6

Game Theory and Strategies

«Where the måtual conlicting situation is not solved by individuals or
rTanizations, game theory solves it by presentËng a feasible solution."
Introduction
Decision making becomes difficult in the case of a competition or in conficting
styation between two or more persons but by following game theory an individual
can maximize his gains by.selecting the most profitable strategy after examining all
the possible alternative strategies. Game theory follows the assumption that the
strategies to be adopted by different competitors can be pre-determincd.
Game theory was propounded by Prof. Jobn von Neumann and Oscar
Morgenstern in their book "Theory of Games and Economic Behaviour" published
in 1944. However, Prof. John von Neumann is said to be the creator of Game theory.
In this book, they gave a new approach to the problems involving conflicting situation.
But, now-a-days gamne theory has become an integral part of operations research and
administration, economics,
isvery widely used in variety of fields such as business,
conomic administration, financial administration, accountancy and statistics,a
pychology, philosophy, political science and military training etc. Game theory is
technique of decision making. This technique isapplied under a competetive situation
interests and where action
Where there are two or more competitors with conflicting
one depends upon the action taken by other. Thus lack of the decision taken
en by calculated to ensure that it is least advantageous to
Dconficting situation must be
the opponent. interactive decision making where the
Game theory is a theory based on
not only to analyse the alternative course of action available to
Sion maker has to the opponent. Game theory can
him but also consider the impact of the decisions
deals with making decisions when two or
be regarded as "a body of knowledge that are cngaged under conditions of
rational competitions
Ore intelligent and
ompetition and conflict." handle conflicting situations between two or more
to
Game theory is used organizations who carry on some specific activities
individuals or purpose of gaining sorme
independent
benefits at the cost
rules withthe a
ccording to a given
sf the Opponents. In
set of
game theory decisions are taken in such
decide his policyin such
situation which are
a way that his losses
has to conditions. The above chart shows the
ot certain
and the participantunfavourable
te even in the under the condition of uncertainty.
minimisedof taking decision
Possibihties
 Game
6.2
Theory and
Decision Making Sraieny
Under Conditions of Under Conditions of Risk
Under Conditions
Certainty
Uncertainty
Non-Competitive Situations
Compet
Situatioitnsive
Pure Strategy
Mixed Strategy
2 x 2 Strategies 2 Xn or m x 2Strategies mXn Stategies
Arithmetic (a) Arithmetic Method Linear Programming Method
Method (b) Graphic Method
Assumptions of Game Theory
Following assumptions must be satisfied to apply the technique of o
theory-
1. The number of competitors
2. The players participating in the competition is knowa
3. It is assumedsimultaneously choose their
that the strategies to be respective courses of action
transforrned mathematically. adopted by competitors can
4. The profit or loss to be
borne by competitors
is fixed and determined the
competition in advance. participating in
5. Each participant in the
courses of action, game has available to him a fnite set of
pos
6. Each participant is
aware of the strategies available with his
does not know the strategy opponc
7. It is assumed that each being adopted by the opponent.
8. It is assumed that
each
competitor behaves rationally and intelige
the losses. player attempts to maximize the gains and u
9.
Participants of the game have a
the solution of the perfect of the gamebec
by them. competition is possibleknowledge adopt
10. The decision
of
through the strategies
these to each the game can be positive, negative or zero oreither
11. It is
assumedparticipant.
that each player
independent takes his
opponents. manner without any direct decision
individualy
communication with
12. It is
relatingassumed
to the that cach
game he player has the
plays. knowledge
of all the
informatú
Game
Theory and Strategies 6.3
13. It is assumed that the pay-offs (Payments to be made in settlement of the
game) are pre-determined in reaction to the different courses of actions
of the players i.c. the
participants.
Technical Terminology
Following terms are used in
Game
1. GameIt means a competitiontheory
:
or a conflicting situation to whicn u
competitors are attracted to optimize their obiccive in terms of proits, os
expenscs etc. at the cost of their opponents.
2. Play-The course of action adopted by the participants of the game S
known as play.
3. Player-Player refer to the participant or competitor taking active part in the
game. There can be 2 or more than 2 players in a game The player may be an
individual, a firm, organization etc.
4. Pay-off-Pay-off is the. quantitative measure of achievement 1.¬. te
outcome of playing the game. It represents the net gain the strategy brings
to the firm for any given counter strategy of the competitor. Net gain can
be in the form of increase in market share, profit etc.
5. Strategy-It refers to the skills, ways or option which a player selects for
the optimisation of his objective ie. maámization of profits or
minimization of losses. The strategies of a game can be divided into
following parts
(a) Pure Strategy : If the players select the samne strategy its known as
pure strategy. In such costs cach player knows what the other player
would do against his selected strategy. Infact, it is a deterministic
attempt known in advance to cach participant. The game of pure
strategy avoids the situation of uncertainty because the participants
are well aware of the result.
(b) Mixed Strategy : Under the condition of mixed strategy the participant
does not know about the strategies being followed by his opponent.
h mixed strategy the participants opt to select their strategies on the
basis of probabilities, so it is also known as probabilistic competition.
In short, the mixed strategy refers to a decision taken in advance of
all plays to select a course of acion in accordance with some fixed
proportions.
6. Pay-off Matrix : A table of outcomes of different strategies of a game is
known as pay-of matrix.
7. Maximin : Maximin is the value which is maximum of the minimum values
of a row.
8. Minimax : Minimax refers to the value which is minimum of the maximum
values of a column.
9. Saddle Point : Any number of the pay-oif matrix which is maximum of its
row minima and minimum of its column mnaxima is called saddle point
Thus, in a pay-off matrix there exists a saddle point where the maximin is
cqual to the minimax, In a game there can be one or more than one saddle
 6.4 Game
Theory and
points. The saddle point is also regarded as an
pay-off matrix. Equilbrium Srateye
10. Value of Game : The value of game mneans the sum of the pay offs
at the level of thcir optimum strategy. The value of the gamne
the cquilibrium point of the pay-olf matrix. The game is said is
the valuc of game is zero but unfair if the value of game is
expeded
to beequal h
not zeo.fair
Two Person Zero Sum Game
In a situation where there are only two players who have the position o
cOmpetition, the gains of one competitor indicate the losses of
actual gains of both the competitors will be equal to zero and opponent, the pertea
it is Sum of
person zero sum game. In other words, it can be said that a game is regarded
called as twn
game when the sum of the pay-off gained and lost by each of the
game amounts to zero. In this type of game, the gain of one is participant
cqual to 1n the.
suffered by the other. he los
For example : 100 customers are to be divided between two
Ram and Shyamn, If70 customers go to Ram then 30 customers will go to Shyam v| shop- keepers
if Ram has 20 customers then Shyam will have 8O
customers. It shows that inere
or decrease in the customers of Ram will result into
decrease or increase in
customers of Shyam, Hence when we sum the gains and loss for
both
the.result is zero. This is why these games are called zero sumn games. shopkeepen,
[In this chapter the Game theory has been confined only to
the twO Dean
zero sum gamej.
Presentation of Two Person Zero Sum Game
To represent the game in terms of adopted strategies by two
related outcome, we can draw a simple matrix as follows : players and thei
Player B's strategies
B1 B2 B3 Bm
A1 A11 A12 A13 Atm
A2 A21 A2 A23 Am
Player A's Strategies A3 A31 A32 A33 AJm
AA A41 A42 : dA43 AAm

