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# GAME THEORY

## Game theory is the study of

how people behave in strategic situations. how individuals make decisions when they are aware that their actions affect each other and when each individual takes this into account.

TYPES OF GAMES
Zero-Sum or Non-Zero-Sum
Cooperative or NonCooperative

Two-Person or N-Person

## TWO-PERSON, ZERO-SUM GAMES

These games involve only two adversaries or players (who may be armies, teams, firms, and so on). Zero sum : one player wins whatever the other one loses, so that the sum of their net winnings is zero. In general, a two-person game is characterized by 1. The strategies of player 1 2. The strategies of player 2 3. The payoff table

## Example : Game odds and evens.

Each player simultaneously showing either one finger or two fingers. If the number of fingers matches, so that the total number for both players is even, then the player taking evens (say, player 1) wins the bet.

## If the number does not match, player 1 losses the bet.

Thus, each player has two strategies: to show either one finger or two fingers.

## PAYOFF TABLE FOR THE ODDS AND EVENS GAME

Player 2 SRATEGY 1 Player 1 2 -1 1 1 1 2 -1

## Problem wage increase in factory

management final offer of a wage increase of \$1.10 per hour union making a final demand of a \$1.60 per hour increase.

Impartial arbitrator to set the wage increase somewhere between \$1.10 and \$1.60 per hour (inclusively). Arbitrator normally accepts the proposal of the a. side that gives the most from its final figure. b. if both give in the same amount, then the halfway between (\$1.35 in this case).

## PAYOFF TABLE FOR THE MANAGEMENT

UNION WAGE INCREASE \$1.10 \$1.60

1
MANAGEME NT 2

\$1.35
\$1.60

(G)
(L)

\$1.60
\$1.35

(L)
(G)

## The Prisoners Dilemma

Two-Person, Non-Zero-Sum, Non-cooperative
Bonnies Decision
Confess Bonnie gets 8 years Confess Remain silent Bonnie gets 20 years

Clydes Decision
Remain silent

## Confessing is the best strategy for Bonnie and Clyde.

In the end, both confess and spend eight years in jail.

From their standpoint, it is not a good outcome. By remaining silent they would have spent one year in jail.
By pursuing their self-interest, they reach an outcome that is worse for each other. Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player.

## Beach Kiosk Game

Two-Person, Zero-Sum, Non cooperative Example: two companies provide snacks and sunscreen on a beach.
Beachgoers spread themselves out evenly along the beach. Both companies ultimately locate at the midpoint of the beach, otherwise the other company has an advantage (closer to more beachgoers) Real life example: location of gas stations

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