GAME THEORY

learning outcomes

01 02
• CONSTRUCT A GAME THEORY • DISCUSS THE UNDERLYING
MATRIX ASSUMPTIONS
• DEFINE THE TERMINOLOGIES • DESCRIBE THE MAJOR TYPES
OF GAME THEORY OF GAMES
 GAME THEORY

A theory of independent and interdependent decision-

making.

It involve strategies of two or more autonomous players, in

which no single player has full control of the outcome of the
game.

Evolved as a mathematical process that results in optimal

solutions for problems under sompetition or conflict.
The norm format of presentation is in a tabular
format, and the entire sequence of decisions for Presentation of game theory
the game must be consolidated in a single
startegy.
NORMAL FORM OF GAME THEORY
 What would be the strategy of What would be the payoff to
each competitor that would each competitor once the
maximize their own welfare? recommended strategy is
pursued?

SolutION TO THE GAME

qUESTION 1 QUESTION 2
ASSUMPTIONS OF GAME
THEORY
 AssumptIons of Game Theory

1. Number of Participants
A game can have a single player or a group of individuals with one goal.
2. Conflicting Goals
There should be conflicting goals from each party.
3. Payoff and Value
Payoff is the consequence of decisions made by opposing parties.
The average payoff per play is the value of the game.
A game with zero value is termed as a fair game.
4. Simultaneous Decisions
Decisions of each party are made simultaneously, without waiting for the others.

5. Information Availability
Both parties should have access to information.
CLASSIFICATION OF GAME
THEORY
 Games are classified into three main
categories:

Game of chance Game of strategy

Game of skill

Single-player games with Single-player games with outcomes Multi-player games without
complete control over outcomes. influenced by nature. nature's influence.
Game of skill

•Involves only one player who has complete control of the

game's outcome.

•This type of game is not really classified as a game at all

because of the absence of interdependence.
Example

Taking an examination

The result of an exam, for example,

depends on the skill of the players.
Game of chance

• It is a single-player games against nature.

•In this game, the player does not completely control the
outcomes as the game also depends on nature , which is
considered the "second player."
 Example

Gambling

The outcomes of games of chance depend more on luck rather

than skills.
 Game of Strategy
•Are games with two or more players.
•Nature is not included.
•Wherein each of the players has partial
control over the outcomes.
This type of games can be classified
into two types:
1. Zero-sum games, and
2. Nonzero-sum games.
 Zero-sum games
This is a strictly competitive game as the
winner receives the entire amount of payoff
or reward as contributed by the losing party.
Zero-sum games with two players are termed
as "two-person, zero-sum games
Requirements:
1. Two players only.
2. "Zero-sum" nature - one player's gain equals the
other's loss.
3. Outcomes of all strategy combinations are known
to both players.
4. Rational players aiming to maximize their payoffs.
5. No bargaining - strategies chosen simultaneously.
 Example

Chess

Players aim to maximize their own

position while minimizing their
opponent's.
NONZERO-SUM games

The gains of one competitor are not equal to the losses of the
other player.

This type of game sometimes involves cooperation and is not

strictly competitive.
 Example

prisoner's dilemma

Where two prisoners are interrogated

separately, and are offered a bargain
where if one confesses, he is set free,
while the other prisoner is convicted for
10 years. If both confess, they both face 2
years in prison.
 ZERO SUM GAME
Two broadcasting firms are competitors in a duopolistic market structure. The two
companies have equal market shares, but both are attempting to increase their
respective market shares. Channel 1 is planning to advertise weekly, which they believe
can increase their market share by 4% if Channel 3 will not do anything. Channel 3 is
planning to offer lower prices weekly, which will result to a 5% increase in market
share if Channel 1 does nothing and 2% gain if Channel 1 will push through the ad
campaign. If both broadcasting companies will not do anything, then there will be no
change in their respective market shares.
 Let us assume that both broadcasting companies are conservative because they do not like to
gamble. They will take pessimistic approach or the minimax approach in making their decisions.

Two steps to accomplish the solution:

1. Players are to determine the worst possible payoff associated with each of the strategies.

2. Then, each player selects the strategy that will yield the best of the worst payoffs
 steps to solve the problem:

CHANNEL 1 CHANNEL 2

• Find the minimum value. • Find the maximum value.

• Insert the values in the new column on • Insert the values in the new bottom
the right side of the table. row.
• From the new column, select the • From the new row, select the minimum
highest value. of the maximum from Step 1.
 CONCLUSION:

The oversimplified zero-sum game model might not be applicable in

real- life situations and may only offer very little practicability.
Nevertheless, the theory stimulates us to think of conflicts in a novel
way as it provides a framework for solving complex problems.
Game theory also gives us an understanding of the intricacies of life
and helps explain social behavior.
 CASE PROBLEM

Find the best strategy for each

player of this two-person zero-
sum game. the maximin and
minimax values. Indicate the
value of the game.
game
over