Gametheory

Mathematicaltheorythatdeals,inanformal,abstract
way,withthegeneralfeaturesofcompetitive
situations:

GAMETHEORY

Likeparlorgames,militarybattles,politicalcampaigns,
advertisingandmarketingcampaigns etc
advertisingandmarketingcampaigns,etc.
Wherefinaloutcomedependsprimarilyuponcombination
ofstrategiesselectedbyadversaries.

(Hillier&LiebermanIntroductiontoOperationsResearch,8th edition)

Emphasisondecisionmakingprocessesofadversaries
Wewillfocusonsimplestcase:
twoperson,zerosumgames
Optimization&Decision2009

Theoddsandevensgame

Twoperson,zerosumgame

Player1takesevens,player2takesodds
Eachplayersimultaneouslyshows1or2fingers
Player1winsiftotaloffingersisevenandlosesifitis
odd;viceversaforPlayer2
E h l
Eachplayerhas2strategies:which?
h t t i hi h?
Payofftable:
Player2(odd)

Strategy
Player1
(even)

Optimization&Decision2009

495

Gametheory

Characterizedby:
Strategiesofplayer1;
Strategiesofplayer2;
Payofftable.

Strategy:predeterminedrulethatspecifies
completelyhowoneintendstorespondtoeach
possiblecircumstanceateachstageofgame
Payofftable:showsgain(positiveornegative)for
oneplayerthatwouldresultfromeachcombination
ofstrategiesforthe2players.
Optimization&Decision2009

496

Prototypeexample

Primaryobjectiveisdevelopmentofrationalcriteria
forselectingastrategy.
Twokeyassumptionsaremade:
1. Both playersarerational;
p y
;
2. Both playerschoosetheirstrategiessolelytopromote
theirownwelfare (nocompassionforopponent).

Contrastswithdecisionanalysis,whereassumption
isthatdecisionmakerisplayingagamewithpassive
opponent nature whichchoosesitsstrategiesin
somerandomfashion.
Optimization&Decision2009

494

497

Twopolititians runningagainsteachotherforsenate
Campaignplansmustbemadeforfinal2days
Bothpolititianswanttocampaignin2keycities
Spendeither1fulldayineachcityor2fulldaysinone
Campaignmanagerineachcityassessesimpactof
possiblecombinationsforpolititianandhisopponent
Polititianshalluseinformationtochoosehisbest
strategyonhowtousethe2days

Optimization&Decision2009

498

Formulation

Variation1ofexample
Giventhe
payofftable,
whichstrategy
shouldeach
playerselect?
l
l t?

Identifythe2players,thestrategiesofeachplayer
andthepayofftable
Eachplayerhas3strategies:
1. Spend1dayineachcity
p
y
y
2. Spend2daysinBigtown
3. Spend2daysinMegalopolis

Appropriateentriesforpayofftableforpolitician1
aretotalnetvoteswonfromtheopponentresulting
from2daysofcampaigning.
Optimization&Decision2009

499

Dominatedstrategy

Politician2

Strategy

1
Politician
1

Applyconceptofdominatedstrategiestoruleout
successionofinferiorstrategiesuntilonly1choice
remains.
Optimization&Decision2009

500

Variation1ofexample(cont.)

Astrategyisdominated byasecondstrategyifthe
secondstrategyisalwaysatleastasgood(and
sometimesbetter)regardlessofwhattheopponent
does.Adominatedstrategycanbeeliminated
immediatelyfromfurtherconsideration.
y
Payofftableincludesnodominatedstrategiesfor
player2.
Forplayer1,strategy3isdominatedbystrategy1.
1
2
3
Resultingreducedtable:
1
2

Total NetVotesWon
byPolitician1
(inUnitsof1,000Votes)

1
1

2
0

4
5

Optimization&Decision2009

501

Valueofthegame

Strategy3forplayer2isnowdominatedby
strategies1and2ofplayer1.
Reducedtable:
1
2
1
2

1
1

2
0

Strategy2ofplayer1dominatedbystrategy1.
1
2
Reducedtable:
1

Strategy2forplayer2dominatedbystrategy1.
Bothplayersshouldselecttheirstrategy1.
Optimization&Decision2009

502

Variation2ofexample

Payofftoplayer1whenbothplayersplayoptimallyis
valueofthegame.
Gamewithvalueofzeroisafairgame.
Conceptofdominatedstrategyisusefulfor:
Reducingsizeofpayofftabletobeconsidered;
Identifyingoptimalsolutionofthegame(specialcases).

