Game Theory
Game Theory
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1. Algebraic Method
In many practical problems, exact optimal solution of the game is not required. It is sufficient to find out an
approximate solution which gives an average gain, close to the value of the game. This is one of such method
based on the principle that “Two players are supposed to play the game iteratively and at each play the players
choose the strategy which is best to himself or say worse to opponent, in view of which the opponent has done
that iteration.”
• Linear Programming Method
When 2 person game has more than two options we can make use of linear programming method to establish the
opposing player’s strategies.\
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Theory of Games
Introduction : The definition given by William G. Nelson runs as follows: “Game theory, more
properly the theory of games of strategy, is a mathematical method of analyzing a conflict.
The alternative is not between this decision or that decision, but between this strategy or that
strategy to be used against the conflicting interest”.
In the perception of Robert Mockler, “Game theory is a mathematical technique helpful in
making decisions in situations of conflicts, where the success of one part depends at the expense
of others, and where the individual decision maker is not in complete control of
the factors influencing the outcome”.
According to von Neumann and Morgenstern, “The ‘Game’ is simply the totality of the rules
which describe it. Every particular instance at which the game is played – in a particular way –
from beginning to end is a ‘play’. The game consists of a sequence of moves, and the play of a
sequence of choices”.
According to Edwin Mansfield, “A game is a competitive situation where two or more
persons pursue their own interests and no person can dictate the outcome. Each player, an entity
with the same interests, make his own decisions. A player can be an individual or a group”.
Game theory helps in finding out the best course of action for a firm in view of the anticipated
countermoves from the competing organizations. A competitive situation is a competitive game
if the following properties hold,
•The number of competitors is finite, say N.
1.A finite set of possible courses of action is available to each of the N competitors.
•A play of the game results when each competitor selects a course of action from the set of
courses available to him. In game theory we make an important assumption that all the players
select their courses of action simultaneously. As a result, nocompetitor will be in a position to
know the choices of his competitors.
1.The outcome of a play consists of the particular courses of action chosen by the individual
players. Each outcome leads to a set of payments, one to each player, which may be either
positive, or negative, or zero.
The techniques of game theory can be effectively applied to various managerial problems
as
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detailed below:
1)Analysis of the market strategies of a business organization in the long
run.
2)Evaluation of the responses of the consumers to a new product.
3)Resolving the conflict between two groups in a business organization.
4)Decision making on the techniques to increase market share.
5)Material procurement process.
6)Decision making for transportation problem.
7)Evaluation of the distribution system.
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8) Evaluation of the location of the facilities.
9) Examination of new business ventures and
10)Competitive economic environment.
Players: The competitors or decision makers in a game are called the players of the game.
Strategies: The alternative courses of action available to a player are referred to as his strategies.
Pay off: The outcome of playing a game is called the pay off to the concerned player.
Optimal Strategy: A strategy by which a player can achieve the best pay off is called the
optimal strategy for him.
Zero-sum game: A game in which the total payoffs to all the players at the end of the game is
zero is referred to as a zero-sum game.
Non-zero sum game: Games with “less than complete conflict of interest” are called non-zero
sum games. The problems faced by a large number of business organizations come under this
category. In such games, the gain of one player in terms of his success need not be completely
at the expense of the other player.
Payoff matrix: The tabular display of the payoffs to players under various alternatives is called
the payoff matrix of the game.
Pure strategy: If the game is such that each player can identify one and only one strategy as the
optimal strategy in each play of the game, then that strategy is referred to as the best strategy
for that Player and the game is referred to as a game of pure strategy or a pure game
.
Mixed strategy: If there is no one specific strategy as the ‘best strategy’ for any player in a
game, then the game is referred to as a game of mixed strategy or a mixed game. In such a
game,each player has to choose different alternative courses of action from time to time.
N-person game: A game in which N-players take part is called an N-person game.
Maxi min-Mini max Principle: The maximum of the minimum gains is called the maxi min
value of the game and the corresponding strategy is called the maxi min strategy. Similarly the
minimum of the maximum losses is called the mini max value of the game and the
correspondingstrategy is called the mini max strategy. If both the values are equal, then that
would guarantee the best of the worst results.
Negotiable or cooperative game: If the game is such that the players are taken to cooperate on
any or every action which may increase the payoff of either player, then we call it a negotiable
or cooperative game.
