11 GAME THEORY

I. INTRoDUCTION
Competition is a 'Key factor of modern life. We say that a competitive situation exists if
two or more individuals are taking decisions in situation that involves conflicting interests
and in which the outcome is controlled by the decisions of all parties concerned. We assume
that in a competitive situation each participant acts in a rational manner and tries to resolve
the conflicts of interests in his favour. It is in this context that game theory has developed.
Professor John von Newmann and Oscar Morgensten published their book entitled "The
Theory of Games and Economic Behavióur" where in they provided a new approach to many
problems involving conflict situations. This approach is now widely used in Economics,
Business Administration, Sociology, Psychology and PoliticarSCience as weft as in MTtary
TrainingIngames Tike chess, draught, pocker etc. wh+chare ptayed as per certai rut s
vTCtory of one side and the defeat of the other is dependent upon the decisions based in
skillful evaluation of the alternatives of the opponent and also upon the selection of the right
alterpative.
Game Theory is a body of knowledge which is concerned with the, study of decision
makmgin situatiorwBiere tWo Or imgKe rationat vpporemts are imvotved-urder-condittorof
cOTmpetttton and coniicting interestt deads With human processes in which an individual
decisiom Tmaking unit is not in complete control of the other decision making units. Here a
unit may be an individual group, organisation, society or a country.
(Game Theory is a type of decision theory which is based on reasoning in which the
ichoice of action is determined after considering the possible alternatives available to the
opponents playing the same game, The aim is to choose the best course of action, because
every player has got an alternative course-of action)
Significance of Game Theory
We know that competition is a major factor in modern life. There are so many competitions
like business competition, elections competitions, sport competition etc. In all these competitions
ersons have conflicting interest, and every body tries to maximise his gains and minimise loss.

Game theory is a
type of decision theory
which is based on the choice of action. And
choice of action is determined after considering the possible alternatives available to the
9pponent. 1t involves the players i.e. decision makers who have different goals or objectives.
he game theory determine the rules of rational behaviour of these players in which the
outcomes are dependent on the actions of the interdependent players.
In a game there are number of possible outcomes, with different values to the decision

makers. They might have

sorne but do not have the
control o v e r others. For
complete control
example players in a chess gaine, labour union striking against the managenent, army
lighting with the enemy, comnpanies striving for larger share of market etc are the situations
where theory of games 1s applicable because each situation can be viewed as games. So, game
theory is important weapon in the hands ofmanagement. Game theorv is a scientific annrnarh
 OPERATIOS RESEARCH
Essential features of Game Theory
A competitive situation is called a game if it has the following featurea:
Finite Number of
playere. The
Conpetitors. There are inite number of competitors,
called
players need not be individuals, thev can be groups,
political parties, institutions ór
even nations.
corporations,
47 Finite Number of Action. A list
of
available to each player. The list needfinite number poseible courses of action is
of
not be the same fcr each
a) Knowledge of player
Alternatives. Each player has the knowledge of alternatives
available to his opponent.
) Choice. Each player makes
choice, i.e.,,
a the game is played. The choices are
assumed to be made
until he has decided simultaneously,
so that no
player knows kis opponents' choice
his own course of action.
Outcome or Gain. The play is associated with
an outcome known
the loss is
considered negative gain. as gain. Here
p Choice of Opponent. The possible gain or lcss of each
only the choice made by him but also the choice player depends upon not
made by his opponent.
Two Persons Zero-sum
Game./Two
nvolves two persons or players and gains madeperson zero-sum game is the situation which

he otherifor example there are two companiesbyCoca-cola

one person is eguals to the loss incured by
& Pepsi and are
larger share in the market. Now striggling
any share of the market gained by the Coca-cola
fora
must be thelost share of Pepsi, and
other words if therefore, the sums of she gains and losses equalscompany
zero. In
gain of Coca-cola is 40% so the lost share of the Pepsi
will be 40%.
game and losses is The sum of
zero i.e.
(+40%)+(-40%) 0 =

