What Is Game Theory?

Game theory is a theoretical framework for conceiving social situations among competing players.
In some respects, game theory is the science of strategy, or at least the optimal decision-making of
independent and competing actors in a strategic setting.

Game theory is used in various fields to lay out various situations and predict their most likely
outcomes. Businesses may use it, for example, to set prices, decide whether to acquire another
firm, and determine how to handle a lawsuit.

Key Takeaways:

ame theory is a theoretical framework to conceive social situations among competing players.
-making of independent and
competing actors in a strategic setting.
-world scenarios for such situations as pricing competition and product
releases (and many more) can be laid out and their outcomes predicted.

clude cooperative/non-cooperative, zero-sum/non-zero-sum,

and simultaneous/sequential.

How Game Theory Works

Game theory tries to understand the strategic actions of two or more "players" in a given situation
containing set rules and outcomes. Any time we have a situation with two or more players that
involve known payouts or quantifiable consequences, we can use game theory to help determine
the most likely outcomes.

The focus of game theory is the game, which serves as a model of an interactive situation among
rational players. The key to game theory is that one player's payoff is contingent on the strategy
implemented by the other player.

The game identifies the players' identities, preferences, and available strategies and how these
strategies affect the outcome. Depending on the model, various other requirements or assumptions
may be necessary.

Game theory has a wide range of applications, including psychology, evolutionary biology, war,
politics, economics, and business. Despite its many advances, game theory is still a young and
developing science.

Useful Terms in Game Theory

Here are a few terms commonly used in the study of game theory:

 Game: Any set of circumstances that has a result dependent on the actions of two or more
decision-makers (players).

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
  Players: A strategic decision-maker within the context of the game.
 Strategy: A complete plan of action a player will take given the set of circumstances that
might arise within the game.
 Payoff: The payout a player receives from arriving at a particular outcome. The payout can
be in any quantifiable form, from dollars to utility.
 Information set: The information available at a given point in the game. The term
information set is most usually applied when the game has a sequential component.
 Equilibrium: The point in a game where both players have made their decisions and an
outcome is reached.

The key pioneers of game theory were mathematician John von Neumann and economist Oskar
Morgenstern in the 1940s.2 Mathematician John Nash is regarded by many as providing the first
significant extension of the von Neumann and Morgenstern work.

The Nash Equilibrium

Nash equilibrium is an outcome reached that, once achieved, means no player can increase payoff
by changing decisions unilaterally. It can also be thought of as "no regrets," in the sense that once
a decision is made, the player will have no regrets concerning decisions considering the
consequences.

The Nash equilibrium is reached over time, in most cases. However, once the Nash equilibrium is
reached, it will not be deviated from. After we learn how to find the Nash equilibrium, take a look
at how a unilateral move would affect the situation. Does it make any sense? It shouldn't, and that's
why the Nash equilibrium is described as "no regrets."

Generally, there can be more than one equilibrium in a game. However, this usually occurs in
games with more complex elements than two choices by two players. In simultaneous games that
are repeated over time, one of these multiple equilibria is reached after some trial and error.

This scenario of different choices over time before reaching equilibrium is most often played out
in the business world when two firms are determining prices for highly interchangeable products,
such as airfare or soft drinks.

Key Takeaways:

 The Nash equilibrium is a decision-making theorem within game theory that states a player
can achieve the desired outcome by not deviating from their initial strategy.
 In the Nash equilibrium, each player’s strategy is optimal when considering the decisions
of other players. Every player wins because everyone gets the outcome that they desire.
 The prisoner’s dilemma is a common game theory example and one that adequately
showcases the effect of the Nash equilibrium.
 The Nash equilibrium is often discussed in conjunction with dominant strategy, which
states that the chosen strategy of an actor will lead to better results out of all the possible
strategies that can be used, regardless of the strategy that the opponent uses.
 The Nash equilibrium does not always mean that the most optimal strategy is chosen.1

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
Impact of Game Theory

Game theory is present in almost every industry or field of research. Its expansive theory can
pertain to many situations, making it a versatile and important theory to comprehend. Here are
several fields of study directly impacted by game theory.

