Game Theory

Meeta Malviya
180070034
Electrical
Engineering June
2019

Mentor : Debabrata Mandal

Contents
1 Introduction 1
1.1 Basic Terminologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2 Dominant Strategy Equilibrium 3

2.1 Strongly Dominant Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Strongly Dominant Strategy Equilibrium . . . . . . . . . . . . . . . . . . . . 3
2.3 Very Weakly Dominated Strategy . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Very Weakly Dominant Strategy Equilibrium . . . . . . . . . . . . . . . . . . 4

3 Nash Equilibrium 5
3.1 Best Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Pure Strategy Nash Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Maxmin and Minmax Values . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4 Mixed Strategies and Mixed Strategy Nash Equilibrium 7

4.1 Mixed Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2 Support of Mixed Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.3 Mixed Strategy Nash Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Theorem- Nash, 1950 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

5 Utility Theory 9
5.1 Axioms of von Neumann - Morgenstern Utility Theory . . . . . . . . . . . . 9
5.2 The von Neumann - Morgenstern Theorem.................................................................10

6 Repeated Prisoner’s Dilemma 11

6.1 Discount Factor...............................................................................................................11
6.2 Nash Equilibrium............................................................................................................11
6.3 Strategies.........................................................................................................................11
6.3.1 Tit for Tat..........................................................................................................11
6.3.2 Trigger................................................................................................................12
6.4 Fictitious Play.................................................................................................................12
6.5 Folk Theorum..................................................................................................................12

7 Bayesian Probability Theorem and Bayesian Games 14

7.1 Basics of Probability.......................................................................................................14
7.2 Conditional Probability..................................................................................................14
7.3 Bayes’ Rule.....................................................................................................................15
7.4 Bayesian Games.............................................................................................................15
8 Coalitional Games 17
8.1 Transferable Utility........................................................................................................17
8.2 The Core.........................................................................................................................17
8.3 The Shapley Value.........................................................................................................19
8.3.1 The Shapley Axioms.........................................................................................19

9 Game theory in real life problems 21

1 Introduction
Let us consider the game of chess, in every turn we play our best move possible and so does
our opponent, ultimately trying to win. For this we tend to use strategies that cause us
minimum harm and maximum harm to our opponent(not actually true for all other games),
we show intellectual decision making and hence use game theory.
Game Theory is better described as Strategy Theory, or Theory of Interactive Decision
Making. A strategic situation involves two or more interacting players who make decisions
while trying to anticipate the actions and reactions by others or better say rational players.
Game theory studies the general principles that explain how people and organizations act in
strategic situations

1.1 Basic Terminologies

Actions These are choices which under some circumstances, are available to the decision-
maker, and a specification of the decision-maker’s preferences, from which she has to
choose.
Game
Any set of circumstances that has a result dependent on the actions of two or more decision-
makers (players)
Players
A strategic decision-maker within the context of the game
Payoffs
These are the no’s which represent the motivations of players or say their preferences.
Rationality
A rational player plays in a way to maximize her payoffs. payoff. A rational player does not
necessarily mean a selfish player because her payoff could have an altruistic component i.e.
a higher payoff for another player would mean a higher payoff to her as well.
Common Knowledge
Since all players in game are intelligent, they also know that they all know the model, they
all know that they all know that they all know the model, etc.
Complete knowledge
All players are aware about the payoffs of all players.
Utility Function
Basically, it is a function that shows motivation of players. It assigns number to every out-
come with property that higher value are more preferred.
Strategy
It is any of the options which he/she chooses in a setting where the outcomes depends not
only on their action but on others too.
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Strategy Profile
It is the set of strategies for all players which fully specifies all actions in a game.
Best Response
A player’s best response strategy to a given combinations of strategies played by the others
in the one she must adopt to maximize her own payoff.
Strategic form Game
A strategic form game is a tuple T = (N , (Si)i∈N , (ui)i∈N )
where N = {1, 2, 3....n} is a set of players;
S1, S2, ..., Sn are sets called the strategy sets of the players 1, . . , n, respectively; and
ui : S1 × Sn ×.....× Sn ⇒ Rfori = 1, 2,. ., n are mappings called the utility functions or
payoff functions.

