RESEARCH OF THE LABOR MARKET MODEL USING GAME

THEORY METHODS
Author: Denys Borovskyi
Advisor: Inna Zaletska
Odessa I. I. Mechnikov National University (Ukraine)

Abstrac. In this work, a signaling model of the labor market based on the
education system was considered. We reached a conclusion about finding the optimal
strategies of each player using the example of the "sender-receiver" signaling model.
Keywords: game theory, signaling game, Bayesian game, optimal strategies,
economics, mathematics.

INTRODUCTION
All issues encountered in the modern world have a rather complex structure.
Nevertheless, they all originate from the economic component. Therefore, in the
conditions of a difficult situation in the world economy, it is important to understand
the basic principles and laws that govern this economy.
Economic problems where the interests of two or more competing players
collide are especially relevant. Such parties pursue different goals - this is the basic
condition of a market economy. It is quite often necessary to analyze such situations,
therefore this problem is quite relevant.
In the future, we will say that the situation is a conflict if there is a subject of
conflict, there are interested parties, each of which has its own goal in relation to the
subject of the conflict and has determined possible actions (strategies) through which
it will try to achieve its goal.
LITERATURE ANALYSIS
So what is a game? The game is a system of rules that determines the possible
actions of participants, their number, the rules of distribution of winnings, which
depend on the behavior of each participant, as well as the outcome of the game as the
winnings of each player. To solve the game means to give recommendations to the
players on the optimal choice of strategy and to indicate the winnings of the player
who corresponds to the chosen strategy of behavior.
The subject of the study is the model of the conflict situation of the economic
market between buyer and seller. The object of the study is the strategy of both
participants to optimally resolve the conflict model. Solution methods are game theory
methods.
Let us turn to a brief historical overview of the emergence and development of
game theory. Already in the XVIII century, some formalized the strategic approach in
the behavior of market participants, including the work of J. Bertrand and A. Cournot.
Later, E. Lasker, E. Cermelo, E. Borel offered the world the idea of a mathematical
approach to conflict resolution. But the lack of relevant methodology for taking any
steps by market participants in the XX century gave impetus to the creation of game
theory. In their research, John von Neumann and Oscar Morgenstern concluded that
the specific behavior of a market participant is influenced not only by his personal
intentions and condition, but also by similar indicators of his competitors.
 In their work “Game Theory and Economic Behavior” Neumann and
Morgenstern formulated the concept of “game” as the activity of two or more people,
which has the conditions of the so – called. "Win". It is important to note that
participants in such a “game” can use certain “resources” and interact with each
other. Therefore, make any decisions based on the behavior of other participants. The
authors mathematically describe the means of finding optimal strategies – those that
lead to gain [1].
To further study conflict situations, we turn to theoretical materials.
The nature of player relationships affects the ability to form coalitions. Non-
coalition games are games in which players are unable to form coalitions.
By the nature of winnings, games are classified as zero – sum games and non –
zero – sum games. In the first case, it is a game in which the total capital of all
players does not change, but is redistributed between players depending on the results
of the game, ie the sum of players winnings is zero. Otherwise, the game will be with
a non – zero amount. An example of a game with a non – zero amount can be trade
relations between countries. As a result of applying their strategies, all countries can
benefit [1].
game is a non-coalition game in which each player has a finite

Bimatrix
number of strategies. Let the first player have , . The second player has
strategies, .The winnings of the first and second players are determined by

the matrices, respectively:

.
In the context of the study of the coalition-free game, it is important to mention
the concept of “equilibrium” as defined by John Nash. Equilibrium according to John
Nash is characterized by the fact that deviating from the balance of one player can not
increase his winnings, and thus the rational strategy of each player should be to
achieve balance.

The number of moves of the game is divided into: single-step and multi – step.
In the first case, the game ends after one move by each player. Multi – step games, in
turn, are divided into: positional – games in which there may be several players, each
of which can make moves. Winnings are determined depending on the results of the
game. If the moves in the game lead to the choice of certain positions, and it is
possible to return to the previous position, the game is stochastic. For the game we
have:
 In this situation , there is a draw of the game in which the number of
strategies for players is finite, but may be different. In turn, a new game can be

drawn in the game: .