Economics: Game theory brought about a revolution in economics by addressing crucial problems
in prior mathematical economic models. For instance, neoclassical economics struggled to
understand entrepreneurial anticipation and could not handle the imperfect competition. Game
theory turned attention away from steady-state equilibrium toward the market process.

Economists often use game theory to understand oligopoly firm behavior. It helps to predict likely
outcomes when firms engage in certain behaviors, such as price-fixing and collusion.

Business: In business, game theory is beneficial for modeling competing behaviors between
economic agents. Businesses often have several strategic choices that affect their ability to realize
economic gain. For example, businesses may face dilemmas such as whether to retire existing
products and develop new ones or employ new marketing strategies.

Businesses can often choose their opponent as well. Some focus on external forces and compete
against other market participants. Others set internal goals and strive to be better than their previous
versions. Whether external or internal, companies are always competing for resources, attempting
to hire the best candidates away from rivals, and gather the attention of customers away from
competing goods.

Game theory in business may most resemble a game tree as shown below. A company may start
in position one and must decide on two outcomes. However, there are continually other decisions
to be made; the final payoff amount is not known until the final decision has been processed.

Types of Game Theories

Cooperative vs. Non-Cooperative Games

Although there are many types of game theories, such as symmetric/asymmetric,

simultaneous/sequential, and so on, cooperative and non-cooperative game theories are the most
common. Cooperative game theory deals with how coalitions, or cooperative groups, interact when
only the payoffs are known. It is a game between coalitions of players rather than between
individuals, and it questions how groups form and how they allocate the payoff among players.

Non-cooperative game theory deals with how rational economic agents deal with each other to
achieve their own goals. The most common non-cooperative game is the strategic game, in which
only the available strategies and the outcomes that result from a combination of choices are
listed. A simplistic example of a real-world non-cooperative game is rock-paper-scissors.

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
Zero-Sum vs. Non-Zero Sum Games

When there is a direct conflict between multiple parties striving for the same outcome, it is often
called a zero-sum game. This means that for every winner, there is a loser. Alternatively, it means
that the collective net benefit received is equal to the collective net benefit lost. Lots of sporting
events are a zero-sum game as one team wins and another team loses.

A non-zero-sum game is one in which all participants can win or lose at the same time. Consider
business partnerships that are mutually beneficial and foster value for both entities. Instead of
competing and attempting to "win," both parties benefit.

Investing and trading stocks is sometimes considered a zero-sum game. After all, one market
participant will buy a stock and another participant sells that same stock for the same price.
However, because different investors have different risk appetites and investing goals, it may be
mutually beneficial for both parties to transact.

Simultaneous Move vs. Sequential Move Games

Many times in life, game theory presents itself in simultaneous move situations. This means each
participant must continually make decisions at the same time their opponent is making decisions.
As companies devise their marketing, product development, and operational plans, competing
companies are also doing the same thing at the same time.

In some cases, there is an intentional staggering of decision-making steps, enabling one party to
see the other party's moves before making their own. This is usually present in negotiations; one
party lists their demands, then the other party has a designated amount of time to respond and list
their own.

One Shot vs. Repeated Games

Game theory can begin and end in a single instance. Like much of life, the underlying competition
starts, progresses, ends, and cannot be redone. This is often the case with equity traders, who must
wisely choose their entry point and exit point as their decision may not easily be undone or retried.

On the other hand, some repeated games continue on and seamlessly never end. These types of
games often contain the same participants each time, and each party has the knowledge of what
occurred last time. For example, consider rival companies trying to price their goods. Whenever
one makes a price adjustment, so may the other. This circular competition repeats itself across
product cycles or sale seasonality.

Examples of Game Theory

There are several "games" that game theory analyzes. Below, we will briefly describe a few of
these.

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
The Prisoner's Dilemma

The Prisoner's Dilemma is the most well-known example of game theory. Consider the example
of two criminals arrested for a crime. Prosecutors have no hard evidence to convict them. However,
to gain a confession, officials remove the prisoners from their solitary cells and question each one
in separate chambers. Neither prisoner has the means to communicate with the other. Officials
present four deals, often displayed as a 2 x 2 box.

