Determination of Best

Strategy
IE402 Optimization Project
Name: Chinmay Vaishnav
Student ID: 202101157
 INTRODUCTION (Game Theory)
 Formal Language for modelling and analyzing the
interactive behaviours of players
 Provides mathematical methods necessary to analyse the
decisions of two or more players based on their
preferences to determine an outcome
 John von Neumann pioneered modern game theory
through his book ‘Theory of Games and Economic
Behaviour’ written alongside co-author Oskar
Morganstern.
 For this reason, he is credited as the Father of Game
Theory.
 Analyzing game theoretic situations is a practical
application of linear programming.
 Finite Two-Person Zero-Sum game: one of the simplest
forms of the game
Formulation of the Problem Statement
 Let’s consider an example of two companies wanting to launch a new
product.
 Since they wish to launch the same product, they have devised strategies to
attract the audience towards one’s product.
 To improve its market share, company A decides to launch the following
strategies:
A1 = Give discount coupons
A2 = Home Delivery services
A3 = Free Gifts
 Company B decides to use media advertising to promote its product:
B1 = Internet
B2 = Newspaper
B3 = Magazine
 Formulation of the Problem Statement
(Continued)
 Next, we have a payoff matrix that summarizes the outcomes of both companies
A and B after implementing their strategies:

Basically, in a payoff matrix, each row

describes the strategy of one player and each
column describes the other player’s strategy.
The matrix entry at the intersection of each row
and column gives the outcome of each player choosing
the corresponding strategy.

 By using linear programming methods, determine the best strategies for both companies.
 Solution to the given problem

 Firstly, we compute the value of the game using the minimax-maximin method.

 Here, minimax = -2 and maximin = 3.

 No saddle point. Value is between
-2 and 3.

 The value of the game, in this case,

might be negative or zero.
 So we add a constant to all entries of
payoff matrix.
 Solution to the given problem
(Continued)
 In this case we add 3 to all elements to get:
 Let V = value of the game
 Let p1, p2, p3 be the probabilities of selecting
strategies A1, A2, A3 by company A.
 Let q1, q2, q3 be the probabilities of selecting
strategies B1, B2, B3 by company B.
 Solution to the given problem
(Continued)
 Company A's objective is to maximize the expected gains, which can be
achieved by maximizing V, i.e., it might gain more than V if company B adopts
a poor strategy. Hence, the expected gain for company A will be as follows:
6p1 + 4p2 + p3 ≥ V Dividing the constraints 6p1/V + 4p2/V + p3/V ≥
1
-p1 - 4p2 + 7p3 ≥ V by V, we get: -p1/V - 4p2/V + 7p3/V ≥ 1
5p1 + 0p2 + 10p3 ≥ V 5p1/V + 0p2/V + 10p3/V
≥1
p1 + p2 + p3 = 1 p1/V + p2/V + p3/V =
1/V
and p1, p2, p3 ≥ 0

To simplify the problem, we put:

p1/V = x1, p2/V = x2, p3/V = x3
 Solution to the given Problem (Continued)
 To maximize V, company A can
Minimize 1/V = x1 + x2 + x3
Subject to: 6x1 + 4x2 + x3 ≥ 1
-x1 - 4x2 + 7x3 ≥ 1
5x1 + 0x2 + 10x3 ≥ 1
and x1, x2, x3 ≥ 0.
 Company B's objective is to minimize its
expected losses, which can be reduced
by minimizing V, i.e., company A adopts
a poor strategy. Hence, the expected
loss for company B will be as follows:
6q1 - q2 + 5q3 ≤ V
4q1 - 4q2 + 0q3 ≤ V
q1 + 7q2 + 10q3 ≤ V
q1 + q2 + q3 = 1
and q1, q2, q3 ≥ 0.
 Dividing the constraints by V, we get:
 6q1/V - q2/V + 5q3/V ≤ 1
4q1/V - 4q2/V + 0q3/V ≤ 1
q1/V + 7q2/V + 10q3/V ≤ 1
q1/V + q2/V + q3/V = 1/V
 To simplify the problem, we put
q1/V = y1, q2/V = y2, q3/V = y3
 In order to minimize V, company B can:
 Maximize 1/V=y1+y2+y3
subject to
6y1 - y2 + 5y3 ≤ 1
4y1 - 4y2 + 0y3 ≤ 1
y1 + 7y2 + 10y3 ≤ 1
 and y1, y2, y3 ≥ 0
 To solve this problem, we introduce
slack variables to convert inequalities to
equalities.
 Solution to the given Problem (Continued)
 The problem becomes: Maximize y1 + y2 + y3 + 0y4 + 0y5 + 0y6
 s.t. 6y1 - y2 + 5y3 + y4 = 1 Initial Basic Feasible Solution
 4y1 - 4y2 + y5 = 1 y1 = 0, y2 = 0, y3 = 0, z = 0
y1 + 7y2 + 10y3 + y6 = 1 y4 = 1, y5 = 1, y6 = 1.
 Table 1:

Here, key column = y1 ; key row = y4 ; minimum positive value = 1/6 ;

pivot element = 6.
Therefore, y4 departs and y1 enters.
 Solution to the given Problem (Continued)
 Table 2:

 Final Table: Linear Programming Method

 Solution to the given Problem (Continued)
 The values for y1, y2 & y3 are 8/43, 5/43 & 0 respectively.
 I/V = y1 + y2 + y3 = 8/43 + 5/43 + 0 = 13/43 or V = 43/13.
 Company B's optimal strategy.
q1 = V X y1 = 43/13 X 8/43 = 8/13
q2 = V X y2 = 43/13 X 5/43 = 5/13
q3 = V X y3 = 43/13 X 0 = 0

 Hence, company B's optimal strategy is (8/13, 5/13, 0).

 Company A's optimal strategy:

 The values for x1, x2 & x3 can be obtained from the final simplex table.
 x1 = 6/43, x2 = 0 & x3 = 7/43
p1 = V X x1 = 43/13 X 6/43 = 6/13
 p2 = V X x2 = 43/13 X 0 = 0
p3 = V X x3 = 43/13 X 7/43 = 7/13

 Hence, company A's optimal strategy is (6/13, 0, 7/13).

Two more examples of Game Theory
Problems
 Conclusion:

 Minimax is a backtracking algorithm used in decision-making and

game theory to determine the best move for a player, provided the
opponent also plays optimally. It is commonly employed in two-player
turn-based games such as tic-tac-toe, chess, backgammon, etc.
 The simplex algorithm is an iterative process that relies on mathematical
calculations and logical reasoning to find the optimal solution to a linear
programming problem. It is efficient and reliable and is also used in mixed
integer programming.
 However, this method is useful only for systems of inequalities involving two
variables.
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