We all must have played the game of Rock, Paper, Scissor. If we wish to show it in a form
of game it would look like this:

1/2 rock paper scissor

rock 0,0 -1,1 1,-1
paper 1,-1 0,0 -1,1
scissor -1,1 1,-1 0,0
• The actions are - rock, paper, scissors.
• The payoffs are the values that you will score after the game is played, eg,
u1(paper, scissor) = 1
• The matrix with actions, and payoffs is called a game.
• one of the strategic profile is (rock, paper) where player 1 plays rock and
player second plays paper.
• common knowledge includes that everyone are aware of the game and its outcomes.

2
2 Dominant Strategy Equilibrium
2.1 Strongly Dominant Strategy
Given a strategic form game T = (N , (Si)i∈N , (ui)i∈N ), a strategy si ∈ Si of player i is
said to be strongly dominated by another strategy st ∈ Si if,
i
ui(st , s−i) > ui(si, s−i) ∀s−i ∈ S−i
i
This implies that player i will always prefer to play strategy st over strategy si.
i

2.2 Strongly Dominant Strategy Equilibrium

A strategy profile (s∗, s∗, ..., s∗ ) is called a strongly dominant strategy equilibrium of the
1 2 n
game T = (N , i∈N , (ui) i∈N ) if, ∀i = 1, 2, .., n the strategy s∗ is a strongly dominant
i
(Si)
strategy for player i.
Consider the example of prisoner’s dilemma,
1/ 2 NC C
NC -2,-2 -10,-2
C -2,-10 -5,-5
Note that the strategy NC is strongly dominated by strategy C for player 1 since

u1(C, NC) > u1(NC, NC)

u1(C, C) > u1(NC, NC)

and similarly, the strategy NC is strongly dominated by strategy C for player 2.

2.3 Very Weakly Dominated Strategy

A strategy si ∈ Si is said to be weakly dominated by strategy st ∈ Si for player i if,
i
ui(st , s−i) ≥ ui(si, s−i) ∀s−i ∈ S−i
i
The strategy st is said to very weakly dominate strategy over si. Note: the strict inequality
i
may not be satisfied even once. And if strict inequality is satisfied then then it is weakly
dominant strategy.

3
2.4 Very Weakly Dominant Strategy Equilibrium
A strategy profile (s∗, s∗, ..., s∗ ) is called a Very weakly dominant strategy equilibrium of the
1 2 n
game T = (N , ∗
i∈N , (ui) i∈N ) if, ∀i = 1, 2, .., n the strategy s is a very weakly dominant
i
(Si)
strategy for player i.
Consider the example of prisoner’s dilemma,

1/ 2 NC C
NC -2,-2 -5,-2
C -2,-10 -5,-10

The strategy C and NC both are very weakly strategies. Hence each profiles therefore
constitute a very weakly dominant equilibrium.

4
3 Nash Equilibrium
It is a stable state of a system involving the interaction of different participants, in which
no participant can gain by a unilateral change of strategy if the strategies of the others
remain unchanged.
Let us consider working in a joint problem-
1/ 2 Work hard Goof off
Work hard 2,2 0,3
Goof off 3,0 1,1
You and your friend both prefers either to work or goof off together. We see that both
goofing off is an equilibrium because if one of the player decides to play goof off then other
can do nothing better than goofing off, which is not in the case of both working together.
Note: This shows that equilibrium may not always gives the highest payoffs to the players.

