Chapter Four: Game Theory

 Game Theory: is a set of models and solution techniques

that are used analyze strategic interactions among different
participants in a market.
Terminology of game theory
 players: At least two players say player A and B
should be there.
 Strategies: Pure Strategy is if the players playing only
single strategy ignoring the remaining.
 Mixed strategy: when the player is playing the game
 using more than one strategy.
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 Payoff

 Payoff is the outcome or numerical value resulting

playing using appropriate strategy.
Player B

1 2 3

Player A 1 20 10 22

2 30 40 38

3 15 18 35

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 Principles in Game Theory
 Maximin Principles intended to maximize the minimum
guaranteed payoff or gain of player
 Minimax principle: principle in which player is
intending minimize the maximum loss.
 Saddle point is point at which maximin=minimax value
 Value of the game, if the game has saddle point, then
the value of the cell at saddle point is value of the
game
 Two person Zero sum game : In a game with two
players if the gain of one player is equal to the loss of
another player it is called Zero sum game.

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 Game with pure strategy

 Given below game table, find the optimum strategies

of players.
Player B

1 2 3 Row minimum Maximin value

Player A 1 25 20 35 20

2 50 45 55 45 45*
3 58 40 42 40

Column 58 45 55
maximum

Minimax 45*
value
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 From the above, it is possible understand that the
intersecting point is C22(45),I’e the game has saddle
point at cell corresponding to row 2 and column 2.
 Since maximin value=Minimax value, the game has
saddle point and the value of the game is 45.
 Optimal probabilities for both players are:
 Player A [p1, p2, p3]= [0, 1, 0]
 Player B [ q1, q2, q3] =[0, 1, 0]

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 Game with mixed Strategy

Example: Consider the following payoff matrix with respect

to player A and Player B and solve it optimally.
Player B Row minimum Maximin value
Player A 9 7 7 7*
5 11 5
Column 9 11
Max
Minimax 9*
value

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 Game with Mixed strategy

Player B Oddments Probabilities Value of the

game
Player A 9 7 6 P1 =6/8 9(6)+5(2)/8 =8 or

5 11 2 P2 =2/8 7(6)+11(2)/8=8

Oddments 4 4 9(4)+7(4)/8=8

Prob. Q1= 4/8 Q2 = 4/8 5(4)+11(4)/8=8

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 Solving game with mixed strategy

 Hence, the strategies of player A is [3/4, ¼]

 the strategies of player B is [1/2, ½]
 and value of the game is 8.
 Dominance Strategy is strategy that always generate
the best outcome for player regardless of what other
player(s) in the game do.

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 Dominance Property
 In some game, it is possible reduce the size of payoff
matrix by eliminating row or column which are
dominated by other rows or columns respectively.
 Dominance property for row:
 If all entries of row is less than or equal to the
corresponding entries of another row, the row is said
to be dominated then delete the lesser row
 X ≤Y
 Dominance property of column
 X ≥Y, delete the greater column

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 Example
 The following table represents the payoff matrix with
respect to player A and Player B. Solve it optimally using
dominance strategy
Player B Row minimum

Player A 1 2 3 4 5

1 4 6 5 10 6 4

2 7 8 5 9 10 5

3 8 9 11 10 9 8*

4 6 4 10 6 4 4

Column max. 8* 9 11 10 10 10
 Dominance Property with Mixed Strategy
Player B

Player A 1 2 3 4

1 5 -3 3 4

2 -4 5 4 5

3 4 -4 -3 3

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