Theory of Games: Quantitative Techniques For Decision Making M.P. Gupta & R.B. Khanna © Prentice Hall India

CHAPTER
THEORY OF GAMES 15
Quantitative Techniques for Decision Making

M.P. Gupta & R.B. Khanna
© Prentice Hall India
Learning Objectives
• Assumptions, Definitions and Classification of

Games.
• Two-person Zero Sum Games
• Saddle Point and Pure Strategies
• Dominance
• Mixed Strategies
• Graphical Solution of Games

Page 2
Theory of Games
• It deals with decision making under

conditions of competition. It deals with
situations where different parties have
opposing interests and both take
decisions so that there interests are
promoted.

Page 3
Assumptions
• Conflict must be focussed on a central issue. Players
(parties to the conflict) must have opposing interests or the
same objective.
• Players act rationally and intelligently.
• Each player has a finite set of alternatives to choose from.
Players must make simultaneous and concurrent decisions
as to which of the set of alternatives to employ. These
decisions, once made, cannot be reversed during a
particular round of conflict.
• Each player must measure the worth of all possible
outcomes on the same scale.
• Each player must exert some influence to bear on the
situation but must not be able to exert complete control over
the situation by himself.
Page 4
Definitions
• Person. The term refers to one of the opposing
interests or players. It could be an individual, a group
of individuals or an organisation.
• Game. The set of rules that defines what can and
cannot be done; the payoffs in terms of monetary
values or utility values and pay off methods. Rules
must be complete and no change is permitted during
the game.
• Zero Sum Game. A game in which the total winnings
equal the total losses.
• Play of Game. The choosing of a course of action by
a player along with an exchange of resulting payoffs.

Page 5
Definitions
• Strategy. A players course of action that is

complete and ready before commencement
of the game.
• Optimal Strategy. A strategy which
guarantees a player the best he can expect
regardless of what the opponent player does.
• Value of the Game. Expected payoff when
each player is using his/her optimal strategy.
• Solution. An optimal strategy for each player
and the value of the game.

Page 6
Classification of Games
• If a game has two players we refer to it as a

two person game. When the players are three
or more, the game is referred to as an n-
person game. Solution of n-person games is
still being developed
• If the sum of total gains and losses is zero,
the game is referred to as a two person zero
sum game.
• If the sum of total gains and losses is not
zero, the game is referred to as a two person
non-zero sum game.
Page 7
Two-Person Zero Sum Games
• Consider the game:
Player B
Player A Strategy M Strategy N
Strategy X B wins 2 points B wins 1 point

Strategy Y A wins 3 points A wins 4 points
• As can be seen, the game is heavily in favour of A. Given a choice A will play only Strategy Y, as he will always win. B will try to
minimise his loss by always playing Strategy M. This is a two-person zero sum game.

Page 8
Two-Person Zero Sum Game
• The game is written as a matrix with payoffs always
written from the row player’s point of view.
Player B
Player A Strategy M Strategy N
Strategy X B wins 2 points B wins 1 point

Strategy Y A wins 3 points A wins 4 points
B
 2 1
A 
3 4
Page 9
Saddle Point and Pure Strategies
Example
• Blue and Red Scooters may both indulge in no advertising,
moderate advertising and heavy advertising.
• If Blue does no advertising – it will get 50% market share if Red
also does no advertising; 40% market share if Red advertise
moderately and 28% market share if Red advertises heavily.
• Blue use moderate advertising – it will get 70% of the market
share with no advertising by Red, 50% of the market share if
Red also resorts to moderate advertising, and 45% of the market
share if Red does heavy advertising.
• Blue uses heavy advertising – in such an event it gets 75% of
the market share if Red does not advertise, 55% if Red
advertises moderately and 50% if Red advertises heavily.
Page 10
Saddle Point and Pure Strategies
Example
• The problem may be written as:
Red
None Moderate Heavy
None 50 40 28
Moderate 70 50 45
Blue
Heavy 75 55 50

Page 11
• Both players will attempt to maximise their gains or minimise their
losses. Blue will choose a criterion of maximin – best of the worst.
• Red will also attempt to minimise his losses by using a similar strategy.
Since the payoffs are written from Blue’s point of view, Red will follow the
criterion of minimax – minimum of the maximums as the matrix
represents loss or regret for him.
Red
None Moderate Heavy Maximin
None 50 40 28 28
Blue Moderate 70 50 45 45
Heavy 75 55 50 50
• Blue should advertise heavily and Red should also advertise heavily.

