GAME THEORY

HISTORY OF GAME THEORY

 Some game-theoretic ideas can be traced to the 18th
century, but the major development of the theory
began in the 1920s with the work of the
mathematician Emile Borel (1871-1956) and the
polymath John von Neumann (1903-57).
 A decisive event in the development of the theory was
the publication in 1944 of the book Theory of games
and economic behavior by von Neumann and Oskar
Morgenstern, which established the foundations of
the field.
 In the early 1950s, John F. Nash developed a key
concept (Nash equilibrium) and initiated the game-
theoretic study of bargaining.
 What is game theory?
 GAME refers to a situation in which two or
more players are competing.

 Game theory is the study of how optimal

strategies are formulated in conflict.

 It is concerned with the requirement of decision

making in situations where two or more rational
opponents are involved under conditions of
competition and conflicting interests in
anticipation of certain outcomes over a period
of time.
 GAME THEORY MODELS

• The models in the theory of games can be

classified depending upon the following
factors:
• Number of players :two person game
and n person game
• Total Payoff: zero sum and non zero sum
game
• Strategy :pure and mixed
 TWO PERSON ZERO SUM GAME
 A game which involves only two players, say player A and player
B, and where the gains made by one equals the loss incurred by
the other is called a two person zero sum game.
 Example:
 Suppose that there are stores, X and Y. The respective market
shares have been stable until now, but the situation then
changes. The owner of store X has developed two distinct
advertising strategies, one using radio spots and the other
newspaper advertisements. Upon hearing this, the owner of store
Y also proceeds to prepare radio and newspaper advertisements.

Player Player Y’s Strategies

 X’s Strategies
Y1(Use radio) Y2(Use newspaper )
X1 (Use radio) 2 7
X2 (Use newspaper) 6 −4
 The 2 x 2 payoff matrix shows what will happen to current
market shares if both stores begin advertising. The payoffs
are shown only for the first game player X as Y’s payoffs will
just be the negative of each number. For this game, there
are only two strategies being used by each player X and Y.

 Here a positive number in the payoff matrix means that X

wins and Y loses. A negative number means that Y wins and
X loses.
 This game favors competitor X, since all values are positive
except one. If the game had favored player Y, the values in
the table would have been negative. So the game is biased
against Y. However since Y must play the game, he or she
will play to minimize total losses.
 Count………
 From this game can you state the outcomes of each player?
 GAME OUTCOMES
 X’s Strategy Y’s Strategy
Outcome
 ( % Change in
market share)
 X1 (use radio) Y1 (use radio) X wins 2 and
Y loses 2
 X1 (use radio) Y2 (use newspaper) X wins 7 and
Y loses 7
 X2 (use newspaper) Y1 (use radio) X wins 6 and
Y loses 6
 X2 (use newspaper) Y2 (use newspaper) X loses 4
and Y wins 4
 This shows the sum of gain and loss equals zero which is called two
person zero sum game
 Pure strategy with saddle point
 If the players select the same strategy each time, then it is
referred as pure – strategy. In this case each player knows
exactly what the opponent is playing.

 Consider two player A and B, we illustrate the issue by using

the following assumptions

ASSUMPTIONS OF THE GAME

 1. Each player has to choose from a finite number of possible

strategies. The strategies for each player may or may not be
the same.

 2. Player A always tries to maximize his gains and players B tries
to minimize the losses.
 
3. The decision by both the players is taken
individually prior to the play without any
communication between them.

4. The decisions are made and announced

simultaneously so that neither player has an
advantage resulting from direct knowledge of the
other player’s decision.
 5. Each player knows not only his own list of
possible course of action but also of his opponent.
 
 Principle
MINIMAX AND MAXIMIN PRINCIPLE
• The objective of the study is to know how these
players must select their respective strategies so that
they could optimize their payoff. Such a decision
making criterion is referred to as the minimax –
maximin principle.
 RULES FOR DETERMINING A
SADDLE POINT
• STEP 1: Select the minimum element of each
row of the payoff matrix
• STEP 2: Select the greatest element of each
column of the payoff matrix
• STEP 3: If there appears an element in the
payoff matrix which is common to both row
minimum and column maximum it is called
saddle point of the game
 example
 Payoff matrix
 Player
A’s Strategies
Player B’s strategiss
B1 B2
 A1 4 3
 A2 8 6
 A3 5 4
 solution
• Step 1: row min 3, 6, 4
• Step 2 column max: 8,6
• Step 3 comun element: 6 which is the saddle
point
Mixed Strategy with out saddle point
Mixed strategy is a selection among pure
strategies with fixed probabilities.
When the players use a combination of strategies
with some fixed probabilities and each player
kept guessing as to which course of action is to
be selected by the other player at a particular
occasion then this is known as mixed strategy.
Thus, there is probabilistic situation and
objective of the player is to maximize expected
gains or to minimize losses strategies.
 example
B’S STRATEGY
b1 b2
A’ STRATEGY a1 8 -7
a2 -6 4

