Game Theory

Meaning
• Game Theory is a body of knowledge which is
concerned with the study of decision making in
situation where two or more rational opponents
are involved under condition of competition and
conflicting interests.
Essential Features of Game Theory
A competitive situation is called a game if it has
following features:
1. Finite number of competitors.
2. Finite number of action.
3. Knowledge of alternatives.
4. Choice.
5. Outcome or Gain.
6. Choice of opponent.
Terms used
• Two Person Zero-sum game – It is the situation
which involves two persons or players and gains
made by one person is equal to the loss incurred
by the other.
• n-persons game – A game involving n persons is
called a n-person game.
• Pay offs - Outcome of a game due to adopting the
different courses of actions by competing players
in the form of gains or losses for each of the
players is known as pay offs.
• Pay off matrix – In a game, the gains or losses, resulting
from different moves and counter moves, when
represented in the form of a matrix are known as pay off
matrix.
• Maximin Criteria – The maximizing player lists his
minimum gains from each strategy and selects the strategy
which gives the maximum out of these minimum gains.
• Minmax Criteria – The minimizing player lists his
maximum loss from strategy and selects the strategy
which gives him the minimum loss out of these maximum
losses.
• Value of Game – The maximum guaranteed gain to the
maximizing player if both the players use their best
strategy.
Saddle Point
Saddle point is the equilibrium point in the theory
of games. It is the smallest value in its row and
largest value in its column.
Steps to find out Saddle Point:-
1. Select the minimum value of each row & put a
circle O around it.
2. Select the maximum value of each column and
put square □ around it.
3. The value with both circle and square is the
saddle point.
Strategy
It is the pre-determined rule by which each
player decides his course of action from list
available to him. It is course of action taken by
one of the participants in a game.

Types
of
Strategy

Pure Mixed
Strategy Strategy
Pure Strategy
It is predetermined course of action to be
employed by the player. The players knew it in
advance. It is usually represented by a number
with which the course of action is associated.
Games with Pure Strategy
• In pure strategy, the maximizing player arrives at his
optimal strategy on the basis of maximin criterion.
The game is solved when maximin value equals
minimax value.
Firm Y

Y1 Y2

0 3
X1
Firm X
X2 6 3
Mixed Strategy
• In mixed strategy the player decides his course
of action in accordance with some fixed
probability distribution. Probabilities are
associated with each course of action and the
selection is done as per these probabilities.
• In mixed strategy the opponent can not be sure
of the course of action to be taken on any
particular occasion.
Games with Mixed Strategies
All game problems where saddle point does not exist
are taken as mixed strategy problems.
Following are the methods of Mixed strategies:-
1. ODDS Method (2*2 game without saddle point)
2. Dominance Method
3. Sub Games Method
4. Equal Gains Method
5. Linear Programming method – Graphic solution
6. Algebraic Method
7. Linear Programming – Simplex Method
8. Iterative Method
1. ODDS Method (For 2*2 game)
• Possible only in case of games with 2*2 matrix.
• It should be ensured that sum of column odds and row odds should
be equal.
Method of finding out odds:-
1. Find out the difference in the value of in cell (1,1) and the value in
the cell (1,2) of the first row and place it in front of second row.
2. Find out the difference in the value of in cell (2,1) and the value in
the cell (2,2) of the second row and place it in front of first row.
3. Find out the differences in the value of cell (1,1) and (2,1) of the
first column and place it below the second column.
4. Similarly find the difference between the value of the cell (1,2)
and the value in the cell (2,2) of the second column and place it
below the first column.
The above odds or differences are taken as positive (ignoring the
negative sign).
Mathematically,
Y Odds
X (b1-b2) a1 a2

(a1-a2) b1 b2

(a2-b2) (a1-b1)

The value of game is determined by the following equation:

Value of game (v) = a1(b1-b2) + b1(a1-a2)
(b1-b2) + (a1-a2)
Probabilities for X1 = b1 – b2
(b1-b2) + (a1-a2)
X2 = a1 – a2
(b1-b2) + (a1-a2)
Probabilities for Y1 = a2 – b2
(a2-b2) + (a1-b1)
Y2 = a1 – b1
(a2-b2) + (a1-b1)
 2. Dominance Method
•The Principle of Dominance states that if the strategy of a player
dominates over the other strategy in all condition then the later
strategy is ignored .
•Rules to be followed :
1.If all the elements of a row ( say ith row) of a pay off matrix are less
than or equal to (≤) the corresponding each element of the other row
(say jth row) then the player A will never choose the ith strategy OR ith
row is dominated by jth row. Then delete ith row.
2.If all the element s of a column (say jth column) are greater than or
equal to the corresponding elements of any other column (say jth
column) then ith column is dominated by jth column. Then delete ith
column.
3.A pure strategy of a player may also be dominated if it is inferior to
some convex combination of two or more pure strategies.
4.By eliminating some of the dominated rows and columns, if the game
is reduced to 2*2 form, it can be easily solved by odds method.
Eliminating Dominated Strategies
Solve the game

