THEORY OF GAMES

In today's modern world, life is full of challenges and competition. While solving many problems of life,
we analyses the situation that involves opposing parties/players are under decision making process
involving conflict interest. The action of one player depends on the action of the opponent player. Such
situations are known as "conflicting situations" Each player acts rationally and tries to resolve the
conflict to his /her own favor.

The term “game" refers to a conflicts between two or more persons/organisations/ parties. It is defined
as an activity between 2 or more persons involving activities by each person according to a set of rules,
at the end of which person receives some benefits/satisfaction or suffers loss. The approach of this
chapter is to determine the best course of action for a firm in view of the expected counter moves from
the competitors. It deals with competitiveness of decision making under uncertainty.

TERMINOLOGY:

• PLAYER: A competitor in a game is known as player/parties/competitors. A game with two

players is known as "two person game/two person zero sum games"(n = 2). Here, gain for one
player is loss for another player. A game with more than two players is called "n person game".
(n>2)

• GAME: A game represents a competitive situation between two players and played with certain
predefined rules. The Maximizing player tries to maximize his gains and the minimizing player
tries to minimize his losses by selecting the right course of action simultaneously.

• STRATEGY: A set of alternative courses of action available to players based on advanced

knowledge is known as “strategy”.

TYPES OF STRATEGIES:

• Pure strategy: When a player selects the same strategy each time. (P1 = 0, P2= 1, P3=0).

• Mixed strategy: Here a player follows more than one strategy. Each strategy is less than 1. If
the player selects his courses of action in accordance with some fixed probability. (P1= 0.65,
P2= 0.35, P3 = 0)

• PLAY: A play occurs when each player selects his strategies. The choices made by both
players are made simultaneously.

• OPTIMUM STRATEGY: A course of action which puts the player in the most preferred position.

• SADDLE POINT: MAXIMIN VALUE = MINIMAX VALUE.

• MAXIMIN PRINCIPLE: Maximize the minimum guaranteed gain of Player “A”. The player
adopts a pessimistic attitude and plays safe.

• MINIMAX PRINCIPLE: Minimize the maximum losses. The player plays safe.
 • VALUE OF GAME: If the game has a saddle point, then the value of cell at saddle point is called
Value of game.

• TYPES OF GAMES:

• Two Person Game: Games with only two players, it is known as two person games.

• N-Person game: When the number of competitors are n ( N>2), then the game is known as N-
Person game.

• 2-person zero sum games: When only two players are involved in the game and if the gain
made by one player is equal to the loss of the other. (EG: 10 % loss made by player A = 10%
gain made by player B.)

• Fair game: When the value of a game is zero it is called a Fair game.

• Non-zero sum game: When the sum of gains or losses is not equal to zero, it is called a "non-
zero sum game".

• Payoff Matrix: Outcome of different combinations of strategies is called “Payoff”.

1 2 3
1 20 10 22
2 30 -40 38
3 15 8 25
GAIN LOSS
+ PLAYER “A” PLAYER” B”
-(EG:-40) PLAYER” B” PLAYER “A”

PRACTICAL PROBLEM

Using the principle of MAXIMIN-MINIMAX PRINCIPLE solve the following games: - (ZERO SUM GAMES)

A.
PLAYER”B”

I II III

PLAYER “A” I 6 8 6

II 4 12 2

B.
PLAYER”B”

B1 B2 B3 B4

PLAYER”A” A1 13 14 -4 -12

A2 8 9 0 5
 A3 7 -5 -2 -8

A4 -9 -5 0 -2

C. Two firms, Lacko textiles & Rayon textiles have 3 strategies each to select from. The 3 strategies are
no advertisements, using moderate advertising & using heavy advertising. You are given the payoff
matrix from view point of Lacko textiles, showing its market share under several combinations of
strategies:
PAYOFF IN ₹ 10,000/-

NO ADVST. (I) MOD ADVST. (II) HEAVY ADVST (III).

LACKO TEXTILES NO ADVST. (I) 50 40 28
MOD ADVST. (II) 70 50 45
HEAVY ADVST (III). 75 52 50

D.
(PAYOFF IN ₹ ) PLAYER “B”
I II III IV
PLAYER “A” I 500 260 200 210
II -50 -100 -40 240
III 200 400 160 -20
IV 250 300 100 50
E.
PLAYER”Y”

I II III

PLAYER “X” I 100 80 40

II -70 60 -20

F.
PLAYER”Q”

I II III

PLAYER “P” I 130 100 105

II -50 -20 120

III 200 80 -10

G.
PLAYER”B”

I II III

PLAYER “A” I 220 150 170

II -50 -40 -20

III 140 120 100

H.
BETA

I II III

ALPHA I -100 50 70

II -50 40 -200

III 100 120 150

I.
PLAYER”B”

3 -1 4 6 7

PLAYER “A” -1 8 2 4 12

16 8 6 14 12

1 11 -4 2 1

J.
PLAYER”B”

B1 B2 B3 B4

PLAYER “A” A1 42 18 -5 -20

A2 20 20 0 18

A3 24 -15 -12 30

H.
FIRM”B”

I II III IV

FIRM “A” I -5 2 1 20

II 5 5 4 6

III 4 -2 0 -5

Using the principle of MAXIMIN-MINIMAX PRINCIPLE solve the following games: - (MIXED STARTEGIES)

A.
PLAYER”Y”

I II

PLAYER “X” I 9 7

II 5 11

B.
 PLAYER”B”

I II

PLAYER “A” I 3 -2

II 2 5

C.
PLAYER”Y”

I II

PLAYER “X” I 4 -4

II -4 4

D.
PLAYER”Y”

I II

PLAYER “X” I 8 -3

II -3 1

Solve the following game using the DOMINANCE PRINCIPLE

1.
PLAYER “B”
I II III IV V
PLAYER “A” I 3 5 4 9 6
II 5 6 3 7 8
III 8 7 9 8 7
IV 4 2 8 5 3

2.
PLAYER “B”
B1 B2 B3 B4 B5
PLAYER “A” A1 9 3 1 8 0
A2 6 5 4 6 7
A3 2 4 3 3 8
A4 3 6 2 2 1
3.
PLAYER “B”
B1 B2 B3 B4 B5
PLAYER “A” A1 20 30 50 60 80
A2 100 120 110 140 150
A3 30 40 70 50 90
A4 90 40 80 50 30
A5 60 70 30 80 10
4.
PLAYER’Y’

YI Y2 Y3

PLAYER’X’ X1 -4 6 3

X2 -3 -3 4

X3 2 -3 4

5.
PLAYER “B”
B1 B2 B3 B4 B5
PLAYER “A” A1 2 4 3 8 4
A2 5 6 3 7 8
A3 6 7 9 8 7
A4 4 2 8 4 3
6.*
PLAYER “B”
B1 B2 B3 B4
PLAYER “A” A1 3 2 4 0
A2 3 4 2 4
A3 4 2 4 0
A4 0 4 0 8
6.
PLAYER’Y’

YI Y2 Y3 Y4

PLAYER’X’ X1 -5 3 1 20

X2 5 5 4 6

X3 -4 -2 0 -5

7.
PLAYER’Y’

YI Y2 Y3 Y4

PLAYER’X’ X1 8 10 9 14
 X2 10 11 8 12

X3 13 12 14 13

8. FIND RANGE OF “p” & “q”.

PLAYER’Y’

YI Y2 Y3

PLAYER’X’ X1 2 4 7

X2 10 7 q

X3 4 P 8