given problem has no saddle point

The
• Now suppose that A plays strategy a 1 with
probability x and plays strategy a­2 with probability 1-
x. if B plays strategy b1, then A’s expected pay-off can
be determined in reference to the figure given in the
first column of the pay-off matrix as follows.
• Expected pay off(given that B plays b1) =8x-6(1-x)
• Similarly if B plays strategy b2 the expected pay off of A can be
determined by
-7x+4(1-x)
• We can determine the value of x as follows
• 8x –6(1-x) = -7x+4(1-x) because the expected pay off for A is
the same irrespective of the strategy adopted by B.
• Then 8x -6+6x = -7x +4 -4x
= 8x +6x +4x +7x = 4 + 6
=x= 0.4
1-x = 0.6
• A would do best to adopt the strategies a1 and a2 choosing in a
random manner in the proportion of 2:3 and the expected pay of
pay off for A using this mixed strategy equals
8(0.4) -6(0.6) = -0.4
-7(0.4) +4(0.6) = -0.4
• So A incur net loss of 0.4 in the long run
 Count……..
 We can determine mixed strategy for B in a similar manner
as for A. if B plays strategy b1 with a probability y and
strategy b2 with a probability of 1-y then
 Expected payoff(given A plays a1) = 8y- 7(1-y)
 Expected payoff(given A plays a2) =-6y+4(1-y)
= 8y-7 +7y = -6y +4 -4y
= 8y+7y+4y+6y = 4+7
Y = 0.44 1-y = 0.56
 Thus B would do best to adopt the strategies b1 and b2
choosing in a random manner in the proportion of 11:14.and
 B’s expected pay off per play is
 8(0.44) -7(0.56) = -0.4 -6(0.44)+4(0.56)= -0.4
 which implies B shall gain 0.4 per play.
Count………
 Count……….
• In general for a zero sum two person game in
which each of the players, say A and B having
a strategies a1 a2 b1 and b2 respectively and
the pay off as given below then if x is the
probability with which A chooses strategy a1
and if y is the probability that B chooses
strategy b1 we have
• B’s strategy
b1 b2
A’strategy a1 a11 a12
a2 a21 a22

x= a22 – a21 y= a22 – a12

a a –(a21 + a12)
( 11+ 22) (a11 + a22) – (a21 +a12)

V = a11a22 –a12a21
a a –(-a21 + a12)
( 11+ 22)
 Count……….
• From the above example
X= 4 –( -6) = 0.4
• (8+4) – (-7-6)

Y= 4- (-7) = 0.44
(8+) – (-7-6)

V= 8x4 –(-7)(-6) = -0.4

(8+4) – (-7-6
 Rule of dominance

• Sometimes, large matrix games may be

reduced in size (hopefully to the 2×2 case) by
deleting rows and columns that are obviously
bad for the player who uses them.
• if a saddle point of the game exists, then
naturally the game shall be reduced to a 1x1
game giving the same solution
 Count…….
example: B’s Strategies
A’s Strategies
B1 B2
A1 4 3
A2 8 6
A3 5 4
For A row two dominates row 1 then we can
delete row 1, the matrix become
 Count………
B’s strategy
B1 B2
A’s strategy
A2 8 6
A3 5 4
Now for B column 2 dominates column 1 so we
have
 Count…….
B’s strategy
B2
A’s strategy
A2 6
A3 4

Finally for A row one dominate row two and the

game become 1x1 one which is the optimal
strategy
 Count……….
B’s strategy
B2
A’s strategy
A2 6
 Count……
 When the saddle point does not exist, the application of
dominance rule, a game becomes of the order 2x2, then
the mixed strategy can be determined by using the
analytical method.

 When after the domination rule is applied, the game is

reduced to 2xn or mx2 size it can be handled graphically.

 When the reduced game has more than two strategies

available to each of the players, then it can be formulated
as a linear programming model.

