15

Theory of Games
________________________________________________________________________

Theory of games is concerned with decision-making in situations where two or more

rational players are involved in conditions of competition and conflicting interests. Firms
sharing a particular market or management-union conflicts illustrate such situations. The
players have different goals and their fates are intertwined. The players are locked in a
situation where their actions influence and are influenced by each other. The solution to a
game calls for determining as to what is the best course of action for each of the players
involved.

Two-person Zero-sum Games

A two-person zero-sum game is a situation where two players are involved, each of
whom is armed with a finite number of strategies and where the gain made by one equals
the loss incurred by the other. To illustrate, suppose that there are two firms A and B in
an area for which, for a long time in the past, have been selling a competing product and
are now engaged in a struggle for a larger share of the market. Now, with the total market
of a given size, the other must lose any share of the market gained by one firm, and,
therefore, the sum of the gains and the losses equals zero.
Let us assume that both these firms are considering some strategies in a bid to gain the
share of the market. Of course, the number and nature of strategies available to each of
the firms need not be equal. If there are m strategies available to A and n strategies to B,
then there would be mn moves possible. Each pair of moves will have an impact on the
market share. Some will result in a favourable shift market share for A, and some in
unfavourable shift, while some pairs could possibly leave the market share unchanged.
These results are tabulated and presented in the form of conditional pay-off matrix. These
pay-off s are given from As point of view as he is considered to be maximising player. A
positive pay-off means a gain for player A and an equal amount of loss for player B,
while a negative pay-off means a loss for A and an equal gain for B.
Solution to Games
The solution to a game calls for determining an optimal strategy for each of the players
and the value of game. As a first step, find the minimum pay-off value for every row and
select the largest in them. This is maximin strategy for player A. Now, locate the largest
pay-off value for every column and choose the minimum value in them. This is minimax
strategy for player B. If the two pay-off values are equal, then the game is solved. The
game is said to have a saddle point. The optimal strategies of the players are the
particular maximin and minimax strategies chosen for them and value of the game is
equal to the pay-off involved with each of them.
Note the following points:
(i) If the value of game v = 0, it is called a fair game. If v > 0, the game favours
A, and if v < 0, it favours B.
(ii) If a game has a saddle point, the strategies of the players are called pure
strategies.
(iii) A game may have more than one saddle point. It implies the availability of
more than one optimal strategy for one/both of the players.
(iv) A game may have no saddle point.

Games with no Saddle Point

When a game does not have a saddle point, the players cannot play pure strategies for
best results. In such a case, each player has to play mixed strategy. Solution to such
games calls for determining the optimal mix of strategies. Note that if the optimal
solution in respect of player calls for playing two strategies a1 and a2 in the ratio 40%
and 60% respectively, it means he would play these strategies at random in the this
ratio when the game is played repeatedly. Given below is the method of solution for
games where (a) each of the players has two strategies (a 2 2 problem), (b) one of
the players has two strategies and the other has more than 2 (2 n or m 2 games),
and (c) each of the players has more than two strategies.
(a) Solution to 2 2 Games Suppose the pay-off matrix of a game being played
by A and B is given as follows, and the pay-off s are such that saddle point does
not exist.
Bs Strategy
b1 b2
As a1 a11 a12
Strategy a2 a21 a22