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Non-negotiable or non-cooperative game: If the players are not permitted for coalition then
we refer to the game as a non-negotiable or non-cooperative game.
Saddle point: A saddle point of a game is that place in the payoff matrix where the maximum of
the row minima is equal to the minimum of the column maxima. The payoff at the saddle point is
called the value of the game and the corresponding strategies are called the pure strategies.
Dominance: One of the strategies of either player may be inferior to at least one of the remaining
ones. The superior strategies are said to dominate the inferior ones.
Types of Games:
There are several classifications of a game. The classification may be based on various factors
such as the number of participants, the gain or loss to each participant, the number of Strategies
available to each participant, etc. Some of the important types of games are enumerated below.
Two person games and n-person games : In two person games, there are exactly two players
and each competitor will have a finite number of strategies. If the number of players in a game
exceeds two, then we refer to the game as n-person game.
Zero sum game and non-zero sum game: If the sum of the payments to all the players in a
game is zero for every possible outcome of the game, then we refer to the game as a zero sum
game. If the sum of the payoffs from any play of the game is either positive or negative but not
zero, then the game is called a non-zero sum game
Games with finite number of moves / players and games with unlimited number of moves : A
game with a finite number of moves is the one in which the number of moves for each playeris
limited before the start of the play. On the other hand, if the game can be continued over an
extended period of time and the number of moves for any player has no restriction, then we
call it a game with unlimited number of moves.
Constant-sum games: If the sum of the game is not zero but the sum of the payoffs to both
players in each case is constant, then we call it a constant sum game. It is possible to reduce
sucha game to a zero sum game.
2x2 two person game and 2xn and mx2 games: When the number of players in a game is two
and each player has exactly two strategies, the game is referred to as 2x2 two person game. A
game in which the first player has precisely two strategies and the second player has
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three or more strategies is called an 2xn game. A game in which the first player has three or more
strategies and the second player has exactly two strategies is called an mx2 game.
3x3 and large games: When the number of players in a game is two and each player has exactly
three strategies, we call it a 3x3 two person game. Two-person zero sum games are said to be
larger if each of the two players has 3 or more choices. The examination of 3x3 and larger
gamesis involves difficulties. For such games, the technique of linear programming can be used
as a method of solution to identify the optimum strategies for the two players.
Non-constant games: Consider a game with two players. If the sum of the payoffs to the two
players is not constraint in all the plays of the game, then we call it a non-constant game. Such
games are divided into negotiable or cooperative games and non-negotiable or non-cooperative
games.
Two-person zero sum games: A game with only two players, say player A and player B, is called
a two-person zero sum game if the gain of the player A is equal to the loss of the player B, so that
the total sum is zero.
Payoff matrix: When players select their particular strategies, the payoffs (gains or losses) can
be represented in the form of a payoff matrix..Since the game is zero sum, the gain of one player
is equal to the loss of other and vice-versa. Suppose A has m strategies and B has n strategies.
Consider the following payoff matrix. Player A wishes to gain as large a payoff aij as possible
while player B will do his best to reach as small a value ij a as possible where the gain to player
B and loss to player A be (-aij ).
The amount of payoff, i.e., V at an equilibrium point is known as the value of the game. The
optimal strategies can be identified by the players in the long run.
Fair game: The game is said to be fair if the value of the game V = 0.
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Assumptions for two-person zero sum game:
For building any model, certain reasonable assumptions are quite necessary. Some assumptions
for building a model of two-person zero sum game are listed below.
a)Each player has available to him a finite number of possible courses of action. Sometimes the
set of courses of action may be the same for each player. Or, certain courses of action may be
available to both players while each player may have certain specific courses of action which
are not available to the other player.
a)Player A attempts to maximize gains to himself. Player B tries to minimize losses to himself.
b)The decisions of both players are made individually prior to the play with no
communicationbetween them.
c)The decisions are made and announced simultaneously so that neither player has an
advantageresulting from direct knowledge of the other player’s decision.
d)Both players know the possible payoffs of themselves and their opponents. Mini max
andMaxi min Principles
The selection of an optimal strategy by each player without the knowledge of the competitor’s
strategy is the basic problem of playing games. The objective of game theory is to know how
these players must select their respective strategies, so that they may optimize their
payoffs. Sucha criterion of decision making is referred to as mini max-maxi min principle. This
principle in games of pure strategies leads to the best possible selection of a strategy for both
players.