3.1 Best Response

For a given strategic game Best response is defined as
bi(s−i) = {si ∈ Si : ui(si, s−i) ≥ ui(st , s−i) ∀st ∈ Si
i i

3.2 Pure Strategy Nash Equilibrium

Given a strategic form game T = (N , (Si)i∈N , (ui)i∈N ), the strategy profile
s∗ = (s∗, s∗, ..., s∗ ) is called a pure strategy Nash equilibrium of T if
1 2
n
ui(s∗, s∗ ) ∗= max ui(si, ) ∀i = 1, 2, .., n
s
i −i −i
si ∈Si
This can be observed that Nash equilibrium strategy is the best response to the Nash
equilibrium strategies of the other players.

3.3 Maxmin and Minmax Values

Nash equilibrium is not unique, there can be two or more equilibria in a game, eg BOS
game. So, which strategy we should use, as everyone wants to maximize their payoff, this
give rise to these strategies:

Maxmin Value
In a given strategic game form, the strategy that maximizes its worst case payoffs in the
situation where all the other players −i happens to play strategies which cause greatest
harm to i. It is also called security value of a player.Its value is given by:
vi = max min
ui(si, s−i)
si∈Si s−i ∈S−i

5
the action that guarantee this payoff is maxmin strategy.

Minmax Value
In a given strategic game form, player its minmax strategy against −i in a 2 player game is
a strategy that minimizes −its best- case payoff, and the minmax value for i against −i is
payoff. Its value is given by:
vi = min max ui(si, s−i)
s−i ∈S−i si∈Si

the action that guarantee this payoff is minmax strategy.

Note:
vi ≥ vi
let us assume that the player 2 plays X, the he gets the minimum payoff if player 1 plays B,

whereas if player 2 plays Y then he receives minimum payoff if player 1 plays A. And out
of both player gets maxmin payoff if when strategy profile (A, Y ) is played. In simple
words it is maximum of all minimum that he can get.
Similarly he gets minmax payoff if (B, Y ) is played.

1/2 X Y
A 1,2 2,3
B 4,1 3,5

Minmax Theorem
In any finite, two player zero sum game, in any Nash equilibrium each player receives a
payoff that is equal to both his maxmin and minmax value.

It is quite intuitive if we see matching pennies game. For player 1 and 2 minmax payoff is
-1 and maxmin payoff is 1. Whenever a game is played, someone receives minmax and
other receives maxmin value.
1/ 2 heads tails
heads 1,-1 -1,1
tails -1,1 1,-1

6
4 Mixed Strategies and Mixed Strategy Nash
Equilibrium
Let us see the example of matching pennies:
1/ 2 heads tails
heads 1,-1 -1,1
tails -1,1 1,-1
if we observe that we see that there is no pure strategy Nash equilibrium. So what should
our strategy be? A mixed strategy says, I’m just going to play more than one action with
positive probability rather than fixing on any strategy i.e. playing that action with full
probability.

4.1 Mixed Strategies

The mixed strategy σi is a probability distribution over pure strategies Si. That is, each
action is played with a non zero probability, such that
I:
σi(si) = 1
si ∈Si

4.2 Support of Mixed Strategy

In the case of matching pennies, on each toss, I am going to play heads and tails with equal
probability, hence heads and tails are two support of my mixed strategy equilibria.

It is the set of all pure strategies which have non zero probability under mixed strategy
profile σi. It is denoted by δ(σi):
δ(σi) = {si ∈ Si : σi(si)} > 0

4.3 Mixed Strategy Nash Equilibrium

Given a strategic form game T = (N , (Si) , (ui) ), a mixed strategy profile (σ∗, ..., σ∗)
i∈N i∈N 1 n
is called Nash equilibrium ∀i ∈ N ,
ui(σ∗, σ∗ ) ≥ ui(σi, σ∗ )
i −i −i

7
4.4 Theorem- Nash, 1950
Every finite game has a Nash Equilibrium.

we consider the game of BOS (battle of sexes)

1/ 2 A B
A 2,1 0,0
B 0,0 1,2

A Mixed strategy profile is a Nash equilibrium iff utility of the profile is same for both the
players and is greater that all other utility for different actions.
let us look at the candidate for equilibrium, ((2 , 1 ), (1 , 2 . We see,
3 3 )) 3 3
∗
u (A, σ
1 2 2
1 2) = (2) + (0) =
3 3 3
∗
u (B, σ 1 2 2
1 2) = (0) + (1) =
3 3 3
from the statement stated above we conclude that the suggested candidate is in-fact a
Nash equilibrium.