1. If both confess, they will each receive a five-year prison sentence.

2. If Prisoner 1 confesses, but Prisoner 2 does not, Prisoner 1 will get three years and Prisoner
2 will get nine years.
3. If Prisoner 2 confesses, but Prisoner 1 does not, Prisoner 1 will get 10 years, and Prisoner
2 will get two years.
4. If neither confesses, each will serve two years in prison.

The most favorable strategy is to not confess. However, neither is aware of the other's strategy
and, without certainty that one will not confess, both will likely confess and receive a five-year
prison sentence. The Nash equilibrium suggests that in a prisoner's dilemma, both players will
make the move that is best for them individually but worse for them collectively.

"Tit for tat" is said to be the optimal strategy in a prisoner's dilemma. Tit for tat was introduced by
Anatol Rapoport, who developed a strategy in which each participant in an iterated prisoner's
dilemma follows a course of action consistent with their opponent's previous turn. For example, if
provoked, a player subsequently responds with retaliation; if unprovoked, the player cooperates.

The image below depicts the dilemma where the choice of the participant in the column and the
choice of the participant in the row may clash. For example, both parties may receive the most
favorable outcome if both choose row/column 1. However, each faces the risk of strong adverse
outcomes should the other party not choose the same outcome.

COL’S CHOICE
C1 C2
ROW’S CHOICE R1 2,2 0,1
R2 1,0 1,1
Example of Static Two-Person Game.

Internet Encyclopedia of Philosophy

Dictator Game

This is a simple game in which Player A must decide how to split a cash prize with Player B, who
has no input into Player A’s decision. While this is not a game theory strategy per se, it does
provide some interesting insights into people’s behavior. Experiments reveal about 50% keep all
the money to themselves, 5% split it equally, and the other 45% give the other participant a smaller
share.

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
The dictator game is closely related to the ultimatum game, in which Player A is given a set amount
of money, part of which has to be given to Player B, who can accept or reject the amount given.
The catch is if the second player rejects the amount offered, both A and B get nothing. The dictator
and ultimatum games hold important lessons for charitable giving and philanthropy.

Volunteer’s Dilemma

In a volunteer’s dilemma, someone has to undertake a chore or job for the common good. The
worst possible outcome is realized if nobody volunteers. For example, consider a company in
which accounting fraud is rampant, though top management is unaware of it. Some junior
employees in the accounting department are aware of the fraud but hesitate to tell top
management because it would result in the employees involved in the fraud being fired and most
likely prosecuted.

Being labeled as a whistleblower may also have some repercussions down the line. But if nobody
volunteers, the large-scale fraud may result in the company’s eventual bankruptcy and the loss of
everyone’s jobs.

The Centipede Game

The centipede game is an extensive-form game in game theory in which two players alternately
get a chance to take the larger share of a slowly increasing money stash. It is arranged so that if a
player passes the stash to their opponent who then takes the stash, the player receives a smaller
amount than if they had taken the pot.

The centipede game concludes as soon as a player takes the stash, with that player getting the
larger portion and the other player getting the smaller portion. The game has a pre-defined total
number of rounds, which are known to each player in advance.

Game theory exists in almost every facet of life. Because the decisions of other people around you
impact your day, game theory pertains to personal relationships, shopping habits, media intake,
and hobbies.

Types of Game Theory Strategies

Game theory participants can decide between a few primary ways to play their game. In general,
each participant must decide what level of risk they are willing to take and how far they are willing
to go to pursue the best possible outcome.

Maximax Strategy

A maximax strategy involves no hedging. The participant is either all in or all out; they'll either
win big or face the worst consequence. Consider new start-up companies introducing new products
to the market. Their new product may result in the company's market cap increasing fifty-fold. On
the other hand, a failed product launch will leave the company bankrupt. The participant is willing
to take a chance on achieving the best outcome even if the worst outcome is possible.