For example, if player A chooses his ith strategy, then he gains at least the payoff min a ij , which
is minimum of the ith row elements in the payoff matrix. Since his objective is to Maximize his
payoff, he can choose strategy i so as to make his payoff as large as possible. i.e., a payoff which
is not less than
Similarly player B can choose jth column elements so as to make his loss not greater than If the
maxi min value for a player is equal to the mini max value for another player, i.e.
then the game is said to have a saddle point (equilibrium point) and the corresponding strategies
are called optimal strategies. If there are two or more saddle points, they must be equal.
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Problem:
Solve the game with the following pay-off
matrix.
Solution:
First consider the minimum of each
row.
We see that the maximum of row minima = the minimum of the column maxima. So
the
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game has a saddle point. The common value is 12. Therefore the value V of the game =
12. Interpretation: In the long run, the following best strategies will be identified by the
two players
The best strategy for player A is strategy 4. The best strategy for player B is strategy IV.
The game is favorable to player A.
Problem 2: Solve the game with the following pay-off matrix
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Minimum of {25, 35, 20, 28, 30}= 20
It is observed that the maximum of row minima and the minimum of the
column maxima are equal. Hence the given the game has a saddle point.
The common value is 20.This indicates that the value V of the game is 20.
Interpretation: The best strategy for player X is strategy 2.
The best strategy for player Y is strategy III.
The game is favorable to player A.
Problem :
Solve the following game:
Solution:
First consider the minimum of each
row.
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Minimum of {5, -4, 8, 7}= - 4
Since the max {row minima} = min {column maxima}, the game
under consideration has a saddle point. The common value is –4.
Hence the value of the game is –4.
Interpretation.
The best strategy for player A is strategy 4.
The best strategy for player B is strategy II. Since the value of the
game is negative, it is concluded that the game is favorable to player
B.
Games with no Saddle point:
2 x 2 zero-sum game When each one of the first player A and the
second player B has exactly two strategies, we have a 2 x 2 game.
Motivating point First let us consider an illustrative example.
Problem :
Examine whether the following 2 x 2 game has a saddle point
Solution:
First consider the minimum of each row.
Maximum of {3, 2} = 3
Next consider the maximum of each column.
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We see that max {row minima} and min {column maxima} are not equal. Hence thegame has
no saddle point
Method of solution of a 2x2 zero-sum game without saddle point: Suppose that a 2x2 game has
no saddle point. Suppose the game has the following pay-off matrix.
Since this game has no saddle point, the following condition shall hold:
In this case, the game is called a mixed game. No strategy of Player A can be called the best
strategy for him. Therefore A has to use both of his strategies. Similarly no strategy of Player B
can be called the best strategy for him and he has to use both of his strategies.
Let p be the probability that Player A will use his first strategy. Then the probability that Player
A will use his second strategy is 1-p.If Player B follows his first strategy. Expected value of the
pay-off to Player A.
In the above equation, note that the expected value is got as the product of the
corresponding values
of the pay-off and the probability.
If Player B follows his second strategy
If the expected values in equations (1) and (2) are different, Player B will prefer the
minimum of the two expected values that he has to give to player A. Thus B will have a pure
strategy.
This contradicts our assumption that the game is a mixed one. Therefore the expected values
of the pay-offs to Player A in equations (1) and (2) should be equal. Thus we have the condition
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Therefore, the value V of the game is
To find the number of times that B will use his first strategy and second strategy:
Let the probability that B will use his first strategy be r. Then the probability that B will
use his second strategy is 1-r.
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Therefore the expected value of loss to B = cr + d(1-r) (4)
If the two expected values are different then it results in a pure game, which is a
contradiction. Therefore the expected values of loss to Player B in equations (3) and (4)
should be equal.
Hence we have the condition
Problem:
Solve the following game
Solution:
First consider the row minima
Maximum of {2, 1} = 2
Next consider the maximum of each
column
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Interpretation.
Therefore, out of 2 trials, player X will use his first strategy once and his second strategy once.
Therefore, out of 3 trials, player Y will use his first strategy twice and his second strategy
once.