persons game. A game involving

persons game are möst common. When F persons called a n persons game. In this two
js

the there are morëthan two players in a game, obviously

complexity of the situation is increased.
Pay offs. Outcomes of a game due to
adopting the different courses of actions by the
competing players in the form of gains or losses for each cf the pleyers is known as pay offs.
Pay off Matrix. In a game, the gains and losses,
resulting from
counter moves,. when
represented in the form of a matrix are known ditferent moves and
as _pay off
matrix or
gain matrix. This matrix shows how
muchpaymentis to
thegame in case a particular strategy is adopted by a player)
be made or received the end of
at

Pay off matrix shows the gains and losses of one of the two
on the left hand side of the
olayers, who is indicated
pay off matrix. Negative entries in the matrix indicate losses.
This is generally prepared for the
maximising player. However the same matrix can be
interpreted for the other player also, as in a zero sum game, the gains of one
represent the losses of the other and
player
player, vice versa. Thus, the pay off matrix of Mr A
is the negative pay off matrix for Mr B. The other
player is known as the minimising
player. ie is indicated on the top of the table.
The pay off matrix can be understood by the following 2xample.
Y
Y
X1 6 9

12 15
 GAME THEORY
In our example we have two players X and
also has two Y.
strategies Y and Y2. Their various
X has
two
strategies X and X2. Sinilarty
courses of
action are as on next page
X1 X X1
Pay off Y1 Y1
6
Y2
The above 12 9
Wr.iten arrangement
tom the X's
of the matrix is
known 15
as
point of view i.e. from the player whopay off matrix. It should
Decision of a Game. In is on the left hand always be
side.
the tasis game theory best strategy for each
of some criteria. Since both
this known as the criteria the players are player is determined on
is

of optimality. expected to be rational in their

objective and then Each player lists the approacll
strategy out of these outcomespossible
se.ects the best outcomes from his
as
per his objective. from point of view o his
Thedecision criteria in
for the game theory is known as the
maximising player and rninimax for the
criteria of
optimality, i.e., maximin
Limitation of minimising player.
1.
Game Theory
Infinite number of
number of possible strategy. In a game theory we assume that
courses of action available to each there is finit
may have infinite player.
number of strategies or courses of Butin'practice a player
Knowledge about strategy. action.
knowledge of strategies available Game theory assumes that each
strategy about the opponent is to his opponent. But some times player about the
as

conclusions. not available to knowledge

players. This leads to the wrong
Zero outcomes. We have
But in assumed that gain of one
practice gain
of one person is the loss
person may not be equal to the loss of of amother person.
Risk and another person i.e. opponent.
uncertainty. Game theory does not takes
probability. So game theory usually ignores the into consideration the
of concept of
Finite number of presence risk and
assumed in the game competitors. There are finite number of uncertainty.
of piayers.
But theory. competitors as has
in real practice there can be more been
than the expected number
But
Certainity of Pay off. Game theory assume that off is
sometimes it is pay always known in advance.
becc mes
impossible ta know the pay off in advance. The decision situation
multidimensional with large number of variables. infact
Pules of Game. Every
game is played according to the
which governs the behaviour of set of rules i.e specific rules
the players. As there we have set
Bad minton, of rules of
Hockey etc. playing Chess,
Strategy
Itis the pre-determined rule by which
list available each player decides his course of action from
to him. How one course of action is selected his
hims known as strategy of the game. out of various courses available to
Types of Strategy
Generally two types of strategy are employed
i) Pure Strategy (ii) MixedStrategy
ti) Pure Strategy. It is the
predetermined course of action to be employed by the
player. The players knew it in advance. It is
which the course of action is associated. usually represented by a number with
lub
lanl1AA
114

