GAME THEORY

It isbusiness and economic, game refers IN a body of knowledge which is concerned to with the study of of conflict and a situation decision making in situation competition. where two or more rational opponents are involved under the condition of competition & conflicting interests.

Game Theory- essential features

1.

The number of competitors is finite.

2. The players act rationally and intelligently. 3. Each player has available to him a finite set of

possible courses of action.

4. There is a conflict of interests between the

participants.
5. The players make individual decisions without

directly communicating

Game Theory- Terminologies

y Number of player two-person game or n-person game y Sum of gains and losses

zero sum game or non-zero

sum game
y Strategy

It is the list of all possible course of actions that

a player will take for every payoff. The types of strategies are:
y Pure Strategy

select a one particular course of action

y Mixed Strategy- Courses of action that are to be selected

with some fixed probabilities

Continued

Game Theory- Terminologies

y Pay-offs Outcomes of a game by adopting different

courses of actions;
y Pay off Matrix It shows the gains/losses of one of the two

players who is indicated on the left hand side of the matrix

y Optimal Strategy

A course of action which puts the

player in the most preferred position irrespective of the strategy of his competitors. Any deviation from this strategy results in a decreased pay-off for the player.

Two-Person Zero-Sum
Two-person zero-sum and constant-sum games are played according to the following basic assumption: Each player chooses a strategy that enables him/her to do the best he/she can, given that his/her opponent knows the strategy he/she is following. A two-person zero-sum game has a saddle point if and only if Max (row minimum) = min (column maximum) all rows all columns

MINIMAX & MAXIMIN PRINCIPLE

y Maximin Principle for player A, minimum value in each

row represents the least gain to him if he chooses his particular strategy (row minima). He ll then select the strategy that gives him the maximum gain among the row minimum values
y Minimax Principle For the player B, who is assumed to

be the loser, the maximum of each column represents the maximum loss to him if he chooses his particular strategy. (Column Maxima). He ll select the strategy that gives him the minimum loss among the column maximum values.

MINIMAX & MAXIMIN PRINCIPLE

y Value of the game 1.

expected payoff at the end of the game

when each player uses his optimal strategy; The value of the game generally satisfies the equation, maximin value V minimax value
2.

Fair Game: If lower (maximin) and upper (minimax) values of the game are equal and zero Determinable Game: If lower (maximin) and upper (minimax) values of the game are equal the value of the game

3.

Problem-MINIMAX & MAXIMIN PRINCIPLE

B1 A1 Player A A2 A3 B2

20 40 50

80 30 60

Find the optimal strategies for player A and B. Also, determine the saddle point of the game.

Pure Strategy PROBLEM 2

FIRM Y

Y1
FIRM X

Y2 20 12

Y3 6 10

X1 X2

4 18

Problem 3
new three year settlement. Each of these has 4 strategies: 1. Hard and aggressive bargaining 2. Reasoning and logical approach 3. Legalistic Strategy 4. Conciliatory Strategy The cost to company are given below for every pair of strategy choice.
Union Strategies I II III IV I 20 25 40 -5 II 15 14 2 4 III 12 8 10 11 IV 35 10 5 0

y A company management and the labor union are negotiating a

What strategy should each sides adopt? Also, determine the value of the game.

 Odds Method (2x2 matrix) Dominance Method Sub Games Method (for mx2 or 2 x n matrices) Linear Programming Method-Graphical Solution

Odds Method
Q1: Solve the following payoff matrix, determine the optimal strategies and the value of the game.

B A 5 3 1 4

Q2: Consider a modified form of Matching baised coins game problem. The matching player is paid Rs 8 if two coins turn both heads and Re. 1.00 if the
coins turn both tail. The non-matching player is paid Rs 3.00 when the two coins do not match. Given the choice of being matching or non-matching player, which one would you choose and what will be your strategy

2. Dominance Principle
Rule 1: For player A who is assumed to be the gainer, if each element in a row Rr, is less than or equal to the corresponding element in another row, say Rs, then the row Rr is dominated by the row Rs & therefore, the row Rr can be deleted as player A would never want to choose this strategy; Rule 2: For player B who is assumed to be the loser, if each element of column Cr is greater than or equal to the corresponding element of the column Cs, then the column Cr is s.t.b. dominated by the column Cs. Therefore the column Cr is to be deleted. Rule 3: A strategy can also be dominated if it is inferior to an average of two or more other pure strategies

Example:
y Solve the game
5 20 6 15

B
-10 2 18 10 20

y Using the dominance property obtain the optimal strategies for both the players & determine the value of the game. The pay off matrix for player A is given:
I I II III IV 2 5 6 4 II 4 6 7 2 III 3 3 9 8 IV 8 7 8 4 V 4 8 7 3

Example:
Two caters A & Co. and B & Co. are competing for an increased market share. The payoff matrix shown in the following table describe the increase in market share for A:
A&Co. Give Coupons Decrease Prize Maintain Present Strategy 4 12 0 7 Increase advertising 1 3 6 1

Give Coupons Decrease Prize Maintain Present Strategy Increase Advertising

2 6 -3 2

-2 1 2 -3

Determine the optimal strategies for both the manufacturer and the value of the game.

Sub-Game Theory (2xn or mx2 Matrices)

1.

Divide the mx2 or 2xn game matrix into as many as 2x2 sub games as possible;

2.

Taking each game one by one and finding out the saddle point of each of the game

3.

In case there is no saddle point, then that game should be solved by Odds Method

4.

Select the best sub game from the point of view of player who has more than two alternatives

5.

The strategies for this selected sub game will hold good for both the players for the whole game & the value so selected sub game will be the value of complete game

Example:
1. Solve the following game:
Player B 1 Player A 1 2 -5 8 2 5 -4 3 0 -1 4 -1 6 5 8 -5

2. Solve the following game:

B I I A II III IV 2 2 3 -1 II 4 3 2 6

Graphic Matrix
y Solve the following game graphically:
1 A I -5 II 8 2 5 -4 3 0 -1 4 -1 6 5 8 -5 p1 (1-p1)

Linear Programming Method- Graphical Method For (2xm) and (nx2) matrix
y Solve the following game by graphic method where

payoff matrix has been prepared for player A.

A I II III IV I 45 35 70 50 II 40 50 35 30