GAME THEORY

Outline

 Definition of Game Theory

 Elements of a Game
 Conservative Strategies
 Pure Strategy Game
 Mixed Strategy Game
 Analytical Method

 Graphical Method

 Linear Programming Solution

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INTRODUCTION
What is Game Theory?

 Game theory is one way to consider the

impact of the strategies of others on our
strategies and outcomes.

 The study of game theory dates back to

1944, when John von Neumann and
Oscar Morgenstern published their
classic book, Theory of Games and
Economic Behavior.
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What is Game Theory?

Bad news: Knowing game theory

does not guarantee winning

Good news: There is a framework for

thinking about strategic
interaction

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Elements of a Game

 Players
 Set of possible actions
 Payoff consequences (in matrix
form)
 Players’ preference over payoffs

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Classification of Game Models

Game models are classified by

 the number of players,
 the sum of all pay-offs,
 and the number of strategies
employed.

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Two-Person, Zero-Sum Game

 There are only two players.

 One player wins a certain amount and
the other player loses the same amount
(i.e., the sum of the gains and losses for
both players is zero).

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Payoff Matrix
Brilliant Lights
Use radio Use newspaper

Use radio 3 5
Bright Lights
Use
newspaper 1 -2

 Positive entries in the matrix represent wins for the

row player (Bright Lights) but losses for the column
player (Brilliant Lights).
 Negative entries represent losses for the row player
(Bright Lights) but wins for the column player (Brilliant
Lights).
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Payoff Matrix
Brilliant Lights
Use radio Use newspaper

Use radio 3 5
Bright Lights
Use
newspaper 1 -2

Assumption:
 Row player tries to maximize winnings
while column player tries to minimize
losses.

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Conservative Strategies
 Playing safe by adopting the conservative strategy
of assuming the worst:
 Row Player’s Maximin Strategy
Choose the strategy that maximizes one’s
minimum gains
 Column Player’s Minimax Strategy
Choose the strategy that minimizes the
maximum loss

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Illustration 1
Consider B
 1 3 5 
2.5 1 3 
A  
 4 0 2
Determine the conservative strategies of Players A
and B.
Answers:
 Player A’s conservative (maximin) strategy is to choose
strategy 3.
 Player B’s conservative (minimax) strategy is to choose
strategy 2.
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Illustration 1
Consider B Row min
 1 3 5 -3
A 2.5 1 3  -2.5

 4 0 2 -2 maximin

Column max 4 1 5
minimax

 If player A knows that player B is playing conservatively,

will he change his strategy? Why or why not?
 If player B knows that player A is playing conservatively,
will he change his strategy? Why or why not?

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Illustration 2

Consider B Row min

8 4 4 maximin
4 0
A
 -4
 5 3 3
Column max 8 4 minimax

 If player A knows that player B is playing conservatively,

will he change his strategy? Why or why not?
 If player B knows that player A is playing conservatively,
will he change his strategy? Why or why not?

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Remark

 There are games where the knowledge

that one’s opponent is playing
conservatively cannot be used to
advantage.

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PURE STRATEGY GAMES
Pure Strategy
(or Strictly Determined) Games
 the strategy of each player does not
change regardless of the other player’s
strategy.
 if and only if its payoff matrix has a
saddle point

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Saddle Point

 a situation where both players are facing

pure strategies or using conservative
strategies
 The game has a saddle point if
maximin = minimax.
 also considered as the value of the game

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Value of the Game

 the numerical value of the saddle point

 average or expected game outcome if

the game is played an infinite number of
times

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Illustration 3

Express Airlines and Air Speed are two airlines

that are competing on two particular routes.
They each have two strategies for improving
their relative market position: pricing (cheaper
tickets) and service (more flight attendants,
better food, more comfortable seats). Market
research indicates when these strategies are
employed, the results will be as indicated on
the next slide.

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Illustration 3
Air Speed
pricing service

pricing 25 18
Express Airlines

service -15 15

Entries are number of passengers (in hundreds).

 Check if the game has a saddle point.

 Determine the optimal strategy for each airline.
 Who wins the game?

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Solution

 Game’s saddle point: 18

 Optimum strategy for
 Express Air: cut fares
 Air Speed: offer improved service

 If both airlines follow this policy, Express

Air will gain 18 units (1,800 passengers)
from Air Speed.

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Exercise
Find the saddle point/s, the conservative
strategies, and the value of each of the
following strictly determined games:

a)
 8 0 2
b) 3 5 4 3
6 4 1  2 4 0 
2
  
 4 3 2  1 6 5 0
0 
1
 2 6
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MIXED STRATEGY GAMES
Marketing Example

Consider two competing companies who are to

make a decision regarding an investment in a
new promotional campaign.
Co. A’s course of actions:
a1: Advertise in all media.
a2: Advertise in newspaper only.
Co. B’s alternatives:
b1: Run a sweepstakes.
b2: Run a big sale.
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Payoff Matrix
Company B
b1 b2

a1 4 -1
Company A
a2 -2 1

 Is this game a pure strategy game?

 What are the conservative strategies of Co. A and
Co. B?
 If each company knows that its competitor is playing
conservatively, will it change its strategy?
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Mixed Strategy Game

 a game where there is no saddle point

 the players play each strategy for a

certain percentage of the time

How to get the time percentage?

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Mixed Strategy Game
Consider a 2 x 2 game.
Let P = fraction of the time A plays a1
1- P = fraction of the time A plays a2
Q = fraction of the time B plays b1
1- Q = fraction of the time B plays b2

Q 1–Q The expected value of

P the game does not
depend upon what the
1–P opponent does if the
expected value of each
strategy is the same.
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Mixed Strategy Game
Example:
Solve the game below.
Company B
b1 b2
a1 4 -1
Company A
a2 -2 1

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Determining A’s best strategy
Multiply P and 1 – P with the corresponding
payoff and solve for P and 1- P by setting
column 1 equal to column 2 in the game.