An Cat Cn2 Ca3 Cat

The above matrix shows the values
player Aand Bsuch that if Aadopts strategy as'outcomes of different
A corresponding strategies
to Bs straleg)folowe
as B,then
outcome will be written as C13.
The matrix los
player B, player Awith equal loss to player Bshows
by thethegivengainor ofadopted A with equal
player strategy. The positi
hes of C; will be indicating gain of A and
negative value loss to A.
Assumptions of wo Person Zero Sum Game
() There will be only two participants in the game and both try tomaximi
their profits.
 6.5
Theory and Strategies
The profits ge compeitor will be cqual to the losses of other
compeògr and he sum of profts and losses of both the players will be
equal to ZrO.
The paiagants
stratemes wtheir
beinggadopted by the
pay-off and cach participant knows the
be faii opponent.
C Bah partidipant acts ratçonally and tries to avoid the
 Solution of Mixed Strategy Problems
We have discussed in the above illustrations the game situations which have a
saddle point (S) and we fnd out its solution in terms'of pure strategies-the maaimin
and minimax. But in the games without saddle point, the solution of such problems
is arrived at by employing mixed strategies. Agame of mixed strategy is that in which
a player does not know exactly the course of action his opponent is going to adopt
but forecast them purely on guess basis. Amixed strategy represents a combination
of two or more strategies at a tim on the basis `of pre-determined probabilities.
Therefore, in the game of mixed strategy a player decides in advance to use
strategically all or some of his available courses of action in some certain proportion.
In mixed strategy, we determine the probabilities of the different strategies for both
the players with their expected values of the game. The problems of mixed strategy
can be divided into 3 parts as follows
()) 2 × 2 Game
(i) 2 X n and m x 2 game
(t) mXngAme
 Game Theory and Strategies

6.10 arithmetically which is

made
game is showthe various opions
of 2 x 2 oddoments
In game theory the solution available considered while using oddoments
called Qddoments Method'. Thepoints should be
adopted by the playcrs. Following participants should be
method the strategy of the are not in the order
method strategies
) To apply oddomentsstrategy. However,dominance
ifthe
the strategies.are conerted
the form of 2 x 2 principle of
of 2 x 2then by applying
into 2x2. first row is calculated. and placed
entries in diference of the entries in
difference ofthe positive
() The positive row. Similarly the the first row.
before the second placed before
calculated and in the first column is
Second row is difference of the entriesLikewise, the positive
Similar to row, the positive second column.
(ii) before the and placed
calculated and put in the second column is calculated
difference of the entries
before 1st column. kaown as oddoments which
thus calculated are adopted by the
(iv) The differencesproportion of different strategies
represent the
participants.
used only when the sunm of row oddoments
method can be
(v) The oddoments
and column oddoments is equal. game is calculated as follows -
the value of
(vi) In oddoments method Player B
Player A
B1 B2

B B1 B2 Oddoments
A

A1 |b1-b2|
2 0 14
A2 b b2
=8: 6 2
Oddomentsa2-b2l a1 -b1l 16
10 16

From the above' table it is cleàr that player Ashould use strategy Aj and A
in the proportion of 14 and 2respectively and player Bshould use the strategy B;
and B, inthe proportion of 6 and 10respectively.
The value of game is calculated with the help of following formula
Value of Game V=
Where
aj = Entry of first row and first column.
bË = Entry of second row and first column,
Theoryand Strategies 6.11

Entry of first row and second column.

b2 Entry of second row and second column.
Positive Value of the difference bctwcen a, and a2
-b2l = Positive Value of the difference bctwcen b, and b2
+ |b1 - b2l = Sum of the row proportion
of the above gamne V=
Value of 2x 14 + (-8) x 2
16 (Sum of oddoments)
The overall solution of the above game can bebe represented as follows
0otimum strategy for row player A = |16 and 2
16

Optimum strategy for column player BB = l6

and
16
3
Value of Game : V = 4