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
Maximin Strategy

A maximin strategy in game theory results in the participant choosing the best of the worst payoff.
The participant has decided to hedge risk and sacrifice full benefit in exchange for avoiding the
worst outcome. Often, companies face and accept this strategy when considering lawsuits. By
settling out of court and avoiding a public trial, companies agree to an adverse outcome. However,
that outcome could have been worse if the case had gone to trial.

Dominant Strategy

In a dominant strategy, a participant performs actions that are the best outcome for the play,
irrespective of what other participants decide to do. In business, this may be a situation where a
company decides to scale and expand to a new market, regardless of whether a competing company
has decided to move into the market as well. In Prisoner's Dilemma, the dominant strategy would
be to confess.

Pure Strategy

Pure strategy entails the least amount of strategic decision-making, as pure strategy is simply a
defined choice that is made regardless of external forces or actions of others. Consider a game of
rock-paper-scissors in which one participant decides to throw the same shape each trial. As the
outcome for this participant is well-defined in advance (outcomes are either a specific shape or not
that specific shape), the strategy is defined as pure.

Mixed Strategy

A mixed strategy may seem like random chance, but there is much thought that must go into
devising a plan of mixing elements or actions. Consider the relationship between a baseball pitcher
and batter. The pitcher cannot throw the same pitch each time; otherwise, the batter could predict
what would come next. Instead, the pitcher must mix its strategy from pitch to pitch to create a
sense of unpredictability that it hopes to benefit from.

Limitations of Game Theory

The biggest issue with game theory is that, like most other economic models, it relies on the
assumption that people are rational actors that are self-interested and utility-maximizing. Of
course, we are social beings who do cooperate often at our own expense. Game theory cannot
account for the fact that in some situations we may fall into a Nash equilibrium, and other times
not, depending on the social context and who the players are.

In addition, game theory often struggles to factor in human elements such as loyalty, honesty, or
empathy. Though statistical and mathematical computations can dictate what a best course of
action should be, humans may not take this course due to incalculable and complex scenarios of
self-sacrifice or manipulation. Game theory may analyze a set of behaviors but it cannot truly
forecast the human element.

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
What Are the Games Being Played in Game Theory?

It is called game theory since the theory tries to understand the strategic actions of two or more
"players" in a given situation containing set rules and outcomes. While used in several disciplines,
game theory is most notably used as a tool within the study of business and economics.

The "games" may involve how two competitor firms will react to price cuts by the other, whether
a firm should acquire another, or how traders in a stock market may react to price changes. In
theoretic terms, these games may be categorized as prisoner's dilemmas, the dictator game, the
hawk-and-dove, and Bach or Stravinsky.

The Maximin – Minimax Principle:

This Principle is used for the selection of optimal strategies by two players. Considered two players
A & B, A is a player who wishes to maximize his gains, while players B wishes to minimize his
losses. Since A would like to maximize his maximum gain. We obtain for player A, the value
called maximin value and the corresponding strategy is called maximin strategy.

On the other hand, since player B wishes to minimize his losses, a value called minimax value,
which is the minimum of maximum losses is found the corresponding strategy is called minimax
strategy. When these two are equal (maximin value = minimax value). The corresponding
strategies are called optimal strategies and the game is said to have a saddle point. The value of
the game is given by the saddle point.
The selection of maximin and minimax strategies by A & B is based upon the so-called maximin
– minimax principle, which guarantees the best of the worst results.
Saddle point: a saddle point is a position in the pay-off matrix where, the maximum of row
minima coincides with the minimum of column maxima. The pay-off at the saddle point is called
value of the game.
We shall denote the maximin value by γ (Gamma Bar)
The minimax value of the game by γ-
And the value of the game by γ
Notes:
i. The game is said to be fair if, Maximin value = Minimax value =0. i.e, γ- = γ = 0
ii. The game is said to be strictly determinable if, Maximin value = Minimax value ≠ 0

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 Question: 01- Solve the game whose pay-off matrix is given below

Player B

Strategies I II III IV V

I -2 0 0 5 3
Player A
II 3 2 1 2 2

III -4 -3 0 -2 6

IV 5 3 -4 2 -6

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
Game theory questions with solutions are given here for practice and to understand the concept of game
theory as a decision theory. In operations research, game theory is a mathematical theory that deals with
some kind of decisions in a competitive situation.
The theory of games started in the 20th century and it was proposed by John Von Neuman and
Morgenstern. It uses the minimax principle to decide the strategy within a competitive situation.
Some terms related to game theory:

Terms Definition

A situation that has two or more opponent parties/players where each

Competitive situations player has a finite list of possible moves with conflicting interests with
each other. The action of one depends on the action of the other.