Q 1–Q
P 4 -1
1–P -2 1
4P21P-1P11P
P = 3/8
Value of the game = 1/4
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Determining B’s best strategy
Multiply Q and 1 – Q with the corresponding
payoff and solve for Q and 1 – Q by setting
column 1 equal to column 2 in the game.
Q 1–Q
P 4 -1
1–P -2 1
4Q-11Q-2Q11Q
Q = 1/4
Value of the game = 1/4
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Dominance Property

 a procedure used to reduce the size of

games to simpler form that is equivalent
to the original by eliminating strategies
that would never be played

 When is strategy eliminated?

 if all its game’s outcomes are the same or
worse than the corresponding game
outcomes of another strategy

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Procedure for Finding the Reduced
Form of a Matrix Game
1. Compare the rows in the matrix. Delete any
row that is dominated by another row (i.e.,
each entry is less than or equal the
corresponding entry of the other row).
2. Compare the columns in the matrix. Delete
any column that dominates another column
(i.e., each entry is greater than or equal the
corresponding entry of the other column).
3. Repeat Steps 1 and 2 to eliminate all
redundant rows and columns.

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Example:

Find the reduced form of the matrix game

below.

3 1 0 3
7 1 1 6 
 
2 4 5 1 
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Example:

Reduced form of the game:

C
1 6
R
4 
 1

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Example:

Find the reduced form of the matrix game

below.
 2 1 4 
1 5 1 
 
1 3 4

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Example:

Reduced form of the game:

 2 1
1 5
 

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GRAPHICAL SOLUTION
OF GAMES

© 2009 Prentice-Hall, Inc. 17 – 38

 Graphical solution of
(2 X n) and (m X 2) Games

© 2009 Prentice-Hall, Inc. 17 – 39

 Graphical solution of
(2 X n) and (m X 2) Games
Example:
Solve the game below graphically.

B
2 4 3 1
A 
4 3 2 6

© 2009 Prentice-Hall, Inc. 17 – 40

 Graphical solution of
(2 X n) and (m X 2) Games

© 2009 Prentice-Hall, Inc. 17 – 41

 Graphical solution of
(2 X n) and (m X 2) Games

© 2009 Prentice-Hall, Inc. 17 – 42

 Graphical solution of
(2 X n) and (m X 2) Games

© 2009 Prentice-Hall, Inc. 17 – 43

 Graphical solution of
(2 X n) and (m X 2) Games
Example:
Solve the game below graphically.
B
2 0
 3 1
A  
3 2
 5 4
 
© 2009 Prentice-Hall, Inc. 17 – 44
 Graphical solution of
(2 X n) and (m X 2) Games
Answer:

© 2009 Prentice-Hall, Inc. 17 – 45

LINEAR PROGRAMMING
SOLUTION OF GAMES

© 2009 Prentice-Hall, Inc. 17 – 46

Solution of (m X n) Games by LP
B1 B2 B3 ... Bn
A1 c11 c12 c13 ... 
c1n
A2 c21 c22 c23 ... 
c2n

A3 c31 c32 c33 ... 
c3n
. . 

. . 
 
Am cm1 cm2 cm3 ... cmn

PlayerAMaxv
PlayerBMinv
Note: Maximinv  Minimax © 2009 Prentice-Hall, Inc. 17 – 47
 Solution of (m X n) Games by LP

PlayerA' s strategies
Maxv
s.t. c11p1 c21p2 c31p3 ...cm1p1 v
c12p1 c22 p2 c32p3 ...cm2 p2 v
c13p1 c23p2 c33p3 ...cm3 p3 v
.
.
c1n p1 c2n p2 c3n p3 ...cmnpm  v
p1, p2, p3,...,pm 0
© 2009 Prentice-Hall, Inc. 17 – 48
 Solution of (m X n) Games by LP

Notethat then
p1  p2  p3 ... pn 1 p1  p2  p3 ... pn  1
v v v v v

let
1
Maxv  Min p p p p
v x1  , x2  , x3  ,...,xn  n
1 2 3
v v v v

© 2009 Prentice-Hall, Inc. 17 – 49

Solution of (m X n) Games by LP

PlayerB' s strategies
Minv
s.t. c11q1 c12q2 c13q3 ...c1nqn v
c21q1 c22q2 c23q3 ...c2nqn v
c31q1 c32q2 c33q3 ...c3nqn v
.
.
cm1q1 cm2q2 cm3q3 ...cmnqn v
q1, q2, q3,...,qn 0
© 2009 Prentice-Hall, Inc. 17 – 50
 Solution of (m X n) Games by LP

Notethat then
q1 q2 q3 ...qn 1 q1  q2  q3 ... qn  1
v v v v v

let
1
Minv  Max q q q q
v y1  , y2  , y3  ,...,yn  n
1 2 3
v v v v

© 2009 Prentice-Hall, Inc. 17 – 51

Solution of (m X n) Games by LP

© 2009 Prentice-Hall, Inc. 17 – 52

Solution of (m X n) Games by LP

Using POM-QM:

© 2009 Prentice-Hall, Inc. 17 – 53

Solution of (m X n) Games by LP

© 2009 Prentice-Hall, Inc. 17 – 54

Solution of (m X n) Games by LP
Using POM-QM:

© 2009 Prentice-Hall, Inc. 17 – 55