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4
M O D U L E

Game Theory

TEACHING SUGGESTIONS organizations, governments, and so on. A zero-sum game means

that when one person wins the other person must lose. Therefore,
Teaching Suggestion M4.1: Game Theory and Conflict.
the sum of gains and losses for both players will always be equal
This module covers zero-sum, two-person games. Conflict is a
to zero because when one player wins, the other player loses.
part of our world. Students can be asked to discuss the use of con-
flict analysis and game theory in corporate and political settings. M4-2. The value of the game can be computed by multiplying
the percentage that each player plays a given strategy times the
Teaching Suggestion M4.2: Use of Pure Strategy
game outcomes embodied in the table of the game. Since the opti-
Games and Dominance.
mal strategies for each player are obtained by equating the ex-
The use of pure strategy games and dominance shows students
pected gains of both strategies for each player, there is a shortcut
that some strategies or alternatives can be eliminated from consid-
method for determining the value of the game. This shortcut
eration by carefully analyzing the situation. This is an important
method involves multiplying game outcomes times their probabili-
concept that can be applied to many problems in addition to game
ties of occurrence for any row or any column.
theory.
M4-3. A pure strategy is one in which a player will always play
one strategy in the game. Dominance can be used in game theory
to reduce the size of the game. This is done by eliminating strate-
ALTERNATIVE EXAMPLE
gies that would never be played by one of the players of the game.
Alternative Example M4.1: Melinda (person A) and Stanley
M4-4. A strategy is dominated if there is another strategy that
(person B) are involved in a competitive situation. Both have two
has outcomes at least as good as the outcomes of this first strategy.
strategies (1 and 2) that they can play. A table showing the win-
Whenever a strategy is dominated, it can be eliminated from con-
nings is presented below.
sideration because it will never be selected.
STANLEY (B) M4-5. A saddle point is found by finding the largest number in
Melinda (A) Strategy 1 Strategy 2 each column and the smallest number in each row. If a number in
the table has both of these characteristics, it is a saddle point.
Strategy 1 10 1
Strategy 2 2 7 M4-6. If a game has a saddle point, it will be a pure strategy
game. If there is no saddle point, the game is a mixed strategy
To solve this game, we determine the strategies for both players. game.
We begin with Melinda (player A). The equations are as follows: M4-7. A mixed game is one in which each player would play
For player AMelinda: every strategy a given percent of the time. In other words, there is
10Q 2(1 Q) 1Q 7(1 Q) no pure strategy in a mixed game. A mixed game can be solved by
equating a players expected winnings for one of the strategies with
10Q 2 2Q 1Q 7 7Q
his or her expected winnings for the other opponents strategy.
14Q 5; Q 5/14 0.357 strategy 1 for player AMelinda
M4-8. Strategy for X X2
1 Q 9/14; Q 0.643 strategy 2 for player AMelinda
Strategy for Y Y1
For player BStanley:
Value of game 6
10P 1(1 P) 2P 7(1 P)
M4-9. As strategy A1
10P 1 P 2P 7 7P
Bs strategy B1
14P 6; P 6/14 0.429 strategy 1 for player BStanley
1 P 8/14 0.571 strategy 2 for player BStanley Value of game 19
M4-10. Xs strategy:
SOLUTIONS TO DISCUSSION QUESTIONS 86Q 36(1 Q) 42Q 106(1 Q),
AND PROBLEMS Q
35
M4-1. A two-person game is one in which only two players 57
22
can participate. These players could be people, companies, other 1Q
57
282
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MODULE 4 GAME THEORY 283