Finite and infinite A game which only a finite number of moves, is called a finite game.
game A game which is not finite is called an infinite game.

It is a predetermined plan that a player uses during the course of the game.
There are two types of strategy:
Strategy
 Pure strategy
 Mixed strategy

A particular game plan in a deterministic game situation (where a player

Pure strategy
what other player is going to do), whose objective is to maximize the gain

When a player is guessing the next move of the opponent, a probabilistic

situation is created whose objective is to maximise the expected gain.
Mixed strategy
Thus, a mixed strategy is to select among pure strategies with a fixed
probability.

If the sum of all the payments to all the players after a play of a game is
Zero-sum game
equal to zero.

Two-person zero-sum
In a game where there are only two players and the gain of one results in
game (rectangular
the loss of the other, such that the net gain of both the player is zero.
game)

A matrix that shows the payment of each player for a particular strategy
Pay-off matrix
after a play or end of the game

It is the maximum gain to the maximizing player if both the player uses
their best strategy. It is denoted by ‘V’ and is unique.
Value of the game
If the value of the game for player A (maximizing player) is ε then the
value for the opponent player will be –ε (a rectangular game)

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
  Maximin: The maximising player lists all his minimum gains from
the respective strategies, and selects a strategy which gives the
Maximin-Minimax maximum gain out the selected minimum gains.
principle  Minimax: The minimising player lists all his maximum gains from
the respective strategies, and selects a strategy which gives the
minimum gain out of the selected maximum gains

Saddle point of a pay-off matrix is that position where the maximum of

the row minima coincides with the minimum of the column maxima.
Saddle point
For a rectangular game,
Maximin of A = Minimax of B is the saddle point of the game.

Game Theory Questions With Solutions

Now let us solve some important questions asked on Game theory.
Question 1:
Solve the following pay-off matrix:

Player B

Strategies I II III
Player A
I 6 8 6

II 4 12 2

Solution:
We shall solve the given pay-off matrix by finding the saddle point,

Player B

Strategies I II III Row Minimum

Player A I 6 8 6 6 Max.

II 4 12 2 2

Column Maximum 6 Min. 12 6 Min.

The matrix has two saddle points at (1, 1)and (1, 3). Thus, the solution of game:
(i) Best strategy for player A is I
(ii) Best strategy for player B is I or III
(iii) Value of the game for A is 6 and for B is –6

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 Question 2:
Solve the following pay-off matrix:

Player B

Strategies I II III IV

Player A I 1 7 3 4

II 5 6 4 5

III 7 2 0 3

Solution:
We shall solve the given pay-off matrix by finding the saddle point,

Player B

Strategies I II III IV Row minimum

I 1 7 3 4 1
Player A
II 5 6 4 5 4 Max.

III 7 2 0 3 0

Column maximum 7 7 4 Min. 5

The solution of the game:

(i) Best strategy for player A is II
(ii) Best strategy for player B is III
(iii) Value of the game for A is 4 and for B is –4.

Points to remember:
 Saddle points may or may not exist for a game
 There may be more than one saddle point, in that case, the game has more than one solution
 If the value of the game is zero this means it is a ‘fair game’.

Question 3:
Solve the following pay-off matrix:

Player B
Player A
Strategies I II III IV V

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 I 9 3 1 8 0

II 6 5 4 6 7

III 2 4 3 3 8

IV 5 6 2 2 1

Solution:
We shall solve the given pay-off matrix by finding the saddle point,

Player B

Strategies I II III IV V Row Minimum

I 9 3 1 8 0 0

Player A II 6 5 4 6 7 4 Max.

