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# GAME THEORY AND ITS APPLICATION S

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CONTENT

What is game theory Applications Definitions Assumptions Game theory Models with examples (Zero sum game, Prisoners Dilemma etc) Saddle points Nash equilibrium Further studies

## WHAT IS GAME THEORY

Theory is associated with the research of John von Neumann and Oskar Morgenstern in early 1940s

## GAME THEORY APPLICATIONS

In Economics decision making Bargaining Military strategies Computer networking, network security

## GAME THEORY DEFINITION

Theory of rational behavior for interactive decision problems. In a game, several agents strive to maximize their (expected) utility index by choosing particular courses of action, and each agent's final utility payoffs depend on the profile of courses of action chosen by all

## agents. The interactive situation, specified by the set of participants,

the possible courses of action of each agent, and the set of all possible utility payoffs, is called a game; the agents 'playing' a game are called

the players.

DEFINITIONS

Definition: Zero Sum Game A game with two players in which the gain to one player is equal to the loss to the other player
Eg : Two companies are the only manufactures of a particular product, they compete each other for market share

DEFINITIONS

Definition: Maximin strategy If we determine the least possible payoff for each strategy, and choose the strategy for which this minimum payoff is largest, we have the maximin strategy.

FURTHER DEFINITIONS Definition: Constant-sum and non constant-sum game If the payoffs to all players add up to the same constant, regardless which strategies they choose, then we have a constant-sum game. The constant may be zero or any other number, so zero-sum games are a class of constant-sum games. If the payoff does not add up to a constant, but varies depending on which strategies are chosen, then we have a non-constant sum game

## GAME THEORY :ASSUMPTIONS

(1) Each decision maker has available to him two or more well-specified choices or sequences of choices.
(2) Every possible combination of plays available to the players leads to a well-defined end-state (win, loss, or draw) that terminates the game. (3) A specified payoff for each player is associated with each end-state.

## GAME THEORY :ASSUMPTIONS

(4) Each decision maker has perfect knowledge of the game and of his opposition.
(5) All decision makers are rational; that is, each player, given two alternatives, will select the one that yields him the greater payoff.

## Two-person, zero-sum games.

Two-person, constant-sum game.

## Two-Person Non constant-Sum Games

TWO PERSON ZERO-SUM AND C O N S TA N T- S U M G A M E S Two-person zero-sum and constant-sum games are played according to the following basic assumption: Each player chooses a strategy that enables him/her to do the best he/she can, given that his/her opponent knows the strategy he/she is following. A two-person zero-sum game has a saddle point if and only if Max (row minimum) = min (column maximum) all all rows columns

b1 b2 b3 2 1 0 2
Raw Minimum

Company A

a1 a2 a3
Maximum

4 -1 5

3 4 -2

2 -1 -2

Strategies

5 4

## Example from text book

ZERO-SUM GAME

Game theory assumes that the decision maker and the opponent are rational, and that they subscribe to the maximin criterion as the decision rule for selecting their strategy This is often reasonable if when the other player is an opponent out to maximize his/her own gains, e.g. competitor for the same customers. Consider: Player 1 with three strategies S1, S2, and S3 and Player 2 with four strategies OP1, OP2, OP3, and OP4

ZERO-SUM GAME
OP1 S1 Player 1 S2 S3 Column maxima 12 5 3 12 Player 2 OP2 3 4 0 4 minimax OP3 9 6 6 9 OP4 8 5 7 8 Row Minima 3 4 0

maximin

Using the maximin criterion, player 1 records the row minima and selects the maximum of these (S2) Player 1s gain is player 2s loss. Player 2 records the column maxima and select the minimum of these (OP2)

example

ZERO-SUM GAME
OP1 S1 Player 1 S2 S3 Column maxima 12 5 3 12 Player 2 OP2 3 4 0 4 minimax OP3 9 6 6 9 OP4 8 5 7 8 Row Minima 3 4 0

maximin

The value 4 achieved by both players is called the value of the game The intersection of S2 and OP2 is called a saddle point. A game with a saddle point is also called a game with an equilibrium solution. At the saddle point, neither player can improve their payoff by switching strategies

example

T W O P E R S O N N O N C O N S TA N T S U M G A M E

Most game-theoretic models of business situations are not constant-sum games, because it is unusual for business competitors to be in total conflict

As in two-person zero-sum game, a choice of strategy by each player is an equilibrium point if neither player can benefit from a unilateral change in strategy

PRISONERS DILEMMA

Two suspects arrested for a crime Prisoners decide whether to confess or not to confess If both confess, both sentenced to 3 months of jail If both do not confess, then both will be sentenced to 1 month of jail If one confesses and the other does not, then the confessor gets freed (0 months of jail) and the non-confessor sentenced to 9 months of jail What should each prisoner do?

## Prisoner 2 Confess Prisoner 1 Confess -3,-3 Not Confess 0,-9

Not Confess

-9,0

-1,-1

Each players predicted strategy is the best response to the predicted strategies of other players No incentive to deviate unilaterally neither player can benefit from a unilateral change in strategy Strategically stable or self-enforcing Prisoner 2 Confess Prisoner 1 Confess -3,-3 Not Confess 0,-9

Not Confess

-9,0

-1,-1

NASH EQUILIBRIUM

## Prisoner 2 Confess Prisoner 1 Confess -3,-3 Not Confess 0,-9

Not Confess

-9,0

-1,-1

MIXED STRATEGIES
A probability distribution over the pure strategies of the game Rock-paper-scissors game
Each player simultaneously forms his or her hand into the shape of either a rock, a piece of paper, or a pair of scissors Rule: rock beats (breaks) scissors, scissors beats (cuts) paper, and paper beats (covers) rock

No pure strategy Nash equilibrium One mixed strategy Nash equilibrium each player plays rock, paper and scissors each with 1/3 probability

FURTHER STUDIES
Will Game Theory give us the optimum or best solution/decision? When there is n number of players and n number of strategies need to go for Leaner programming.

## Multi agent Systems: Algorithmic, Game-Theoretic, and Logical Foundations

by Yoav Shoham, Kevin Leyton-Brown Publisher: Cambridge University Press 2008 ISBN/ASIN: 0521899435 ISBN-13: 9780521899437 Number of pages: 532 Description: Multiagent systems consist of multiple autonomous entities having different information and/or diverging interests. This comprehensive introduction to the field offers a computer science perspective, but also draws on ideas from game theory, economics, operations research, logic, philosophy and linguistics. It will serve as a reference for researchers in each of these fields, and be used as a text for advanced undergraduate and graduate courses.

## Game Theory for Applied Economists Robert Gibbons

This book introduces one of the most powerful tools of modern economics to a wide audience:

## Strategy: An Introduction to Game Theory, 2nd Edition Joel Watson

Book Description

October 16, 2007 | ISBN-10: 0393929345 | ISBN-13: 978-0393929348 | Edition: 2 Strategy, Second Edition, is a thorough revision and update of one of the most successful Game Theory texts available.
Publication Date:

Known for its accurate and simple-yet-thorough presentation, Joel Watson has refined his text to make it even more student friendly. Highlights of the revision include the addition of Guided (or Solved) Exercises and a significant expansion of the material for political economists and political scientists.