Depending on the state of information, there are games with complete and
incomplete information. If at each stage each player knows which choices were made
by the players before, such a game is called with full information. Otherwise, the
game with incomplete information. An example of a game with complete information
is a game of checkers [1].
By repeating the bimatrix game repeatedly, players will choose their pure
strategies with a certain frequency. Therefore, we can move on to a new production -
bimatric game in mixed strategies (Bayesian game). We will consider a complete set
of probabilities the first player's application of his pure strategies to the
mixed strategy of the first player, and the full set of probabilities the
second player’s use of his pure strategies – the mixed strategy of the second player.
There are other types of games, other principles of game classification are also
possible.

By repeating the bimatrix game repeatedly, players will choose their pure
strategies with a certain frequency. So you can move on to a new setting of the game,

. This
the solution of which will provide a full set of probabilities and
new production is a matrix game in mixed strategies or a Bayesian game. Incomplete
game or Bayesian game in game theory is characterized by incomplete information
about opponents, but players have some confidence in the distribution of probability.
The Bayesian game can be turned into a game with complete but imperfect
information, assuming the assumption of a general a priori distribution. Unlike
incomplete information, imperfect information includes knowledge of opponents
strategies and winnings, but the game history (previous actions of opponents) is not
available to all participants. Bayesian equilibrium is a generalization of Nash
equilibrium in mixed strategies in the case of Bayesian games. The winning function
is a mathematical expectation of winning [2].
The paper will also use a decision tree – a mathematical model consisting of
arcs, decision nodes, event nodes and end nodes (outputs), which defines the decision
– making process so that it reflects every possible decision that precedes, subsequent
events or other decisions and the consequences of each final decision [3].

OBJECT, SUBJECT, AND METHODS OF RESEARCH

It is known from game theory that it is impossible to find the “perfect” solution
for all players, but to use the optimal solution is a very real task. This aspect is
especially relevant for the economy. Consider a market model with incomplete and
asymmetric information on the example of the game “buyer – seller”.
Let's imagine that there are two groups of employees: a group of people who
perform their work well (modern terminology calls such people "Cream") and a
group of people with low productivity (modern terminology calls such people
"Plums"). In the future, we will use this terminology. The work of the cream is
valued at 2 units, and the plums at 1. If the employer has no way to distinguish the
cream from the plums, then he would assign wages randomly: 1 with probability ρ
and 2 with probability 1-ρ, where ρ is the proportion of people in the plums group.
Then the average salary was equal to: 1 · ρ + 2 · (1 - ρ) = 2 - ρ. Instead, the smaller
the cream group, the more complaints about their average salary.
It should be noted that for a person who hires, productivity is the main factor
that cannot be ascertained in advance. Of course, plums will not inform management
that they have a low productivity ratio. But the management can use the signal -
education. The cost of education for plums for a year, let's say, will cost 1. Such
employees can hire tutors, go to extra classes, buy a lot of literature, buy courses, etc.
In turn, the cream will spend 1/2 during this time with the help of their abilities,
desire, skills and other factors. Then m years of education for a person from group 1
costs m, and for a person from group 2 it costs m/2.
In the original simple model of A. Spence, it is assumed that education affects
the productivity of a person in the specialty he claims. Note that the cost of education
is inversely correlated with human productivity (an unobservable factor for the
employer). We have a signaling game where the sender is the employee and the
receiver is the employer. There are two types of senders: T = {1,2}, where type t ∊
{1,2} means that the person belongs to group t. The message m∊ M = [0,∞ ) means
that a person studied for m years (not necessarily whole). The recipient has two
actions: A = {1,2}, where action a ∈ A means "assign salary a". The employer wants
to assign a salary to his employee that corresponds to his productivity. Here, for any t
∊ T, m ∊ M, and a ∊ A, the payoffs of the sender and the receiver, respectively, are
m 2
ɸ S ( m, a ; t )=a− , ɸ R ( m, a ; t )=−( t−a ) .
t