III 2 4 3 3 8 2

IV 5 6 2 2 1 1

Column Maximum 9 6 4 Min. 8 8

The solution for the game:

(i) Best strategy for player A is II
(ii) Best strategy for player B is III
(iii) Value of the game for A is 4 and for B is –4.
Question 4:
Find a range of values of a and b for which the following pay-off matrix will a saddle point at (2, 2)
position.

Player B

Strategies I II III

Player A I 2 4 5

II 10 7 b

III 4 a 6

Solution:
Finding the row minimum and column maximum of the given pay-off matrix,

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 Player B

Strategies I II III Row minimum

I 2 4 5 2
Player A
II 10 7 b 7

III 4 a 6 4

Column Maximum 10 7 6

Now, given (2,2) is a saddle point, for row 2, 7 will be the minimum then b > 7. In the second column,
7 will be the maximum, then a < 7. If b = 7, then also (2,2) is a saddle point. But if b = 7, then (2, 3)
will also be a saddle point.
∴ the range of values for a and b are a ≤ 7 and b > 7.

Question 5:
Solve the following pay-off matrix:

Player B

Strategies I II III

Player A I 1 3 1

II 0 –4 –3

III 1 5 –1

Solution:
We shall solve the given pay-off matrix by finding the saddle point,

Player B

Strategies I II III Row minimum

I 1 3 1 1 Max.
Player A
II 0 –4 –3 –3

III 1 5 –1 –1

Column maximum 1 Min. 5 1 Min.

The given pay-off matrix has two saddle points at (1, 1) and (1, 3).
The solution for the game:
(i) Best strategy for player A is I

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 (ii) Best strategy for player B is I or III
(iii) Value of the game for A is 1 and for B is –1

Mixed Strategies Games:

A pay-off matrix without any saddle point comes under a game of mixed strategy. Methods of solving
such a problem:
 Odds method ( 2 × 2 game without saddle point)
 Dominance method
 Sub-games method – (for m × 2 or 2 × n matrices)
 Graphical method
Odds Method – 2 × 2 Game
Steps:
 Find the difference between the element in (1, 1) and (1, 2), and place it in front of the second
row.
 Find the difference between the element in (2, 1) and (2, 2), and place it in front of the first row.
 Find the difference between the element in (1, 1) and (2, 1), and place it in front of the second
column.
 Find the difference between the element in (1, 2) and (2, 2), and place it in front of the first column.

Question 5:
Solve the following pay-off matrix:

Player B

Strategy I II
Player A
I 1 5

II 4 2

Solution:
The matrix have no saddle points, thus solving by the method of odds

Player B

Player A Strategy I II Odds

I 1 5 |4 – 2| = 2

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 II 4 2 |1 – 5| = 4

Odds |5 – 2| = 3 |1 – 4| = 3

Value of game, V = [1 × 2 + 4 × 4]/[2 + 4] = 18/6 = 3

Probabilities of selecting strategies:

Probability of strategies →
I II
Players ↓

A 1/3 2/3

B 1/2 1/2

Question 6:
Solve the following pay-off matrix:

Player B

Strategy I II
Player A
I –2 8

II 5 –1

Solution:
The matrix have no saddle points, thus solving by the method of odds

Player B

Strategy I II Odds

Player A I 2 8 |5 – 1| = 4

II 5 1 |2 – 8| = 6

Odds |8 – 1| = 7 |2 – 5| = 3

Value of game, V = [2 × 4 + 5 × 6]/[4 + 6] = (6 + 30)/10 = 3.6

Probabilities of selecting strategies:

Probability of strategies →
I II
Players ↓

A 2/5 3/5

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 B 7/10 3/10

Dominance Method:
The main principle behind the dominance method is that if the strategy of a player dominates over the
other in all conditions, then the later strategy is ignored.
Rules of dominance method:
 If all the elements of the ith row of a payoff matrix are less than or equal to the corresponding jth
row, then the jth row strategy dominates over the ith row strategy. Hence, ith row is deleted.
 If all the elements of the r-th column are greater than or equal to the corresponding s-th column,
then the s-th column dominates over the r-th column. Hence the r-th column is deleted.
 A pure strategy may be dominated if it is inferior to an average of two or more other pure strategies.
The objective is to reduce the given pay-off matrix into a 2 × 2 matrix which can be solved by the
odds method.