Now, let x and 1 x be the respective probabilities that A plays a1 and a2, y
and 1 y be the respective probabilities that B plays b1 and b2, and v be the
value of game. To obtain the values of x and y such that they yield unique
value of v, the following formulae may be used.
a22 a21 a22 a12
x = --------------------------- y = ----------------------------
(a11 + a22) (a21 + a12) (a11 + a22) (a21 + a12)
(a11 a22) (a21 a12)
and v = -----------------------------
(a11 + a22) (a21 + a12)
Once the values of x and y are obtained, the mixed strategy for each of the
players can be determined. To illustrate, if x = 8/11 and y = 5/11, the optimal
strategy for A would be stated as 8/11 and 3/11 (for a1 and a2), so that he
 would play the two strategies in the ratio 8:3; while B would play b1 and b2 in
the ratio 5:6.
(b) Solution to 2 n and m 2 Games When one of the players has two
strategies available to him, the problem can be handled graphically, where the
expected pay-off functions are plotted on a graph. This is done to reduce the
problem to a 2 2 size and then solve it analytically as given earlier. Consider
a game where A has two strategies a1 and a2, and B has four strategies b1, b2,
b3 and b4. Suppose pay-offs for b1 are 8 and 5, respectively, against a1 and
a2. To plot it, calculate the expected pay-off E = 8x + (5 )(1 x), which
simplifies to 13x 5. Since x can assume minimum value of 0 and a maximum
of 1, we have, E = 5, for x = 0 and E = 8 for x = 1. Now, on a graph, we take
a scale from 0 to 1 on x-axis while we represent pay-off on y-axis. For the
calculation under consideration, plot 5 on y-axis at x = 0 and plot 8 at x = 1.
Now, join the two points. In a similar manner, all the strategies for B are
plotted. Next, the graph is viewed from below and lower envelope is
considered and the highest attainable point is located (it is viewed from above
if B is given to have two strategies available and the lowest point in the upper
envelope is considered). Whichever pair of strategies determines that point,
they are considered for B. the two strategies for A and two for B makes the
problem a 2 2 one to be solved accordingly.
(c) Solution to m n Games An m n game can be formulated and solved
as an LPP and the optimal strategies for both the players are determined using
the concepts of duality. To illustrate the formulation, let both the players have
3 strategies each; for player A : a1, a2, and a3 which he plays with probabilities
x1, x2, and x3 respectively, and for player B : b1, b2, and b3 which he plays with
probabilities y1, y2, and y3 respectively. Let U (or V) denote the game value. If
all entries in the pay-off matrix are non-negative, we have,

From As point of view: From Bs point of view:

Minimise 1/U = X1 + X2 + X3 Maximise 1/V = Y1 + Y2 + Y3
Subject to Subject to
a11X1 + a21X2 + a31X3 1 a11Y1 + a12Y2 + a13Y3 1
a12X1 + a22X2 + a32X3 1 a21Y1 + a22Y2 + a23Y3 1
a13X1 + a23X2 + a33X3 1 a31Y1 + a32Y2 + a33Y3 1
X1, X2, X3 0 Y 1, Y 2, Y 3 0
where Xi = xi /Ui where Yi = yi /Vi
Notes:
(i) The problems can be solved using simplex algorithm and from the values of Xi
and Yi, we can obtain xis and yis.
 (ii) It would suffice to solve one of the problems and read the solution to the other
from it, since they are dual of each other.
(iii) In case some pay-off /s are negative, a constant k should be added in each of
the pay-offs such that none of them remains negative. Once the game value, U
or V, is obtained, the constant value would be subtracted there from.

Games and Dominance Rule In solving the games, particularly relatively large
problems with no saddle point; it is always convenient to attempt to reduce the order of
the game by application of the principle of dominance. The underlying principle here is
that if a particular strategy for a particular player gives him as much, or better, pay-off
than another one in respect of every strategy of the other player, then he would always
prefer the first strategy to the other. In other words, the first one dominates the second.
The dominated strategy need never be played and is deleted. The rules of dominance are
stated here:
(i) If every value in a row is greater than or equal to the corresponding value in
another row, the strategy of first row dominates the strategy of the second row.
(ii) If each value in a column is lower than or equal to the corresponding value in
another column, the strategy of the first column dominates the strategy of the
second column.
(iii) A combination of two strategies in a certain fixed proportion may be seen to
dominate a strategy. Here again, the dominated strategy is deleted.

After all possible deletions (i) if only one value remains, it is the saddle point; and (ii) if
the game is reduced to a 2 2, then solve by analytical method. Otherwise, the game
may be formulated and solved as an LPP.