Game Theory

Arithmetic Method
Two competitors are competing for the market share of the
similar product. The payoff matrix in terms of their
advertising plan is as follows. Suggest Optimal Strategy for
them.
Competitor B

No Advertising Medium Heavy

Advertising Advertising
No 10 5 -2
Competitor A Advertising
Medium
Advertising 13 12 15
Heavy 16 14 10
Advertising
We have 3 rows and 3 column. Reduce it 2 x2 using the
Dominance Rule (Delete the Higher Column, lower row)

Competitor B

No Advertising Medium Heavy

Advertising Advertising
No
10 5 -2
Competitor A Advertising
Medium 13 12 15
Advertising
Heavy 16 14 10
Advertising
We have 3 rows and 3 column. Reduce it 2 x2 using the
Dominance Rule (Delete the Higher Column, lower row)

Competitor B

No Advertising Medium Heavy

Advertising Advertising
Medium
13 12 15
Competitor A Advertising
Heavy 16 14 10
Advertising
We have 3 rows and 3 column. Reduce it 2 x2 using the
Dominance Rule (Delete the Higher Column, lower row) 1st
Column dominates the 2nd Column
Competitor B

Medium Heavy
Advertising Advertising
Medium
12 15
Competitor A Advertising
Heavy 14 10
Advertising
Applying the Arithmetic method for mixed strategy;
Competitor B

Medium Heavy
Advertising Advertising
Medium 14-10 = 4 4/7
12 15
Competitor Advertising
A Heavy 14 10 15-12 = 3 3/7
Advertising

15-10 = 5 5/7 14-12=2 2/7

Expected Gain to Firm A
1. 12 x (4/7) + 14 x (3/7) = 90/7, Firm B adopts
B2
2. 15 x (4/7) + 10x (3/7) = 90/7, Firm B adopts B3

Expected Gain to Firm B

1. 12 x (5/7) + 15 x (2/7) = 90/7, Firm A adopts
B2
2. 14 x (5/7) + 10x (2/7) = 90/7, Firm A adopts B3
Game Theory
Algebraic Method
In a small town there are 2 stores A and B. The total number of
customers is equally divided between the two as price and
quality are the same. Both plan for a pre- Diwali sales Mela.
Advertisement is to be made through local newspaper, radio
and TV. The game matrix is as follows. Determine optimal
strategy for them.
Competitor B

Newspaper Radio (B2) TV (B3)

(B1)
Newspaper (A1) 30 40 -80
Competitor
A Radio (A2) 0 15 20
TV (A3) 90 20 50
Since there is no saddle point, find payoff matrix using
dominance rule. (Delete the Higher Column, lower row)
Row 2 is lower than row 3
Competitor B

Newspaper Radio (B2) TV (B3)

(B1)
Newspaper (A1) 30 40 -80
Competitor
A Radio (A2) 0 15 20
TV (A3) 90 20 50
Since there is no saddle point, find payoff matrix using
dominance rule. (Delete the Higher Column, lower row)
Column 1 is grater than column 3

Competitor B

Newspaper Radio (B2) TV (B3)

(B1)
Newspaper 30 40 -80
Competitor A (A1)
TV (A3) 90 20 50
Since there is no saddle point, find payoff matrix using
dominance rule. (Delete the Higher Column, lower row)
Column 1 is grater than column 3

Competitor B

Radio (B2) TV (B3)

Newspaper
40 -80
(A1)
Competitor A
TV (A3) 20 50
Since there is no saddle point, find payoff matrix using
dominance rule. (Delete the Higher Column, lower row)
Column 1 is grater than column 3
Competitor B

Radio (B2) TV (B3) Probability

Newspaper
(A1) 40 -80 P1
Competitor A
TV (A3) 20 50 P2
Probability q1 q2
For store A: Let p1 and p2 be the probabilities of company A
selects A1 (newspaper) and A3 (television). The expected gain
to company A, when company B uses B2 (Radio)and B3
(television) are as follows;

40p1 + 20p2 and -80p1 +50p2 p1 + p2 = 1

For company A, probability p1 and p2 should bring equal
gains, p1 = p2 . Therefore,

40p1 + 20p2 = -80p1 +50p2

40p1 + 20 (1- p1) = -80p1 + 50 (1-p1)
40 p1 + 20-20p1 = -80p1 + 50 – 50p1
40 p1 -20p1 + 80p1 + 50p1 = 50 -20 150p1 = 30 p1
= 1/5
P2 = 1-p1 = 1 – 1/5
= 4/5
For store B: Let q1 and q2 be the probabilities of company B
selects B2 (radio) and B3 (television). The expected gain to
company B, when company A uses A1 (Newspaper)and A3
(television) are as follows;

40q1 -80q2 and 20q1 +50q2 q1 + q2 = 1

For company B, probability q1 and q2 should bring equal
gains, q1 = q2 . Therefore,

40q1 – 80q2 = 20 q1 +50q2

40q1 -80 (1- q1) = 20q1 + 50 (1- q1)
40q1 -80 + 80q1 = 20q1 + 50 – 50q1
40q1 + 80q1 - 20q1 +50q1 = 50 + 80 150q1 = 130 q1 =
13/15
q2 = 1-q1 = 1 – 13/15
= 2/15
Expected Gain to Firm A
1. 40p1 + 20p2 = 40 x (1/5) + 20 x (4/5) = 24
2. -80p1 + 50p2 = -80 x (1/5) + 50 x (4/5) = 24

Expected Gain to Firm B

1. 40q1-80q2 = 40x (13/15) – 80 x (2/15) = 24
2. 20q1 + 50q2 = 20x (13/15) + 20 x (2/15) = 24

The expected loss of one company is the expected

gain of the other company.
THANK YOU
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