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The Principle of Dominance:
In the previous lesson, we have discussed the method of solution of a game without a saddle
point. While solving a game without a saddle point, one comes across the phenomenon of the
dominance of a row over another row or a column over another column in the pay-off matrix of
the game. Such a situation is discussed in the sequel.In a given pay-off matrix A, we say that the
ith row dominates the kth row if
and
In this case, the player B will loose more by choosing the strategy for the q th column than by
choosing the strategy for the pth column. So he will never use the strategy corresponding to the q th
column. When dominance of a row ( or a column) in the pay-off matrix occurs, we can delete a
row (or a column) from that matrix and arrive at a reduced matrix. This principle of dominance
can be used in the determination of the solution for a given game.
Let us consider an illustrative example involving the phenomenon of dominance in a
game.
Problem :
Solve the game with the following pay-off matrix:
Solution:
First consider the minimum of each
row.
Maximum of {2, 3, 3} = 3
Next consider the
maximum of each
column.
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The following condition holds:
Max {row minima}== min {column maxima}
Therefore we see that there is no saddle point for the game under
consideration. Compare columns II and III.
We see that each element in column III is greater than the corresponding element in
column
II. The choice is for player B. Since column II dominates column III, player B will discard
his strategy 3.Now we have the reduced game
For this matrix again, there is no saddle point. Column II dominates column IV. The
choice is for player B. So player B will give up his strategy 4
The game reduces to the following:
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The value of the game
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Method of convex linear combination :
A strategy, say s, can also be dominated if it is inferior to a convex linear combination of several
other pure strategies. In this case if the domination is strict, then the strategy s can be deleted. If
strategy s dominates the convex linear combination of some other pure strategies, then one of
the pure strategies involved in the combination may be deleted. The domination will be decided
as per the above rules. Let us consider an example to illustrate this case.
Problem:
Solve the game with the following pay-off matrix for firm A:
Solution:
First consider the minimum of each row.
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Minimum of { 4, 8, 6, 8, 6}= 4 Hence,
Maximum of {row minima}== minimum of {column maxima}.
So we see that there is no saddle point. Compare the second row with the fifth row. Each
element
in the second row exceeds the corresponding element in the fifth row. Therefore, A 2 dominates A5 . The
choice is for firm A. It will retain strategyA 2 and give up strategy A5 .Therefore the game reduces to the
following.
Compare the second and fourth rows. We see that A 2 dominates A4 . So, firm A will retain the strategy A 2
and give up the strategy A4 . Thus the game reduces to the following:
Compare the first and fifth columns. It is observed that B1 dominates B5. The choice is for
firm B. It will retain the strategy B 1 and give up the strategy B5 . Thus the game reduces to the Following
Compare the first and fourth columns. We notice that B1 dominates B4. So firm B will
discard the strategy B4 and retain the strategy B1 . Thus the game reduces to the following
For this reduced game, we check that there is no saddle point. Now none of the pure strategies
of firms A and B is inferior to any of their other strategies. But, we observe that convex linear
combination of the strategies B2 and B3dominates B1 , i.e. the averages of payoffs due to strategies B 2 and B3,
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dominate B1 . Thus B1 may be omitted from consideration. So we have the reduced matrix
Here, the average of the pay-offs due to strategies A 1 and A2 of firm A, i.e.
off matrix
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. Value of the game
Problem:
For the game with the following pay-off matrix, determine the saddle point
Solution:
The choice is with the player B. He has to choose between strategies II and III. He will
lose more in strategy III than in strategy II, irrespective of what strategy is followed by A.
So he will drop strategy III and retain strategy II. Now the given game reduces to the
following game.
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Interpretation: No player gains and no player loses. i.e., The game is not favourable to
any player. i.e. It is a fair game.
Problem:
Solve the game
Solution:
First consider the minimum of each row
Maximum of {4, 2, 4} = 4
Next, consider the maximum of each column.
Since Maximum of { Row Minima} and Minimum of { Column Maxima } are different, it
follows that the given game has no saddle point.
Denote the strategies of player A by A 1, A2 , A3 . Denote the strategies of player B by B 1 ,B2 ,B3
.
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Compare the first and third columns of the given
matrix.