Giventhepayofftable,whichstrategyshouldeach
playerselect?

Politician2
Strategy
Politician
1

Minimum

Maximum

Minimax value
Optimization&Decision2009

503

Saddle point
(equilibrium
solution)

Total NetVotesWon
byPolitician1
(inUnitsof1,000Votes)

Optimization&Decision2009

Maxmin value

Both politicians
break even:
fair game!
504

Minimax criterion

Variation3ofexample

Eachplayershouldplayinsuchawayastominimize
hismaximumlosseswhenevertheresultingchoiceof
strategycannotbeexploitedbytheopponenttothen
improvehisposition.
Selectastrategythatwouldbebestevenifthe
selectionwerebeingannouncedtotheopponent
beforetheopponentchoosesastrategy.
Player1shouldselectthestrategywhoseminimum
payoffislargest,whereasplayer2shouldchoosethe
onewhosemaximumpayofftoplayer1isthesmallest.

Giventhepayofftable,whichstrategyshouldeach
playerselect?

Optimization&Decision2009

Optimization&Decision2009

505

Variation3ofexample(cont.)

Cycle!
Unstable solution

Total NetVotesWon
byPolitician1
(inUnitsof1,000Votes)
Politician2
Strategy
Politician
1

Minimum

Maximum

Maxmin value

Minimax value
506

Gameswith mixed strategies

Originallysuggestedsolutionisanunstablesolution
(nosaddlepoint).
Wheneveroneplayersstrategyispredictable,the
opponentcantakeadvantageofthisinformationto
improvehisposition.
improvehisposition
Anessentialfeatureofarationalplanforplayinga
gamesuchasthisoneisthatneitherplayershouldbe
abletodeducewhichstrategytheotherwilluse.
Itisnecessarytochooseamongalternative
acceptablestrategiesonsomekindofrandombasis.

Wheneveragamedoesnotpossessasaddlepoint,
gametheoryadviseseachplayertoassigna
probabilitydistributionoverhersetofstrategies.
Let:

Optimization&Decision2009

Optimization &Decision 2009

507

When the gameis actually played

Probabilitiesneedtobenonnegativeandaddto1.
Theseplans(x1,x2,...,xm)and(y1,y2,...,yn)are
usuallyreferredtoasmixedstrategies,andthe
originalstrategiesarecalledpurestrategies.
508

Expected payoff

Itisnecessaryforeachplayertouseoneofherpure
strategies.
Purestrategywouldbechosenbyusingsome
randomdevicetoobtainarandomobservationfrom
theprobabilitydistributionspecifiedbythemixed
strategy.
Thisobservationwouldindicatewhichparticularpure
strategytouse.

Optimization&Decision2009

xi =probabilitythatplayer1willusestrategyi
probabilitythatplayer1willusestrategyi (i =1,2,...,m)
1 2 m)
yj =probabilitythatplayer2willusestrategyj(j=1,2,...,n)

509

Supposepoliticians1and2selectthemixedstrategies
(x1,x2,x3)=(,,0)and(y1,y2,y3)=(0,,).
Eachplayercouldthenflipacointodeterminewhichof
histwoacceptablepurestrategieshewillactuallyuse.
p
p
g
y
Usefulmeasureofperformanceisexpectedpayoff:
m

Expectedpayoffforplayer1 = pij x i y j
i =1 j =1

pij ispayoffifplayer1usespurestrategyi andplayer2

usespurestrategyj.
Optimization&Decision2009

510

Expected payoff (cont.)

