a) Develop a payoff table for this game. (Place the PLAYER Y’s STRATEGIES
sum of both bills in each cell.) Y1 Y2 Y3
(b) What are the best strategies for each player?
PLAYER X’s X1 4 5 10
(c) What is the value of the game? Which player
would you like to be? STRATEGIES X2 3 4 2
M4-13 Resolve Problem M4-12. If the total of the bills is X3 8 6 9
even, player A gets both of the bills selected, but if
the total is odd, player B gets both bills. M4-19 Refer to Problem M4-8. There is a saddle point in this
M4-14 Solve the following game: game, making it a pure strategy game. Ignore this and
solve it as a mixed strategy game. What special con-
Y1 Y2 dition in the solution indicates that this should not
X1 -5 - 10 have been solved as a mixed strategy game?
X2 12 8
X3 4 12
X4 - 40 -5

*Note: means the problem may be solved with QM for Windows.

Z00_REND1011_11_SE_MOD4 PP3.QXD 2/21/11 12:50 PM Page M4-11

BIBLIOGRAPHY M4-11

M4-20 Petroleum Research, Inc. (A), and Extraction Inter- are critical to their success. Petroleum Research,
national, Inc. (B), have each developed a new extrac- with the help of an advertising firm, has developed
tion procedure that will remove metal and other 15 possible strategies. Extraction International has
contaminants from used automotive engine oil. The developed 5 possible advertising strategies. The eco-
equipment is expensive, and the extraction process is nomic outcome in millions of dollars is shown in the
complex, but the approach provides an economical following table. What strategy do you recommend
way to recycle used engine oil. Both companies have for Petroleum Research? How much money can it
developed unique technical procedures. Both com- expect from its approach?
panies also believe that advertising and promotion

B STRATEGY STRATEGY STRATEGY STRATEGY STRATEGY

A B1 B2 B3 B4 B5
STRATEGY A1 1 2 2 1 4
STRATEGY A2 -1 3 -6 7 5
STRATEGY A3 10 -3 -5 -20 12
STRATEGY A4 6 -8 5 2 2
STRATEGY A5 -5 3 3 7 5
STRATEGY A6 -1 -1 -3 4 -2
STRATEGY A7 -1 0 0 0 -1
STRATEGY A8 3 6 -6 8 3
STRATEGY A9 2 6 -5 4 -7
STRATEGY A10 0 0 0 -5 7
STRATEGY A11 4 8 -5 3 3
STRATEGY A12 -3 -3 0 3 3
STRATEGY A13 1 0 0 -2 2
STRATEGY A14 4 3 3 5 7
STRATEGY A15 4 -4 4 -5 5

Bibliography
Bierman, H., and L. Fernandez. Game Theory with Economic Applications, Fudenberg, D., and D. K. Levine. The Theory of Learning in Games.
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M4-12 MODULE 4 • GAME THEORY

Appendix M4.1: Game Theory with QM for Windows

In this module we show how to solve 2 * 2 games using a variety of techniques. In Section
M4.5, for example, we discuss how a mixed strategy game could be solved using straightfor-
ward algebraic techniques. In this game, player X will receive 4 and 2 by playing strategy X1
when player Y plays strategies Y1 and Y2, respectively. Values of 1 and 10 are the results when
player X1 plays strategy X2.
To illustrate QM for Windows, let’s use these data. Program M4.1 shows the mix that each
player should play for each strategy. The value of the game, 3.45, is displayed at the bottom right
of the decision table.

PROGRAM M4.1
QM for Windows Output
for Game Theory

Other information is available

by selecting Window.

The player represented by the

rows will play strategy 2 about
18% of the time.

The value of the game is 3.45.