Column

a b

9 4
a
Row
b 5 0
Eliminating Dominated Strategies
• For any column action, Maximizing player
will prefer a.

a b

9 4
a

b 5 0
Eliminating Dominated Strategies
• Given that row will pick a, column will pick b.
• (a,b) is the unique Nash equilibrium.

a b

9 4
a

b 5 0
3. Sub – game Method (In case od 2*n or
m*2 Matrices)
• A game where one of the players has two
alternatives while the other player has more than
two alternatives.
• This method is used when there is no saddle point
or it can not be reduced by dominance method.
• This method is suitable when the number of
alternatives is limited say 4 or 5. In case of large
number of alternatives , the solution will be
lengthy.
Procedure of Sub-Games Method
1. Divide the m*2 or 2*n game matrix into as many 2*2
sub games as possible.
2. Taking each game one by one and finding out the
saddle point of each game (if exists) and then that sub
game has pure strategies.
3. In case there is no saddle point, then that sub game
should be solved by odds method.
4. Select the best sub game from the point of view of the
players who has more than two alternatives.
5. The strategies for this selected sub game will hold
good for both the players for the whole game and the
value of the so selected sub game will be the value of
complete game.
4. Equal Gains Method
• Solution of 2*2 matrix without saddle point.
• As players are rational in their approach, the selection of
their combination of strategies will be done in such a way
that the net gain is not influenced by the selection of any
combination of strategy by the opponent.
• In this, players select each of the available strategies for
certain proportion of the time i.e., each player selects a
strategy with some probability.
• This method is applicable only in case of square matrices.
• This method is not suitable when the rule of game is
negative.
5. LPP – Graphic Method
• Graphic method is applicable only to those games in which
one of the players has two strategies only (2*m or n*2
games).
• The following are the steps involved in this method:-
1. The game matrices of 2*m or n*2 is divided into 2*2 sub
matrices.
2. Next taking the probabilities of the two alternatives of
the first player say A as p1 and (1-p1) the net gain of A
from the different alternative strategies of B is expressed
with equation.
3. The boundaries of the two alternative strategies of the
first player are shown by two parallel line shown on the
graph.
4. The gain equation of different sub games are
then plotted on the graph.
5. In case of maximizing player A, the point is
identified where minimum expected gain is
maximized. This will be the highest point – out
the inter section of the gain lines in the ‘Lower
Envelop’.
In case of minimizing player B, the point where
maximum loss is minimized is justified. This
will be the lowest point at the intersection of
the equations in the ‘Upper Envelop’.
6. Algebraic Method
• Algebraic Method is used in the game of 3*3
matrix and game does not have any saddle point.
• Another condition is that game cannot be
reduced to 2*2 matrix by the principle of
dominance.
• Use the formula of 2 3 1 2 for the cross
multiplication.
7. Linear Programming – Simplex Method
• It is sometimes difficult to solve a game problem
in the m*n pay off matrix having neither a saddle
point nor any dominant row or column and m
and n are more than 2.
• Simplex method of LPP is a general method for
all types of game problems particularly when all
the players have 3 or more strategies.
8. Iterative/Approximation Method
• This method can be applied to solve 3*3 or higher
games which cannot be easily solved by any other
method.
• The following steps are used for iterative method:
1. Player A chooses the superior strategy over the
other and places that row below the matrix.
2. Player B examines this row and chooses a column
corresponding to the smallest number in that row.
This column is placed to the right of the matrix.
3. Player A examines this column and selects a row
corresponding to the largest number in this column. This
row is then added to the row last chosen and then sum of
the two rows is placed below the previous row selected.
4. Player B chooses a column corresponding to the smallest
number in the row and adds this column to the last
chosen and place it below the previous column selected.
5. In case of tie, the player should choose the row or
column different from his last choice. The procedure is
repeated for a number of iterations.
6. The upper limit of the game is calculated by dividing the
highest number in the last column by the total number
of iterations. Similarly the lower limit of the game is
determined by dividing the lowest number in the last
row by the total number of iterations.
Limitations of Game Theory
• Infinite number of strategy
• Knowledge about strategy
• Zero outcomes
• Risk & uncertainty
• Finite number of competitors
• Certainty of Pay offs
• Rules of game.