Minimax criterion formixed strategies

4possible payoffs 2,2,4,3 ,each with probability

Expected payoff is 2 2 43 =
Thismeasureofperformancedoesnotdisclose
anythingabouttherisksinvolvedinplaying the game
Itindicateswhattheaveragepayoffwilltendtobeif
thegameis played many times
Gametheoryextendstheconceptoftheminimax
criterion togamesthatlackasaddlepointandthus
needmixedstrategies
Optimization &Decision 2009

511

Stable and unstable solutions

Agivenplayershouldselectthemixedstrategythat
maximizesthe minimum expected payoff tothe player
Optimal mixedstrategyforplayer1istheonethat
providestheguarantee (minimumexpectedpayoff)
thatisbest
h i b (maximal).
(
i l)
Valueofbestguaranteeisthemaximin value
Optimal strategy forplayer2providesthebest
(minimal)guarantee (maximumexpectedloss)
Valueofbestguaranteeistheminimax value
Optimization &Decision 2009

512

Minimax theorem

Usingonlypurestrategies,gamesnothavinga
saddlepointturnedouttobeunstable because <
Playerswantedtochangetheirstrategiestoimprove
theirpositions
p
Forgameswithmixedstrategies,itisnecessarythat
= foroptimalsolutiontobe stable
Thisconditionalwaysholdsforsuchgamesaccording
totheminimax theoremofgametheory

Minimax theorem: Ifmixedstrategiesareallowed,

thepairofmixedstrategiesthatisoptimalaccording
totheminimax criterionprovidesastablesolution
with(thevalueofthegame),sothatneither
= =
playercandobetterbyunilaterallychangingheror
hisstrategy.

Optimization&Decision2009

Optimization&Decision2009

513

Graphical solution procedure

514

Back tovariation 3of example

Consideranygamewithmixedstrategiessuchthat,
afterdominatedstrategiesareeliminated,oneofthe
playershasonlytwopurestrategies
Mixedstrategiesare(x1,x2)andx2=1 x1,soitis
necessarytosolveonlyfortheoptimalvalueofx
f
f 1
Plot expected payoffasafunctionofx1 foreachof
heropponentspurestrategies
Thenidentify:
pointthatmaximizestheminimumexpectedpayoff
opponents minimax mixed strategy
Optimization&Decision2009

Buthowtofindtheoptimalmixedstrategy
foreachplayer?

515

Politician 2
Probability

y1

y2

Probability

Purestrategy

x1

1x1

Politician1

y3

Foreachofthepurestrategiesavailabletoplayer2,
theexpectedpayoffforplayer1is
(y1,y2,y3)

Expectedpayoff

(1,0,0)
(0,1,0)
(0,0,1)

0x1 +5(1 x1)=5 5x1

2x1 +4(1 x1)=4 6x1
2x1 3(1 x1)=3+5x1

Optimization&Decision2009

516

Optimal solution forpolitician 1

Optimal solution forpolitician 2

= = max{min{3 + 5 x 1 ,4 6 x 1 }}
0 x1 1

x 1* = 7

11

y 1* (5 5 x 1) + y2* (4 6 x 1) + y 3* (3 5 x 1) = = 2

x =4
*
2

11
= = 2

11

Other situation

y 1* + 2

11

y2* + 2

11

y 3* = = 2

11

11

Optimization&Decision2009

518

Anygamewithmixedstrategiescanbetransformed
toalinearprogramming problem applying the
minimax theoremandusingthedefinitionsof
maximin value andminimax value .
Define = x m +1 = y n+1

519

LPproblem forplayer 1

Optimization&Decision2009

520

LPproblem forplayer 2
Minimizey n+1
subjectto
p11 y 1 + p12 y2 + ... + p1 n y n y n+1 0
p21 y 1 + p22 y2 + ... + p2n y n y n+1 0

Maximizex m+1
subjectto
p11 x 1 + p21 x2 + ... + pm1 x m x m+1 0
p12 x 1 + p22 x2 + ... + pm2 x m x m+1 0
...
p1 n x 1 + p2n x2 + ... + pmn x m x m+1 0
x 1 + x2 + ... + x m = 1