8
5 Utility Theory
Utilities capture the preferences that the player have for different outcomes in terms of real
numbers thus enabling real valued functions to be used in game theoretic analysis. It
assigns payoffs to action s.t. higher value means more preferable.

Preferences over Lotteries To describe the interaction of preferences, notion of

lottery is used. Suppose X = {x1, x2, .., xn}. then the lottery on X is

σ = [p1 : x1; p2 : x2; ...pm : xm; ]

where
I:
m
pj ≥ 0 for j = 1, 2...m pj = 1,
and j=1

5.1 Axioms of von Neumann - Morgenstern Utility Theory

Let X be usual set of outcomes.
• x1 c:: x2 : outcome x1 is weakly preferred to outcomex2
• x1 >- x2 : outcome x1 is strictly preferred to outcomex2
• x1 ∼ x2 : outcomes x1 and x2 are equally preferred.

Axiom 1: Completeness
A set of preferences is complete if, for all pairs of outcomes A and B, the individual prefers
A to B, prefers B to A, or is indifferent between A and B or in other words it means that,
every pair of outcomes is related by the preference relation.

Axiom 2:Transtivity
If a player prefers outcome A to B and outcome B to C, then he prefers A to C.
x1 c:: x2 and x2 c:: x3 =⇒ x1 c:: x3 ∀x1 , x2, x3 ∈ X

Axiom 3:Substitutability
This axiom is often called independence. If x1 ∼ x2, then player is indifferent between
lotteries σ1 and σ2 if probabilities of x1, x2 and all other probabilities of outcomes are same.

Axiom 4:Decomposibility
Also called simplification of lotteries. It states that, if probability of each qutcome is same
for σ1 and σ2 then
Pσ1 (xi) = Pσ2 (xi)∀xi ∈ X =⇒ σ1 ∼ σ2

9
Axiom 5:Monotonicity
Consider a player who strictly prefers outcome x1 to outcome x2.Suppose σ1 and σ2 are two
lotteries over {x1; x2}. Monotonicity implies that the player would prefer the lottery that
assigns higher probability to x1.

Axiom 6:Continuity
The axiom states that if, outcome x1 is strictly preferred to x2 and outcome x2 is strictly
preferred to another outcome x3, then player is indifferent to x2 or [p : x1; 1 − p : x3] for
some probability p ≥ 0

5.2 The von Neumann - Morgenstern Theorem

Theorem. Given a set of outcomes X = {x1; ..; xm} and a preference relation c::o n X
that satisfies completeness, transitivity, substitutability, decomposability, monotonicity and
continuity, there exists a utility function u : X → [0; 1] with the following two properties:
1. u(x1) ≥ u(x2) iff x1, x2 ∈ X
�m
2. u([p1 : x1; p2 : x2; ...; pm : xm]) = pju(xj)
j

It tells that under certain axioms of rational behavior, a decision-maker faced with risky
(probabilistic) outcomes of different choices will behave as if he or she is maximizing the
expected value.

10
6 Repeated Prisoner’s Dilemma
When we think of most interactions in the world, there’s a lot of them that occurs more
than once. Like in a market place firm we interact, negotiate with our competitors
repeatedly. So, there is a long history and a long future ahead of them. Now when you are
asked to make a strategy, your decision will depend upon how your competitors have
played in past.