• This course will always yield a payoff of 50.

Page 12
Minimax
© Prentice Hall India 75 55 50
Red
None Moderate Heavy Maximin
None 50 40 28 28
Blue Moderate 70 50 45 45
Heavy 75 55 50 50

• There is a single strategy for both players which would
maximise their gains (or minimise their losses). Both players
will play the same strategy every time the game is played.
Each Minimax
player has 75
a pure strategy,
55 one
50 that he will play
all the
time.
• The payoff obtained when each player plays his pure strategy
is called a saddle point, or the saddle point is the value of the
game when each player has a pure strategy.
Page 13
Mixed Strategies
• When a pure strategy is not available for the players, they will
have to use a mix of strategies.
• It is imperative that the strategies are mixed in such a manner
that the payoffs are optimised.
• When using mixed strategies, the players have to maintain
security of their game plan. It must be ensured that the opponent
does not come to know of the strategy that will be employed. If
he can get prior information, he will choose an appropriate
strategy to counter the one used by the other player.
• The strategies will have to played randomly in the desirable
proportions so that no patterns of play can be established.

Page 14
Mixed Strategies - Example
Player B
b1 B2
Player
A a1 1 0
a2 -4 3
• Let p be the proportion of time A plays row a1 , then
(1 – p) is the proportion of time that he plays a2.
• He would expect the same payoff irrespective of
whether B plays b1 or b2.
p  1  (1  p )  ( 4)  5 p  4
• Expected Value if B plays b1,
p  0  (1  p )  3  3  3 p
• Expected Value if B
7 plays b2, 1
5 p  4  3  3 p; p  , (1  p ) 
8 8 Page 15
Player B
b1 B2
Player
A a1 1 0
a2 -4 3
• Let q be the proportion of time B plays row b1 , then
(1 – q) is the proportion of time that he plays b2.
• He would expect the same payoff irrespective of
whether A plays a1 or a2.
q  1  (1  q )  0  q
• Expected Value if A plays a1,
q  4  (1  q )  3  3  7q
• Expected Value if3 A plays a52,
q  3  7q; q  , (1  q ) 
Quantitative Techniques for Decision Making 8 8 Page 16
Player B
b1 B2
Player
A a1 1 0
a2 -4 3
• A should play strategy a1 for 7/8 of the time and a2 for
1/8 of the time.
• B should play strategy b1 for 3/8 of the time and b2 for
5/8 of the time.
• Value of the game is 3/8

Page 17
Mixed Strategies – Short Cut
Method
Player B
b1 b2
Player A a1 1 0 7/8
17
a2 -4 3 1/8
71
3/8
5
3 5/8
53
• Subtract the smaller payoff in each row from the

larger payoff, and the smaller payoff in each column
from the larger payoff.
• Interchange each of these pairs of subtracted numbers
• Divide each pair of numbers by the sum of the pair
• Strategy for A (7/8, 1/8) and for B (3/8, 5/8)
Page 18
Dominance
• In a game, it is often possible to find an entire row (or column)
which one player will avoid when there is another row (or
column) which is always better for him to play. In that case, we
say that the row (or column) is dominated by another row (or
column).
• If all values of elements of Row A are greater than corresponding
values of Row B, we can eliminate row B as Row A dominates
Row B. The Row player will never play strategy B, if he has a
choice between strategy A and B as A always gives him more
payoff.
• Similarly, if the value of elements in Column A are all smaller
than corresponding values of Column B, then Column A
dominates Column B and Column B can be eliminated.
Page 19
Dominance - Example
• Two breakfast food manufacturing firms A and B are
competing for an increased market share. To improve
their market share both the firms have the following
options:
– Give coupons – a1, b1
– Decrease price – a2, b2
– Maintain present strategy – a3, b3
– Increase advertising – a4, b4