...
pm1 y 1 + pm2 y2 + ... + pmn y n y n+1 0
y 1 + y2 + ... + y n = 1
and
y j 0forj =1,2,..., n

and
x i 0fori =1,2,..., m
Optimization&Decision2009

11

Solving by linearprogramming

Ifthereshouldhappentobemorethantwolines
passingthroughthemaximin point,sothatmore
thantwooftheyj* valuescanbegreaterthanzero,
thisconditionwouldimplythattherearemanyties
fortheoptimalmixedstrategyforplayer2.
Setallbuttwooftheseyj* valuesequaltozeroand
solvefortheremainingtwointhemannerjust
described.Fortheremainingtwo,theassociated
linesmusthavepositiveslopeinonecaseand
negativeslopeintheother.
Optimization&Decision2009

20

11

517

11

x1 = 7
Whenplayer1isplayingoptimally,and
11

Also y 1* + y2* + y 3* = 1
So y 1* = 0,y2* = 5 andy 3* = 6

Minimum expected
payoff
Optimization&Decision2009

Expectedpayoffresultingfromoptimalstrategyfor
allvaluesofx1 satisfies:

521

Optimization&Decision2009

522

Duality

Stillalooseend

Player2LPproblemandplayer1LPproblemaredual
toeachother
Optimalmixedstrategiesforbothplayerscanbe
foundbysolvingonlyoneoftheLPproblems
g
Dualityprovidessimpleproofoftheminimax
theorem(showit)

Optimization&Decision2009

523

Example

Addingx3 0yields

11

, x2* = 4

11

, x 3* = 2

y = 0, y = 5
*
2

y =2
*
4

11

,y =6
*
3

Maximizex 3
subjectto
5 x1 x3 0
2 x 1 + 4 x2 x 3 0

11

Dualproblemyields(y4 0)
*
1

11

11

Optimization&Decision2009

2 x1 3 x2 x 3 0
x1 + x2 = 1
and
x 1 0,x2 0
525

Extensions(cont.)

Optimization&Decision2009

524

Twoperson,constantsumgame:sumofpayoffsto
twoplayersisfixedconstant(positiveornegative)
regardlessofcombinationofstrategiesselected
Npersongame, e.g.,competitionamongbusiness
firms internationaldiplomacy etc
firms,internationaldiplomacy,etc.
Nonzerosumgame:e.g.,advertisingstrategiesof
competingcompaniescanaffectnotonlyhowthey
willsplitthemarketbutalsothetotalsizeofthe
marketfortheircompetingproducts.Sizeofmutual
gain(orloss)fortheplayersdependsoncombination
ofstrategieschosen.
Optimization&Decision2009

526

Conclusions

Nonzerosumgamesclassifiedintermsofthedegree
towhichtheplayersarepermittedtocooperate
Noncooperativegame:thereisnopreplay
communicationbetweenplayers
Cooperativegame:wherepreplaydiscussionsand
bindingagreementsarepermitted
Infinitegames:playershaveinfinitenumberofpure
strategiesavailabletothem.Strategytobeselected
canberepresentedbyacontinuous decisionvariable
Optimization&Decision2009

1. Replacevariablewithoutanonnegativityconstraintby
thedifferenceoftwononnegativevariables;
2. Reverseplayers1and2sothatpayofftablewouldbe
rewrittenasthepayofftotheoriginalplayer2
3. Addasufficientlylargefixedconstanttoallentriesin
payofftablethatnewvalueofgamewillbepositive

Extensions

Consideragainvariation3
afterdominatedstrategy3
forplayer1iseliminated

x 1* = 7

Whattodoaboutxm+1 andyn+1 beingunrestrictedin

signintheLPformulations?
If 0,addnonnegativityconstraints
If 0,either:

527

Generalproblemofhowtomakedecisionsina
competitiveenvironmentisaverycommonand
importantone
Fundamentalcontributionofgametheoryisabasic
g
conceptualframeworkforformulatingandanalyzing
suchproblemsinsimplesituations
Researchiscontinuingwithsomesuccesstoextend
thetheorytomorecomplexsituations

Optimization&Decision2009

528