6.1 Discount Factor

It is the calculation of present value of future payoffs, or more specifically it is used to
measure how much people will care about the payoff in the future as compared to today. It
is denoted by β. The payoffs value decrease by exponential rate in every next game by the
factor β.

Discounted Repeated games

lets take the example:
1/ 2 NC C
NC 3,3 0,5
C 5,0 3,3
we need to check that if anyone wants to deviate if everyone has co-operated in past.
co-operate:3 + 3β + 3β2 + ... = 3
1
defect:5 + β + β2 + ... = 5 + β 1
1
difference:−2 + 2β + 2β2 + ... = β 1 − 2
1
for difference to be non-negative: β 1 − 2 ≥ 0, so β ≥ 1/2
1
we need to care about tomorrow at least half as much as today!

6.2 Nash Equilibrium

1. we won’t be able to construct an induced normal form & appeal to Nash’s theorem to
say equilibrium exists.

2. Nash’s equilibrium applies to finite game.(There could be infinite number if pure

strategy equilibrium)

6.3 Strategies
6.3.1 Tit for Tat
In this strategy we start from co-operating; if the opponent defects, then we defect in the
next round, then again co-operate.

11
6.3.2 Trigger
we start from co-operating, if opponent defects, then we defect forever, hence the name
Trigger.

6.4 Fictitious Play

In it, each player presumes that the opponents are playing stationary (possibly mixed)
strategies. At each round, each player thus best responds to the empirical frequency of play
of their opponent. We observes the opponents play and update our belief or in other words,
keeps count of number of times the player played a given action.
The player assumes that the opponent plays the game with Mixed strategy σi.
ω(a)
σ(a) = � ,
ω(a )
a ∈A
where ω(a) represents number of times the player
,
player the action a, and A represents
number of actions available.

given the initial belief player 1 assumes that player two has higher probability to play tails
than heads, similarly player two assumes that player 1 has higher probability to play tails.
Hence, player 1 plays tails and player two plays heads. Now they both update their belief.
And it goes on.

6.5 Folk Theorum

Folk theorems are a class of theorems about possible Nash equilibrium payoff profiles in
repeated games. The theorem suggests that anything that is feasible and individually
rational is possible.

Enforceable
Consider a strategic game, T = (N , (Si)i∈N , (ui)i∈N ) with payoff vector r = (r1, r2, ..., rn)
and vi is minmax strategy that player i−1 plays against player i.
A payoff profile ris enforceable if ri ≥ v¯i

12
Feasible
A payoff profile r is feasible if there exist rational, non-negative values αa such that for all
�
i, we can express ri as α∈A αui(a) with σα∈Aαa = 1

Folk Theorem
Consider any n-player game G and any payoff vector (r1, r2, ..., rn).

1. If r is the payoff in any Nash equilibrium of the infinitely repeated G with average
rewards, then for each player i, ri is enforceable.

2. If r is both feasible and enforceable, then r is the payoff in some Nash equilibrium of
the infinitely repeated G with average rewards.

13
7 Bayesian Probability Theorem and Bayesian Games
Everyone uses sentences like, it might rain today, I may not be able to make-up. We all use
probability everyday in our life, to make a guess about our actions for which we are not
sure of.

7.1 Basics of Probability

We say probability of happening of event A is P (A), similarly for event B. Probability is
defined between 0 and 1.

