Introduction to Game Theory

 In decision analysis, a single decision maker seeks to select

an optimal alternative.
 In game theory, there are two or more decision makers,
called players, who compete against each other.
 Each player selects a strategy independently without
knowing in advance the strategy of the other player(s).
 The combination of the competing strategies provides the
value of the game to the players.
 A Saddle point that element of the payoff matrix which
represent the value of the game.

Slide 1
 Introduction to Game Theory

 An Optimal strategy refers to the course of action, or

complete plan, that leaves a player in the most preferred
position regardless of the actions of his competitors.

 A game is known as fair game if its value is zero, and unfair

if its value is nonzero.

Slide 2
 Two-Person Zero-Sum Game
 Two-person means there are two competing players in the
game.
 Zero-sum means the gain (or loss) for one player is equal to
the corresponding loss (or gain) for the other player.

 There are two types of Two-person, Zero-sum games. In one

of the most preferred position for each player is achieved by
adopting a single strategy. Hence this game is known as
Pure-strategy game.

 The second type requires the adoption by both players of a
mixture or a combination of different strategies as opposed
to a single strategy. Therefore this is termed as Mixed
strategy game.
Slide 3
 Two-Person Zero-Sum Game Example
 Negotiation with Union
Suppose a company is currently involved in negotiation with its
union on the upcoming wage contract. The table shows in the next slide
the conditional cost to the company (in lakhs of rupees), wherein the
positive values represent the wage increase while the negative values
represent wage reduction. What are the optimal strategies for the
company as well as the union? What is the value of the game?

 Strategy Choices (or demand) of Union

U1: Production bonus.
U2: Pay package for Leave Travel.
U3: New rate for Overtime work.
 Strategy Choices (or demand) of Company
S1: More customer orientation.
S2: Automation downsizing.
S3: Multi-scheduling / Flexibility in work schedule

Slide 4
 Two-Person Zero-Sum Game Example
 Conditional Cost (Payoff) Table of the Company
Union

Company U1 U2 U3
S1 2 2 1
S2 -3 3 -1
S3 3 -2 0
 Strategy Choices (or demand) of Union
U1: Production bonus.
U2: Pay package for Leave Travel.
U3: New rate for Overtime work.
 Strategy Choices (or demand) of Company
S1: More customer orientation.
S2: Automation downsizing.
S3: Multi-scheduling / Flexibility in work schedule Slide 5
 Two-Person Zero-Sum Game Example

 Step 1: Identify the minimum payoff for each row.

 Step 2: For Company, select the strategy that provides the
maximum of the row minimums (called the maximin).

 Step 3: Identify the maximum payoff for each column.

 Step 4: For Union, select the strategy that provides the
minimum of the column maximums (called the minimax).

Slide 6
 Two-Person Zero-Sum Game Example

 Identifying Maximin and Best Strategy for the Company

Union
Row
Company U1 U2 U3 Minimum
S1 2 2 1 1
S2 -3 3 -1 -3
Best Strategy S3 3 -2 0 -2
for Company

Maximin payoff (i.e. Best of Worsts)

Slide 7
 Two-Person Zero-Sum Game Example
 Identifying Minimax and Best Strategy for Union

Best Strategy
For Union
Union
Row
Company U1 U2 U3 Minimum
S1 2 2 1 1
S2 -3 3 -1 -3
S3 3 -2 0 -2
Column Maximum 3 3 1

Minimax Payoff (i.e. Best of worsts)

Slide 8
 Pure Strategy

 Whenever an optimal pure strategy exists:

 The maximum of the row minimums equals the
minimum of the column maximums (Player A’s maximin
equals Player B’s minimax)
 The game is said to have a saddle point (the intersection
of the optimal strategies)
 The value of the saddle point is the value of the game
 Neither player can improve his/her outcome by
changing strategies even if he/she learns in advance the
opponent’s strategy

Slide 9
 Pure Strategy Example

 Saddle Point and Value of the Game

Value of the
Union game is 1

Row
Company U1 U2 U3 Minimum
S1 2 2 1 1
S2 -3 3 -1 -3
S3 3 -2 0 -2
Column Maximum 3 3 1 Saddle
Point

Slide 10
 Pure Strategy Example

 Pure Strategy Summary

 The company should choose Strategy S1
(S1 : More Customer orientation).

 The Union should choose Strategy U3

(U3 : New rate of overtime work).

Slide 11
 Mixed Strategy

 If the maximin value for Player A does not equal the

minimax value for Player B, then a pure strategy is not
optimal for the game. In this case, a mixed strategy is best.

 With a mixed strategy, each player employs more than one

strategy with the probabilities of it.

 The optimal solution is the probabilities with which each

player should use his possible strategies.

Slide 12
 Mixed Strategy Example

 Consider the following two-person zero-sum game.

The maximin does not equal the minimax. There is
not an optimal pure strategy.