Page 20
Firm B
b1 b2 b3 b4
a1 35 65 25 5 20 5/25
Firm A a2 30 20 15 0
a3 40 50 0 10 20/25
5
a4 55 60 10 15
15 10
10/25 15/25
• All payoffs in the row a1 are higher than the payoffs in the row
a2. a1 dominates a2. Eliminate a2
• All payoffs in the row a4 are higher than the payoffs in the row
a3. a4 dominates a3. Eliminate a3
• All payoffs in the column b4 are lower than the payoffs in the
column b1. b4 dominates b1. Eliminate b1
• b4 also dominates column b2.. Eliminate b2
• Solve by short cut method. A’s Strategy (1/5,0,0,4/5) B’s
Strategy (0,0,2/5,3/5). Value of game 13.
Page 21
Graphical Solution of Games
• Used for solving two person zero sum 2 X n or m X 2 games
( 2 rows and n columns or m rows and 2 columns).
B • Assume that Player A plays

strategy a1 for p proportion of
b1 b2 b3 b4
time and strategy a2 for (1 -
A a1 7 -7 4 -8 p) part of the time, then if B
a2 -6 4 2 6 plays strategy b1, A’s payoff
will be: 13p – 6
• Work out for other strategies
of B and plot on a graph.

Page 22
• Player A’s aim is to
8
maximise his
6
b4 b1 minimum payoff.
Consider the lower
4 b3 shaded envelope
2 and find the highest
P point, which in this
O0 case is P.
0 0.2 0.4
P’ 0.6 0.8 1
-2 • OP gives the value
of p = 5/12
-4 b2 • PP’ is value of game
-6 = -7/12
• P lies on the
-8
intersection of
-10 strategies b1 and b2.
p
Solve as a 2 X 2
game

Page 23
8 B
7 -7 10/24
6
b4 b1
A -6 4 14/24
4 b3 11/24 13/24
2
P • The game reduces
O0 to the one shown
0 0.2 0.4
P’ 0.6 0.8 1 above.
-2
• Solving by short cut
-4 b2
method, strategy for
-6 A is (5/12,7/12) and
for B
-8
(11/24,13/24,0,0)
-10 • Value of the game is
p
-7/12.

Page 24
Graphical Solution of Games
• If the game is of the form m X 2, the procedure remains the

same, except that the upper envelope is considered, as the
column player is minimising his maximum loss.
Player B
b1 b2
a1 7 -5
Player A a2 2 6
a3 -6 3
a4 8 -1

Page 25
10
8 • OQ’ gives the value of

6
q = 7/13
a2 • QQ’ gives the value of the
4 Q
game = 50/13
a3
2 • The game can be reduced
to a 2 X 2 game with the
0O a4
Q’ strategies being a2, a4,b1
0 0.2 0.4 0.6 0.8 1
-2 and b2.
a1 • Strategies for A (0, 9/13,0,
-4
4/13) and for B (7/13, 6/13)
-6
-8
q

Page 26
Summary
• The game theory has too many assumptions

to be of any real practical value. It can be
used only in a limited context.
• n person games are more complex as some
players may collaborate against others. There
may be negotiations and so on. Solutions to
such games are currently not available.

Page 27

Theory of Games: Quantitative Techniques For Decision Making M.P. Gupta & R.B. Khanna © Prentice Hall India

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CHAPTER

Quantitative Techniques for Decision Making

• Assumptions, Definitions and Classification of

Quantitative Techniques for Decision Making

• It deals with decision making under

Quantitative Techniques for Decision Making

Quantitative Techniques for Decision Making

• Strategy. A players course of action that is

Quantitative Techniques for Decision Making

• If a game has two players we refer to it as a

Strategy X B wins 2 points B wins 1 point

Quantitative Techniques for Decision Making

Strategy X B wins 2 points B wins 1 point

Quantitative Techniques for Decision Making

None Moderate Heavy Maximin

Quantitative Techniques for Decision Making

None Moderate Heavy Maximin

Quantitative Techniques for Decision Making

Quantitative Techniques for Decision Making

• Subtract the smaller payoff in each row from the

Quantitative Techniques for Decision Making

B • Assume that Player A plays

Quantitative Techniques for Decision Making

Quantitative Techniques for Decision Making

Quantitative Techniques for Decision Making

• If the game is of the form m X 2, the procedure remains the

Quantitative Techniques for Decision Making

8 • OQ’ gives the value of

Quantitative Techniques for Decision Making

• The game theory has too many assumptions

Quantitative Techniques for Decision Making

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