• Probability of happening of event A or B is defined as:

P (A ∪ B) = P (A) + P (B) − P (A ∩ B)

• if both events are independent, eg. raining today and it being Sunday day, then:
P (A ∩ B) = P (A)P (B)

• probability of not happening of an event A :

P (A) = 1 − P (A)

• DeMorgan’s Laws
P (A ∩ B) = P (A ∪ B)
P (A ∪ B) = P (A ∩ B)

7.2 Conditional Probability

It is the probability of an event A given that event B has occurred.
P (A ∩ B)
P (A|B) =
P (B)
or,
P (A ∩ B) = P (A|B).P (B)
it follows that

P (A ∩ B ∩ C) = P (A|B ∩ C).P (B ∩ C) = P (A|B ∩ C).P (B|C).P (C)

we can get a version of Total Probability Theorem:

P (A) = P (A|B).P (B) + P (A|B).P (B)

14
7.3 Bayes’ Rule
it gives us a way to express one conditional probability in terms of other.
P (B|A).P (A)
P (A|B) = P (B|A)P (A) + P (B|A)P (A)

or, P (B|A).P (A)

P (A|B) =
P (B)

7.4 Bayesian Games

We have so far studied strategic form games with complete information, where the entire
game is common knowledge to the players. We will now study games with incomplete
information, where at least one player has private information about the game which the
other players may not know.
A strategic form game with incomplete information is defined as a tuple
T = (N , (Θi), (Si), (pi), (ui)) where
• N = 1,2,...,n is the set of players
• Θi is the set of types of player i where i = 1, 2, .., n.
• si is the set of actions or pure strategies of player i where i = 1, 2, .., n.
• the belief function pi represents player its beliefs about the types of the other players
if his own type were θi.

• the payoff function ui; Θ1 × .. × Θn × S1 ×.....× Sn → Rassigns to each profile of

actions, a payoff that player i would get.

In this Bayesian game, the player 1 knows whether player 2 is a-type or b-type but player 2
does not know which type he has to play. Here player 1 has extra an information that
player 2 does not have, this is an example of incomplete information game.

a type = p b type = 1-p

1/ 2 left right 1/ 2 left right

Let us observe
up strategy
3,4 of player
1,0 1, if the proposed game isupa-type 6,2
he would
0,4 prefer playing
down than playing
down up 4,3and if2,0
the proposed game is b-type down
than he 5,1
would-1,4
prefer playing up
than down as the playoffs in up are greater than down.
Now if we observe player 2, we see that in a-type game player 2 is better off playing left
than right, and in b-type game he is better off playing right than left. But he knows the

15
probability by which each type is going to occur. So, we calculate the utility of playing left
and right. Which equals to-
When it is a-type game then player 1 will play down, and when it is b-type he’ll play up.
when player 2 makes a strategy of playing left-
3p + 2(1 − p)

when player 2 makes a strategy of playing right-

0 + 4(1 − p)

if we compare both-
3p + 2(1 − p) = 0 + 4(1 −
p)
2
p=
5
player 1 will play left if the probability of a-type is more than 2
and play right if the
5
probability of a-type is less than 2
5

16
8 Coalitional Games
Cooperative games are often analysed through the framework of cooperative game theory,
which focuses on predicting which coalitions will form, the joint actions that groups take
and the resulting collective payoffs.

8.1 Transferable Utility

Transferable utility is a concept in cooperative game. Utility is transferable if one player
can losslessly transfer part of its utility to another player. Such transfers are possible if the
players have a common currency that is valued equally by all. Note that being able to
transfer cash payoffs does not imply that utility is transferable: wealthy and poor players
may derive a different utility from the same amount of money.

A cooperative game with transferable utility is defined as the pair (N, v) where
N = {1, ..., n} is a set of players and v : 2N → R is a characteristic function, with
v(∅)41 = 0. We call such a game also as a game in coalition form, or game in
characteristic form, or coalitional game, or TU game.

8.2 The Core

The core of (N,v) is the set of allocations x such that x is feasible for N and no coalition
C ⊆ N can improve upon it.
The core has given property

Feasible Allocation
An allocation x = (xi, .., xn)is said to be feasible for the a coalition C if
I:
xi ≤ c(C)
i∈C

this means players in C can achieve their respective allocations in x by dividing among
themselves the worth v(C) that they would earn by cooperating.