Player B
Row
Player A b1 b2
Minimum
Maximin
a1 4 8 4
a2 11 5 5
Column
11 8
Maximum Minimax

Slide 13
 Mixed Strategy Example

p = the probability Player A selects strategy a1

(1 - p) = the probability Player A selects strategy a2

If Player B selects b1:

EV of player A = 4p + 11(1 – p)
If Player B selects b2:
EV of player A = 8p + 5(1 – p)

Slide 14
 Mixed Strategy Example

To solve for the optimal probabilities for Player A

we set the two expected values equal and solve for
the value of p.
4p + 11(1 – p) = 8p + 5(1 – p)
4p + 11 – 11p = 8p + 5 – 5p
11 – 7p = 5 + 3p
-10p = -6 Hence,
p = 0.6 (1 - p) = 0.4

The optimal mixed strategy of Player A should be:

Strategy a1 with a 0.6 probability and
Strategy a2 with a 0.4 probability.

Slide 15
 Mixed Strategy Example

q = the probability Player B selects strategy b1

(1 - q) = the probability Player B selects strategy b2

If Player A selects a1:

EV of player B = 4q + 8(1 – q)
If Player A selects a2:
EV of player B = 11q + 5(1 – q)

Slide 16
 Mixed Strategy Example

To solve for the optimal probabilities for Player B

we set the two expected values equal and solve for
the value of q.
4q + 8(1 – q) = 11q + 5(1 – q)
4q + 8 – 8q = 11q + 5 – 5q
8 – 4q = 5 + 6q
-10q = -3 Hence,
q = 0.3 (1 - q) = 0.7

The optimal mixed strategy of Player B should be:

Strategy b1 with a 0.3 probability and
Strategy b2 with a 0.7 probability.

Slide 17
 Mixed Strategy Example
Expected gain
 Value of the Game per game
for Player A
For Player A:
EV = 4p + 11(1 – p) = 4(.6) + 11(.4) = 6.8

For Player B: Expected loss

per game
EV = 4q + 8(1 – q) = 4(.3) + 8(.7) = 6.8 for Player B

Slide 18
 PRINCIPLES OF DOMINANCE

In a game, sometimes a strategy available to a player might be

found to be preferable to some other strategy / strategies. Such
a strategy is said to dominate the other one(s).

This concept of domination is employed in simplifying the two

– person zero sum games without saddle point. In general the
rules of dominance are used to reduce the size of the payoff
matrix.

These rules help in deleting certain rows and/or columns of the

payoff matrix, which are of lower priority to at least one of the
remaining rows, and/or columns in terms of payoffs to both the
players.

Slide 19
 RULES OF DOMINANCE

Rule 1: If all the elements in a row (say ith row) of a payoff matrix
of player A are less than or equal to the corresponding elements of
the other row (say jth row) then the player A will never choose the
ith strategy then we say ith strategy is dominated by jth strategy and
will delete the ith row.

Rule 2: If all the elements in a column (say rth column) of a payoff

matrix of player A are greater than or equal to the corresponding
elements of the other column (say sth column) then the player B will
never choose the rth strategy or in the other words the rth strategy is
dominated by the sth strategy and we delete rth column .

Rule 3: A pure strategy may be dominated if it is inferior to average

of two or more other pure strategies.

Slide 20
 Dominated Strategies Example

Suppose that the payoff table for a two-person zero-sum game

is the following. Here is no optimal pure strategy.

Player B
Row
Player A b1 b2 b3 Minimum
Maximin
a1 6 5 -2 -2
a2 1 0 3 0
a3 3 4 -3 -3
Column
Maximum 6 5 3
Minimax

Slide 21
 Dominated Strategies Example

If a game larger than 2 x 2 has a mixed strategy, we first look

for dominated strategies in order to reduce the size of the game.

Player B
Player A b1 b2 b3
a1 6 5 -2
a2 1 0 3
a3 3 4 -3

Player A’s Strategy a3 is dominated by

Strategy a1, so Strategy a3 can be eliminated.

Slide 22
 Dominated Strategies Example

We continue to look for dominated strategies in order to

reduce the size of the game.
Player B
Player A b1 b2 b3
a1 6 5 -2
a2 1 0 3

Player B’s Strategy b2 is dominated by

Strategy b1, so Strategy b2 can be eliminated.

Slide 23
 Dominated Strategies Example

The 3 x 3 game has been reduced to a 2 x 2. It is now possible to

solve algebraically for the optimal mixed-strategy probabilities.

Player B
Player A b1 b3
a1 6 -2
a2 1 3

Slide 24
 Example
Suppose that the following is the payoff matrix of player A for
a two-person zero-sum game. Solve the game and find out the
optimal strategies for both the players.
Player B

Player A B1 B2 B3
A1 1 3 12
A2 8 6 2
A3 5 4 1

Slide 25
Applying the Rules of dominance, we get the following payoff
matrix of player A for a two-person zero-sum game. Now we
solve the game by graphical method and find out the optimal
strategies for both the players.

Slide 26
Slide 27
 Value of the game = 66/13
 Optimal strategy of player A = (4/13, 9 /13,0)
 Optimal strategy of player B = (0, 10/13, 3 /13)

Slide 28
 Solve the game by graphical method

Player B

Player A

Payoff matrix of Player A

Slide 29
Slide 30
 Value of the game = 1/3
 Optimal strategy of player A = (0, 5/9, 4/9, 0)
 Optimal strategy of player B = (3/9, 6 /9)

Slide 31