UNIT- 4

THEORY OF GAMES OR
COMPETITIVE MODELS
Dr S Madhava Reddy
Professor,
Dept. of Mechanical Engineering
Mahatma Gandhi Institute of Technology
Gandipet, Hyderabad-75
[email protected]

Dr S Madhava Reddy, Professor, Dept.of

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Mechanical Engg@MGIT
Introduction
It is a decision theory applicable to competitive situations.

It is helpful when two or more individuals or organization

with conflicting objectives try to make decisions.

This theory is applicable to a wide variety of situations such

as two players struggling to win at chess, candidates fighting an
election, two enemies planning war tactics, firms struggling to
maintain their market shares, etc.

It is based on the minimax principle (put forward by J.Von

Neumann- called the father of game theory in 1928) which
implies that, each competitor will act so as to minimize his
maximum loss(or maximize his minimum gain) or achieve best
of the worst.
Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
Characteristics Or Properties of a Game
There are finite number of participants or competitors.
If the number is two---- two person game. n>2 --- n-person game
Each participant has a finite number of possible courses of
actions.
Players must have conflicting interests.
Each player has a finite number of possible courses of action
A play is said to occur when each player chooses one of his
course of action.
The pay-off’s of the game are affected by the selection of the
strategies by other players.
All the players are aware of the rules governing the choice of
action. Each player selects one strategy. The selections are
assumed to be made simultaneously and hence no one knows his
opponent’s strategy.
Each pay-off of the game is represented by a single pay-off
number representing gain or loss. Dr S Madhava Reddy, Professor, Dept.of 3
Mechanical Engg@MGIT
Key Elements of a game
Players: Who is interacting?
Strategies: What are their options?
Payoffs: What are their incentives?
Information: What do they know?
Rationality: How do they think?

Dr S Madhava Reddy, Professor, Dept.of

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Mechanical Engg@MGIT
Applications of Game theory
Mathematics
Computer Science
Biology
Political Science
Economics
International Relations
Philosophy
Psychology
Law
Military Strategy
Management
Sports
Game playing
Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
A GAME consists of:
 a collection of decision-makers, called players;
 the possible information states of each player at each
decision time;
 the collection of feasible moves (decisions, actions,
plays,...) that each player can choose to make in each of
his possible information states;
 a procedure for determining how the move choices of
all the players collectively determine the possible
outcomes of the game;
 preferences of the individual players over these
possible outcomes, typically measured by a utility or
payoff function. Dr S Madhava Reddy, Professor, Dept.of
Mechanical Engg@MGIT
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 Terminology
Game: It is an activity between two or more persons involving
action by each of them and results in some gain( =ve, -ve or zero)
for each.
Zero-sum game: A game in which the sum of payments to all the
players, after the play of the game, is zero is called zero-sum game.
The gain of players that win is exactly equal to the loss of players
that lose.
If the no.of players in a zero-sum game is two, it is known as two
person zero-sum game or rectangular game.
Strategy: It is the predetermined rule by which a player decides his
course of action from his list of courses of actions during the game.
Optimal strategy: The strategy that most benefits a player.
Pure strategy: It is the decision rule by which a player always select
a particular course of action i.e the same row or column to select.
Mixed strategy: A player changes the choice of row or column with
different plays or turns. Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
Dominated strategy: A strategy that is never considered because
another play is always better. For the row player, a row is
dominated by another row if all the corresponding elements are
all larger. For the column player, a column is dominated by
another column if all the corresponding elements are all smaller.

Fair game: A game with a value of mimax=maximin= 0.

Value (expected value) of game: The amount representing the
result when the best possible strategy is played by each player.
Strictly determined game: A game that has a saddle point and
maximin=minimax = 0
Saddle point: The element in a payoff matrix that is the smallest
in a particular row while, at the same time, the largest in its
column. Not all matrices have saddle points.

Dr S Madhava Reddy, Professor, Dept.of

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Mechanical Engg@MGIT
Payoff: An amount showing as an element in the payoff matrix,
which indicates the amount gained or lost by the row player.