Rational Allocations
A payoff allocation x = (x1, .., xn) is said to be coalitionally rational if
I:
xi ≥ v(C) ∀C ⊆ N
i∈C

it is also individually rational, as an individual will cooperate only when he gets a payoff
that is equal or more of that he would get if he plays without cooperation.

17
Example 1:Divide the Dollar Game
For the Divide the Dollar game(Version 1), C(N, v) is given by.
{(x1, x2, x3) ∈ R3 : x1 + x2 + x3 = 300; x1 ≥ 0; x2 ≥ 0; x3 ≥ 0}

The core treats the three players symmetrically and includes all individually rational.
In Version 2 of the game (where players 1 and 2 by themselves can earn 300 without the
involvement of player 3), the core will be
{(x1, x2, x3) ∈ R3 : x1 + x2 = 300; x1 ≥ 0; x2 ≥ 0; x3 = 0}

If the players get a nonzero allocation whenever any two players suggest the same
allocation (Version 3 of the game - three person majority game), it can be seen that the
core is empty. The following two insights provide a rationale for the emptiness of the core
in this case. First, when any player i obtains a positive payoff in a feasible allocation, the
other two players must get less than 300 which they would be able to gain by themselves.
Second, regardless of what the final allocation is, there is always a coalition that could gain
if that coalition gets one final opportunity to negotiate effectively against this allocation.

Example 2: Gloves
Mr A and Mr B are knitting gloves. The gloves are one-size-fits-all, and two gloves make a
pair that they sell for Ru 5. They have each made three gloves. How to share the proceeds
from the sale? Each man has three gloves, that is one pair with a market value of Ru5.
Together, they have 6 gloves or 3 pair, having a market value of Ru 15. Since the singleton
coalitions (consisting of a single man) are the only non-trivial coalitions of the game all
possible distributions of this sum belong to the core, provided both men get at least Ru 5,
the amount they can achieve on their own. For instance (7.5, 7.5) belongs to the core, but
so does (5, 10) or (9, 6).

18
8.3 The Shapley Value
The Shapley value is a popular solution concept in cooperative game theory that provides a
unique allocation to a set of players in a coalitional game.The Shapley value faithfully
captures the marginal contributions of the players in deciding the allocations.
Given a coalitional game, the core may be empty or may be very large or even uncountably
infinite. These certainly cause difficulties in getting sharp predictions for the game. The
Shapley value is a solution concept which is motivated by the need to have a solution
concept that would predict a unique expected payoffs allocation for every given coalitional
game.
It is denoted by φ(N, v) = (φ1(N, v), .., φn(N, v)), where φi(N, v) is the expected payoff of
player i. We can write it simply ass φi(v).

8.3.1 The Shapley Axioms

Axiom 1: Symmetry
The Shapley value of a player relabeled by a permutation, under the permuted value
function is the same as the Shapley value of the original player under the original value
function. This axiom implies that only the role of a player in the game should matter. The
labels or specific names used in N are irrelevant.

Axiom 2: Linearity
Given any two coalitional games (N ; v) and (N ; w), any number p ∈ [0; 1], and any player
i∈ N,
φi(pv + (1 − p)w) = pφi(v) + (1 − p)φi(w)
In other words, the Shapley value of a player for a convex combination of coalitional games
is the convex combination of Shapley values of the player in the individual games. This
axiom asserts that the expected payoff to each player is the same before resolution of
uncertainty and after resolution of uncertainty.

Axiom 3: Carrier
This axiom asserts that the players in a carrier set should divide their joint worth (which is
equal to the worth of the grand coalition) among themselves. This means the dummies are
allocated nothing. The above expression also illustrates a key fact that the Shapley value
always divides the worth of the grand coalition among the players of the game.

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Calculation of Shapley Value
There is exactly one mapping φ : R2n−1 → Rn that satisfies Axiom 1, Axiom 2, and Axiom
3. This mapping satisfies: ∀i ∈ N ; ∀v ∈ R2n−1
I: |C|!(n − |C| − 1)!
φi(v) = {v(C ∪ {i}) − v(C)}
C⊆N−i n!