Ys strategy: Bs strategy:
86P 42(1 P) 36P 106(1 P), 6P 25(1 P) 11P 30(1 P),
32 55
P P
57 72
25 17
1P 1P
57 72
35 22 So strategies remain identical
Value of game 86 36 66.70
57 57 41 31
c. Value of game 6 11 1.32
M4-11. 21Q 89(1 Q) 116Q 3(1 Q) 72 72
86 95 Since game value is negative, Id rather be B.
Q ,1Q
181 181 M4-14. The game can be reduced to a 2 2 game, since X
86 95 would never play X1 or X4 since X stands to lose in every eventual-
value of game 21 89
181 181 ity under those two strategies. Thus, the game is
56.69 Y1 Y2
M4-12. A1: A selects $5 bill X2 12 8
A2: A selects $10 bill X3 4 12
B1: B selects $1 bill
Xs strategy: 12Q 4 (1 Q) 8Q 12(1 Q)
B2: A selects $20 bill
Q 2/3, 1 Q 1/3
a. B1 B2
Ys strategy: 12P 8 (1 P) 4P 12(1 P)
A1 6 25
P 1/3, 1 P 2/3
A2 11 30
Value of game 12 2/3 4 1/3 9.33
b. Strategy for A: M4-15. A1: Shoe Town does no advertising.
6Q 11(1 Q) 25Q 30(1 Q), A2: Shoe Town invests $15,000 in advertising.
41
Q , B1: Fancy Foot does nothing.
72
B2: Fancy Foot invests $10,000 in advertising.
31
1Q B3: Fancy Foot invests $20,000 in advertising.
72
Strategy for B: a. B1 B2 B3
6P 25(1 P) 11P 30(1 P), A1 0 2 5
55 A2 3 1 1
P ,
72
17 This particular problem has a saddle point with strategies A2 and
1P B3 and game value of 1.
72
41 31 M4-16. a. B1 B2 B3
c. Value of game 6 11 1.32
72 72 A1 0 2,000 5,000
Since game value is positive, Id rather be A. A2 3,000 1,000 1,000
M4-13. a. B1 B2
Once again we have a saddle point at A2 and B3.
A1 6 25
A2 11 30

b. As strategy:
6Q 11(1 Q) 25Q 30(1 Q),
41
Q ,
72
31
1Q
72
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284 MODULE 4 GAME THEORY

M4-17. The value of the game is 3.17. The optimal strategies for M4-20. The best strategy for Petroleum Research is to play strat-
A and B can be computed along with the value of the game using egy 14 all of the time. Petroleum Research can expect to get a re-
QM for Windows. The results are presented below. turn of $3 million from this approach. These results are summa-
rized below.

Mixed Strategy
Mixed Strategy
For player A:
Probability of strategy 1 0.390 For player A:
Probability of strategy 2 0.244 Probability of strategy 1 0.000
Probability of strategy 3 0.366 Probability of strategy 2 0.000
Probability of strategy 4 0.000 Probability of strategy 3 0.000
Probability of strategy 5 0.000 Probability of strategy 4 0.000
Probability of strategy 6 0.000 Probability of strategy 5 0.000
Probability of strategy 6 0.000
For player B: Probability of strategy 7 0.000
Probability of strategy 1 0.190 Probability of strategy 8 0.000
Probability of strategy 2 0.707 Probability of strategy 9 0.000
Probability of strategy 3 0.102 Probability of strategy 10 0.000
Probability of strategy 11 0.000
Value for this game is 3.17 Probability of strategy 12 0.000
Probability of strategy 13 0.000
Probability of strategy 14 1.000
Probability of strategy 15 0.000
M4-18. Strategy X2 is dominated by both X1 and X3, so we may For player B:
eliminate X2. When this is eliminated, we find that strategy Y3 is
Probability of strategy 1 0.000
dominated by both Y1 and Y2, so we can eliminate Y3. The value of
Probability of strategy 2 0.615
the game is 6. Probability of strategy 3 0.385
M4-19. Probability of strategy 4 0.000
Probability of strategy 5 0.000
Y1 Y2
P 1P Expected gain Value for this game is 3.00
X1 Q 2 4 2P 4(1 P)
X2 1Q 6 10 6P 10(1 P)
Expected gain 2Q 6(1 Q) 4Q 10(1 Q)
To solve this as a mixed strategy game, the expected gain for each
decision should be the same. Taking the expected gain for player
X, we have
2P 4(1 P) 6P 10(1 P)
2P 4 4P 6P 10 10P
6P 4 10 4P
10P 14
P 1.4
Also, 1 P 1 1.4 0.4
Thus, for a mixed strategy game, the probability that X would play
strategy 1 must be 1.4 which is greater than 1 (this strategy must
be played 140% of the time). This is impossible. Therefore, if a
person mistakenly solves a pure strategy game with the techniques
of a mixed strategy game, the fraction (probability) for one of the
players will be greater than one (or less than zero).