Payoff matrix: It is the outcome of the game. A matrix whose

elements represent all the amounts won or lost by the row
player.
Two Person Zero Sum Game In a game, if the algebraic sum of
gains and losses of all the players is called “Zero sum game”. A
game with two players, where a gain of one player equals the
loss to the other is known “two person zero sum game”. The
characteristics of two person zero sum game are:
1. There are only two players with exactly the opposite
interests.
2. Each player has finite number of strategies.
3. Each specific strategy results in a pay-off.
4. Sum of pay-offs at the end of each play is zero.
Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
Steps required to detect a saddle point

1. Find out the minimum element of each row of the pay-off

matrix and circle the maximum value.
2. Find out the maximum element in each column of the pay-
off matrix and circle the minimum value [ ].
3. If these two values are same (i.e. the pay-off containing
both ‘O’ and square box marks), is the saddle point of the
matrix. And the element in that cell is the value of the
game.
4. If the two rounded elements are unequal, there is no
saddle point , and the value of game lies between these
two values.
5. If there is no saddle point , the two players cannot use pure
strategies as their optimal strategies.
Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
Step 1. Find the saddle point . If the game has saddle point ,
the game is solved. Write the optimal strategies and the
value of the game.

Step 2. If no saddle point, try to reduce the size of the

matrix given (m × n) to: (a) 2 × 2 matrix, which has formula
for optimal strategies and the value of the game. Use the
formula to get the answer. (b) 3 × 2 or 2 × 3 matrix and use
Sub game method to get the answer. (The sub games are
once again 2 × 2 games). (c) To m × 2 or 2 × n matrix and use
graphical method to get solution. Graphical solution will
give us way to 2 × 2 matrix.

Step 3. Use algebraic method to get the solution.

Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
 Assumptions of the Game Theory
Each player has available to him a finite number of possible
courses of action. The list may not be same for each player.

Player A attempts to maximize gains and player B minimize

losses.

The decisions of both players are made individually prior to the

play with no communication between them.

The decisions are made simultaneously and also announced

simultaneously so that neither player has an advantage resulting
from direct knowledge of the other player’s decision.

Both the players know not only possible payoffs to themselves

but also of each other.
Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
MAXIMIN-MINIMAX PRINCIPLE
Consider a two person zero sum game involving the set of pure
strategies A1, A2 , A3 for A and B1, B2 and B3 for player B and
having the following pay-off matrix for the player A.

Maximin

Minimax
Suppose if player A adopts a pessimistic approach to the pay-off
matrix, then the worst outcome of A for his strategy A1 will be 2.
(A player A’s minimum gain).
Similarly, the minimum outcome for player A’s strategy A2 and
A3 will be 6 and 4 respectively.
Dr S Madhava Reddy, Professor, Dept.of
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Mechanical Engg@MGIT
Player A is a maximizing player and he aims at maximizing his
minimum gains. Thus, the maximum of all the minimum values is
6 . So the best strategy for A is A2 which maximizes his minimum
gains.

Thus, maximin refers to maximizing his minimum gains.

Player B is a minimizing player and he tries to minimize the

maximum gains of player A.
The maximum pay-off of the player A corresponding to the B’s
strategies B1, B2 and B3 are [9, 6, 7]. Thus, B wants to minimizes
his maximum loss. The minimum of maximum value of pay-off is
6 . So, player ‘B’ always tries to use his strategy B2.

Thus, minimax refers to minimizes his maximum loss.

Dr S Madhava Reddy, Professor, Dept.of

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Mechanical Engg@MGIT
Saddle Point
Saddle point in a pay-off matrix is the position in the matrix
where the maximum of row minimum (maximin) coincides
with the minimum of column maximum (minimax).

The pay-off at the saddle point is called the value of the game
which equals minimax of miximin value.

The optimum solution can be had for the game by applying

minimax and maximin.

Thus, the solution of the game is:

Best strategy for A is A2 ; Best strategy for B is B2; Value of the
game is 6.

Dr S Madhava Reddy, Professor, Dept.of

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Mechanical Engg@MGIT