 The only advantage in applying domination rule is that

the game cloud be reduced in size and hence solved in
easier way.
 Solutions of 2xn and mx2 games
• When player A has 2 strategies to choose
from and the player B has n strategies, the
game shall be of the order 2xn,
• where as in case B has only two strategies
available to him and A has m strategies, the
game shall be mx2 game.
• We use graphical method to solve such kind
of problems.
 Count…
 
Example
B’S STRATEGY
b1 b2 b3 b4
A’ STRATEGY a1 8 5 -7 9
a2 -6 6 4 -2
Here A has two strategies a1 and a2 which suppose he
plays with probabilities x and 1-x respectively.
When B choose to play b1 the expected pay off for A
shall be 14x – 6.
Similarly the expected pay off functions in respect of b2,
b3 and b4 can be derived as being 6-x, 4 – 11x ; and
11x -2 respectively. We can represent by graph by
plotting each pay off as a function of x.
 Count…….
A is concerned with his least pay off when he plays
a particular strategy, which is represented by
the lowest of the four lines at that point, and
wishes to choose x so as to maximize this
minimum pay off.
This at k on the graph where the lower envelop
( represented by the shaded region), the lowest
of the lines at point, is the highest.
This point lies at the intersection of the line
representing strategies b1 and b2.the distance kl
=- 0.4 on the graph represents the game value V
and x =0.4 is the optimal strategy for A.
Count………
 Count…….
Since the upper limit is on the intersection of b1 and b3 then
we calculate the value of x by using this two strategies
X= 4- (-6) = 0.4 y= 4-(-7) =0.44

(8+4) - (-7-6) (8+4)- (-7-6)

 
V= 8x4 –(-7)(-6) = - 0.4
(8+4)- (-7-6)
Thus the optimal strategy for A is 0.4, 0.6 and for B 0.44, 0.56
AND 0
 Couunt…….
EXAMPLE TWO

B’S STRATEGY
b1 b2
A’ STRATEGY a1 -7 6

a2 7 -4

a3 -4 -2

a4 8 -6
 Count……..
• every thing is similar with the abve example
but the only difference is B CONSIDE THE
UPPER ENVELOP AND THE OPTIMAL
STRATEGY FOR A IS 0.45, 0.54, 0, 0 AND FOR
B 0.41,0.58
• V = 0.58
Count………..
 Solution of mxn games ( formulation
and solution as LPP
Example:
B’S STRATEGY
b1 b2 b3
A’ STRATEGY a1 8 9 3
a2 2 5 6

a3 4 1 7
 Count……….
Solution
Formulate the LPP for A
Minimize 1/U = X1+ x2 + x3
Subject to x + 2x2 +4x3 >1
8 1

9x1 + 5x2 +x3 > 1

3x1 + 6x2 + 7x3 > 1
X1, x2 , x3 >0
 Count………
LPP FOR B
MAXIMIZE 1/V = Y1+ Y2 + Y3
Subject to 8Y1 + 9Y2 +3Y3 <1
2Y1 + 5Y2 +6Y3 < 1
4Y1 + Y2 + 7Y3 < 1
Y1, Y2 , Y3 >0
Let calculate for B
First change the equation to standard form by
adding some slack variables
 
 Count…….
MAXIMIZE 1/V = Y1+ Y2 + Y3 +0s1 +0s2 + 0s3
Subject to
8Y1 + 9Y2 +3Y3 +s1 =1
2Y1 + 5Y2 +6Y3 +s2 =1
4Y1 + Y2 + 7Y3 + s3 =1
Y1, Y2 , Y3,s1,s2,s3 >0
Simplex tableau 1
Simplex tableau 3
Simplex tableau 2
Simplex tableau 4
 Count………
• substitiuting the values of y1, y2,and y3 in the
objective function we have
1/67+3/37 + 8/67 =13/67
• There fore game value = 67/13
• Since yi = yi/v we have yi = yi x v thus
Y1 =2/67 x67/13 =2/13
Y2 = 3/67 x 67/13 =3/13
Y3 = 8/67 x 67/13 =8/13
 Count…..
We can read the values of the dual variables x1, x2 and x3 the
c-z row of the final table. These are respectively 21/268,
12/268,and 19/268.
• 1/U =21/268+ 12/268 +19/268 =52/268 =13/67
THUS U = 67/13
Now
X1 = 21/268x 67/13 =21/52
X2 =12/268x 67/13 =12/52
X3 = 19/268 x 67/13 =19/52
Thus the optimal strategy for A is ( 21/52, 12/52, 19/52) for B
it is (2/13, 3/13,8/13) while the game value is 67/13.