) Mixed Stratogy. mixedIn

Cavlnan tadeERATIONS RESEARC
accordance with some fixed strategy the player decides his
cach course of action probability
and the selection distribution.
course of action
ln mixed is Probability are
done as
in
associated with
any particular occasion.
strategy the opponent can not be sure of theper these
probabilities.
course of action
Decision of
to be taken
the basis of some
a Game. In Game theory, best
on

this is known as
rule. Since both the
players
strategy for each
player is
the criteria of are
expected to be rational determined on
action and selects the best optimality. Each player lists the their approach in
possible outcomes fromhis
Cxpressed as Maximin for action to achieve his objectives. This
thé maximising player and criteria of
optimality is
II. THE Minimax for the minimising
)
MAXIMIN-MINIMAX
Maximin Criteria : The PRINCIPLE
player.
maximising player lists his minimum
strategy and selects the strategy
gains which gives the gains from cach
maximum out of these
(ii) Minimax minimum
CriteriaA : 'The minimising player lists
strategy and selects the
strategy which
his maximum loss from each
maximum losses. gives him the minimum loss out of these
For
for
Example Consider a two person zero
Maximising A player say
sum game
Aj Az & Ag and for player involving the set of
B, Bj & B2, with the pure strategy
Player B
following pay off
B
B2 Row minima
Player A
A2
I(6 Maximin
A
Column Maxima
6 Minimax
Since Maximin =
Minimax
V= 6
Suppose that player A starts the
game knowing fully well that whatever
adopts B will select that
particular counter strategy which will minimise strategy he
the
A selects the
strategy A1 then B will select B2 so that A may get minimum payoff to A. If
A chooses Az than B will
adopt the strategy of B2. Naturally A would like gain.
to
Similarly if
maximise his
maximin gain which is just the largest of row minima.
Which is called 'maximin
Similarly will minimise his minimum loss which is called 'minimax
B strategy'.
that in the above example, the maximum if row strategy'. We observe
minima and minimum of column maxima
are equal. In symbols.
Maxi [ Min.] Mini [ Maxl =

The strategies followed by both the players are called

'optimum strategy
Value of Game. In game theory, the concept value of game is considered
as very
important. The value of game is the maximum guaranted gain to the maximising player-if
both the players use their best strategy. it refers to th average-payoffpuptay of the game
Over a period of time. Consider the following thegames.
Player Y Player Y
.

Player X Player X

(with positive value) (with negative value).

 GAME THEORY
11.5
In the first game
player X wins 3 points and the value of the value is three with
sign and in the second game the player Y wins 3 points and the value positive
indicates that Y is the winner. The value is
denoted
of the game is -ve which
'v'. by
Saddle Point. The Saddle
ts row and the point in
pay off matrix is one which is the smallest value in
a
largest. value its column. The saddle point is also known as
in
point in the theory of games. An
element ofa matrix that simultaneously minimum equilibrium
rOw n which it occurs and the maximum of the column in is which it occurs Is a saddle
of the
the matLX game. In a game having a saddle pointof
to play the row point optlmum strategy for a player X iS always
containing saddle point and for a player Y to play the column that contains
saddle point.
The following steps required to find out Saddle point :
are
Select the
minimum value of each row & put a circlearound
it.
t) Select the maximum value
of each column and put square around it.
ii) The value with both circle &
square O is the saddle point.
in case there are more
than one Saddle point there exist as
solutions of the game. There many optimum points ar
may.or may not be the. saddlepoint in the gam. Whën there is
nosaddle point we have to use/algebrai imethods tor
working out the soljtions conicerning
the game problem. Saddle point can be found out in different
ways.
Example 1. Player B
B1 B2
A1 |20 80
Player AA A2 | 40 30
A3 50 60
Solution.Ist Method
Step 1. Putting circle around Row minima.
Step 2. Putting square around Column Maxima
Step 3. Saddle point is a point where circle & squareare both combined.
Player B
B B2
A
Player A A 40

A 60

Value of game = V=50

IInd Method
or i) Putting mark" on each Row minima.
(i) Putting mark" on each Column Maxima.
(ii) Saddle point where both* and tdifferent star) appears
B B2
A1 20 80
Player A Ag 40 30
50" 60