The term |C|!(n−|C|−1)! can be interpreted as the probability that in any permutation, the
n
members of C are ahead of a distinguished player i. The term v(C ∪ {i}) − v(C) gives the
marginal contribution of player i to the worth of the coalition C. Thus the above formula
for φi(v) gives the expected contribution of player i to the worth of any coalition.

Divide the Dollar Game

The players wish to divide a total wealth of 300 (to be regarded as a real number) among
themselves. Each player can propose a payoffs such that no player’s payoffs is negative and
the sum of all the payoffs does not exceed 300. players get a zero payoffs unless players 1
and 2 propose the same allocation in which case the allocation proposed by players 1 and 2
is enforced. number of players
N = {1, 2, 3}; v(1) = v(2) = v(3) = v(23) = 0; v(12) = v(13) = v(123) = 300. The Shapley
value expression would be:
As N = 3 hence, N ! = 6. if we take C as 0 then we get 2 (v(1) − v(∅)) and if we take C = 2
6
we get, 1(v(12) − v(2)) and similarly we put C = 3, 23, we get:
6
2 1 1 2
φ1(v) = (v(1) − v(∅)) + (v(12) − v(2)) + (v(13) − v(3)) + (v(123) − v(23))
6 6 6 6
similarly,

φ2(v) = 2 1 1 2(v(123) − v(13))

6 (v(2) − v(∅)) + 6 (v(12) − v(1)) + 6 (v(23) − v(3)) + 6
φ3(v) = 2(v(3) − v(∅)) + 1 (v(13) − v(1)) + 1 (v(23) − v(2)) + 2 (v(123) − v(12))
6 6 6 6
we can conclude that,
φ1(v) = 200; φ2(v) = 50; φ3(v) = 50

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9 Game theory in real life problems
We all have our personal reasons for our choices. We choose according to the situation or
what we think is right for us and sometimes for others too. The aim of doing is what is
best for yourself. In economic terms, you are “best-responding” to other people’s actions in
a purely individual and self-interested way.

Evolution
Humans usually imitate other people in living and survival. Evolution is a popular
application of game theory; for example, people follow the trends and strategies for
survival. Survival not only depends upon fitness but instead also depends upon evaluating
how others in the same community are faring based on their actions. Because of this, it is
important to figure out how certain survival strategies come to be adopted

Market Shares and Stockholders

By investing in the stock market, you become a player. You have invested your money in a
company knowing that you will either make money or lose money, but you don’t know
what will happen. The company needs your investment to thrive. The decisions the
company makes will either drive the price of its stock up or down, which determines its
future success. The stockholder does not know what decisions the company will make, and
the company does not know what decision the stockholder will make.

Poker Card Game

Most of us have seen people losing huge amount of money in poker clubs in movies as well
as in real. Poker card game is a zero sum game because one wins exactly the amount one’s
opponents lose. They make strategies on their belief of what they think others strategies
are.

Bargaining Problems
We buy commodities, negotiate with people every day, we have our belief of how much a
particular thing cost and so does others. We negotiate to come to a point where we both
agree upon. We try to maximize our payoffs. Here payoffs does not depend upon money,
we also consider the perks and conditions with it.

Chess or any other games

We all have played the game chess once or more in our life. It depends upon the players,
how they use the moves to win the game. The rules of the game are known to both the
players and have remained unchanged which makes it a game of perfect information. So,

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chess is an example of game theory as both players know the possible moves and the effects
of those moves.
Same is the case with any other game, all players know the rules of games, and they make
strategies that will help then win the game.

War Strategies
These war strategies and military decisions are examples of game theory. In general, the
military head or commander select the course of action which offers the most significant
promise of success in view of the enemy’s capabilities of opposing him.

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