The pay-offs in B3 are greater than or equal to the corresponding pay-offs in B 1 . The player B has to
make a choice between his strategies 1 and 3. He will lose more if he follows strategy 3 rather
than strategy 1. Therefore he will give up strategy 3 and retain strategy 1. Consequently, the
given game is transformed into the following game:
The pay-offs in A1 are greater than or equal to the corresponding pay-offs in A 2 . The player A has to
make a choice between his strategies 1 and 3. He will gain more if he follows strategy 1 rather
than strategy 3. Therefore he will retain strategy 1 and give up strategy 3.Now the given game
is transformed into the following game.
Maximum of {4, 2} = 4
Next, consider the maximum of each
column
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Maximum {row minima} and Minimum {column maxima } are not equal.Therefore, the
reduced game has no saddle point. So, it is a mixed game
The probability that player A will use his first strategy is p. This is calculated
as
The probability that player B will use his first strategy is r. This is calculated
as
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Interpretation
Out of 3 trials, player A will use strategy 1 once and strategy 2 once. Out of 4 trials, player
B will use strategy 1 thrice and strategy 2 once. The game is favorable to player A.
Problem:
Solve the game with the following pay-off matrix.(Dividing a game into sub-games)
Solution:
First, consider the row minima.
We assert that Player B will retain the first strategy and give up the third strategy. We get
the following reduced matrix
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We check that it is a game with no saddle point.
Sub games : Let us consider the 2x2 sub games. They
are:
We see that it is a game with no saddle point. Take a = -4, b = 6, c = 2, d = -3. Then the
value of the game is
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Let us tabulate the results as
follows:
The value of 0 will be preferred by the player A. For this value, the first and third
strategies of A correspond while the first and second strategies of the player B correspond
to the value 0 of the game. So it is a fair game.
Problem:
Consider the game with the following pay-off matrix.
Solution:
Maximum of {2, 1} = 2.
Next, consider the
column maxima.
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Minimum of {4, 5} = 4.
We see that Maximum { row
minima} == Minimum { column
maxima } So, the game has no
saddle point. It is a mixed game.
Equations involving probability and
expected value:
Let p be the probability that player
A will use his first strategy. Then
the probability that A will use his
second strategy is 1--p. Let E be the
expected value of pay-off to player
A.
When B uses his first strategy (1)
When B uses his second strategy The expected value of pay-off to
player
The expected value of pay-off to player A isAgiven
is given
by by
(2)
Consider equations (1) and (2). For plotting the two equations on a graph sheet, get some
points on them as follows: E = -2p+4 E = 4p+1
Graphical solution:
Procedure: Take probability and expected value along two rectangular axes in a graph sheet.
Draw two straight lines given by the two equations (1) and (2). Determine the point of
intersection of the two straight lines in the graph. This will give the common solution of the two
equations (1) and (2). Thus we would obtain the value of the game.
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Represent the two equations by the two straight lines AB and CD on the graph sheet.
Take the point of intersection of AB and CD as T. For this point, we have p = 0.5 and E = 3.
Therefore, the value V of the game is 3.
Problem:
Solve the following game by graphical
method.
Solution:
First consider the row
minima.
Maximum of {-18, - 4} = - 4.
Next, consider the column
maxima.
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Minimum of {6, 2} = 2.
We see that Maximum {row minima}== Minimum { column maxima }So, the
game has no saddle point. It is a mixed game. Let p be the probability that player
A will use his first strategy. Then the probability that A will use his second
strategy is 1- p.
When B uses his first strategy. The expected value of pay-off to player A is given
by
Graphical solution:
Take probability and expected value along two rectangular axes in a graph sheet. Draw two
straight lines given by the two equations (1) and (2). Determine the point of intersection of
the two straight lines in the graph. This will provide the common solution of the two
equations (1) and (2). Thus we would get the value of the game.
Represent the two equations by the two straight lines AB and CD on the graph sheet. Take the
point of intersection of AB and CD as T. For this point, we have p = 1/ 3 and E = -2.
Therefore, the value V of the game is -2.
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Tutorial Questions
b Reduce the following Game by dominance and the fit the game value
PlayerA
I II III IV
I 3 2 4 0
II 3 4 2 4
III 4 2 4 0
IV 0 4 0 8
4. a) Obtain the optimal strategies for both pensions and the value of the game for
two personszero sum game whose payoff matrix is as follows.
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Assignment Questions
2.
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