Question 7:
Solve the following pay-off matrix:
Solution:
Clearly, the given pay-off matrix has no saddle points. Let apply the dominance rules to reduce the
given pay-off matrix to a 2 × 2 matrix
Elements of row 1 < Elements of row 3 ⇒ Row 1 is deleted
The resultant pay-off matrix

Player B

Strategies I II III
Player A
II 7 5 –1

III 6 0 12

Elements of column 1 > Elements of column 2 ⇒ Column 1 is deleted

The resultant pay-off matrix

Player B

Strategies II III
Player A
II 5 –1

III 0 12

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 Now let us apply the odds method, to find the value and probability of strategies.

Player B

Strategies II III Odds

Player A II 5 –1 12

III 0 12 6

Odds 13 5

Value of the game = [5 × 12 + 0 × 6]/[12 + 6] = 60/18 = 10/3

Probability selecting strategies:
Player A:
I=0
II = ⅔
III = ⅓
Player B:
I=0
II = 13/18
III = 5/18
Question 8:
Solve the following pay-off matrix:
Solution:
Clearly the given pay-off matrix has no saddle point, let us reduce the given matrix using dominance
rules:
Elements of row 1 < Elements of row 3 ⇒ Row 1 is deleted
The resultant pay-off matrix

Player B

Strategies I II III IV

Player A II 2 4 2 4

III 4 2 4 0

IV 0 4 0 8

Elements of column 1 = Elements of column 3 ⇒ Column 1 is deleted

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 The resultant pay-off matrix

Player B

Strategies II III IV

Player A II 4 2 4

III 2 4 0

IV 4 0 8

Now, average of column III and IV (3, 2, 4) is dominated by column II, the matrix is reduced to

Player B

Strategies III IV

Player A II 2 4

III 4 0

IV 0 8

The average of row III and IV (2, 4) is equal to the elements of row II, the matrix reduced to

Player B

Strategies III IV
Player A
III 4 0

IV 0 8

Now let us apply the odds method, to find the value and probability of strategies.

Player B

Strategies II III Odds

Player A III 4 0 8

IV 0 8 4

Odds 8 4

Value of the game = [4 × 8 + 0 × 4]/[8 + 4] = 32/12 = 8/3

Probability selecting strategies:
Player A:
I=0

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 II = 0
III = ⅔
IV = ⅓
Player B:
I=0
II = 0
III = ⅔
IV = ⅓
Question 9:
Solve the following pay-off matrix:
Solution:
Clearly, the given pay-off matrix has no saddle point, let us reduce the given matrix using dominance
rules:
All elements of row 2 < all elements of row 3 ⇒ deleting the row 2, we get the resultant pay-off matrix

Player B

Strategy I II III
Player A
I 30 40 –80

III 90 20 50

All elements of column I > all elements of column III ⇒ deleting column I, we get the reduced pay-off
matrix

Player B

Strategy II III
Player A
I 40 –80

III 20 50

Now let us apply the odds method, to find the value and probability of strategies.

Player B

Player A Strategies II III Odds

I 40 –80 30

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 III 20 50 120

Odds 130 60

Value of the game = [40 × 30 + 20 × 120]/[30 + 120] = 3600/150 = 24

Probability selecting strategies:
Player A:
I = 1/5
II = 0
III = 4/5
Player B:
I=0
II = 13/15
III = 2/15.
Practice Problems on Game Theory
1. Solve the following pay-off matrices
(i)

Player B

Strategies I II III

Player A I 1 2 3

II –3 1 2

III 1 3 2

(ii)

Player B

Strategies I II III

Player A I –2 2 –1

II 1 1 1

III 3 0 1

(iii)

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.
 Player B

Strategies I II III IV

Player A I 10 0 7 4

II 2 6 4 7

III 5 2 3 8

Md. Saiful Islam, Assistant Professor, Dept. of Finance and Banking, B.U.