The recipient's presentation of the types of corrections are as follows:

ϻ ( 1 ) =ρ , ϻ ( 2 )=1− ρ.
 Suppose that the employer determined the level of education m∗ ∈ (1, 2), that
the productivity of a person who studied m < m∗ years is equal to 1 with probability
1, and the productivity of a person who studied m ≥ m* years is equal to 2 with
probability 1. The manager uses a threshold strategy
{
¿
a ( m )= 1 , m<m¿
~ ¿

2 ,m ≥ m

which representation of the type of employee after receiving the message m is

determined by:
{ {
¿ ¿
ϻ ( 1∨m )= 1 , m<m ¿ ϻ ( 2∨m )= 0 , m<m¿
0 , m≥ m 1 ,m ≥ m

{
¿
a ( m )= 1 , m<m¿
~ ¿

2 ,m ≥ m

m
c t t ( m) = - the cost of education for people of group t. The profit of an
t
employee from group t (t = 1,2) is equal to
ɸ S ( m, ~
a ¿ ; t ) ≝ u t ( m )=~
a ¿ ( m )−c t (m).

Thus, the group of plums determines its optimal strategy m1=0 , maximizing
u1 (m). Then the profit is equal to u1 (m1 )=1−m1=1 . And the optimal strategy of the
¿
¿ m
cream group will be m2=m . Then the gain is equal to u2 (m2 )=2− 2 >1.
Regarding the equilibrium situation: it was shown that the optimal strategy of
the sender for the strategy of the receiver ~a ¿is the strategy ~
m
¿

~
m ( 1 )=0 , ~
¿ ¿ ¿
m ( 2 )=m .

It is worth noting that in the situation (~

m¿ , ~
a¿ ) the gain of the recipient is zero.
This is the most likely event. Therefore, the receiver's strategy ~a ¿is the optimal
response to the sender's strategy ~¿
m.
However, it is advantageous for creams to signal the cost of education if
¿
¿ m
m <2 ρ . Then their profit 2− will be greater than the average profit 2− ρ, which can
2
be obtained by the receiver if he does not have any information about his employees.

RESULTS
 Fig.1. Optimal game strategies

CONCLUSIONS
In this paper, we came to the conclusion that the use of strategy is an important
aspect of the functioning of the economic market, for which, of course, the concept of
“game” is relevant. The strategy was studied as a means of creating an optimal model
for all participants in the “conflict”. It has been shown that in the absence of
information from buyers, low-quality cheap goods displace expensive quality goods
from the range. Based on the analysis, the following conclusions can be drawn about
the prospects for the use of game theory and formal models in the study of modern
conflicts. An important but insufficiently studied area is the analysis of the actions of
opponents in several periods, the strategic behavior of participants in the presence of
incomplete information. Another area that is practically not taken into account in both
classical and modern research and games is the moral norms, values of society, the
moral side of each strategy. The main feature of the studied theory will be the aspect
of “uncertainty”. Game theory allows you to structure the process of making optimal
strategic decisions in a situation of uncertainty, when it is not known how opponents
will behave in the game, which, of course, is one of the properties of the economic
market.

REFERENCES
1. Borovskiy D., Kichmarenko O. (2022). Research of the model of relations by methods of
game theory. https://card-file.ontu.edu.ua/handle/123456789/23774
2.von Neumann, John; Morgenstern, Oskar (1944), “Theory of games and economic
behavior”, Nature, Princeton University Press, 157 (3981): 172 p.
3. Gibbons R. Game Theory for Applied Economists. – Princeton University Press,
Princeton,New Jersey, 1992. – 288 p.
4. Phlips, Louis (June 30, 1983). The Economics of Price Discrimination. Cambridge
University Press. p. 239.