SATHYABAMA UNIVERSITY

DEPARTMENT OF MANAGEMENT STUDIES

Subject Title: Operations Research Subject Code: SBAX1013

Course: B.Com

UNIT V – GAME THEORY

INTRODUCTION
A competitive situation in business can be treated similar to a game. There are two or
more players and each player uses a strategy to out play the opponent.
A strategy is an action plan adopted by a player in-order to counter the other player.In our of
game theory we have two players namely Player A and Player B.
The basic objective would be that
Player A – plays to Maximize profit (offensive) - Maxi (min) criteria
Player B – plays to Minimize losses (defensive) - Mini (max) criteria
The Maxi (Min) criteria is that – Maximum profit out of minimum possibilities
The Mini (max) criteria is that – Minimze losses out of maximum possibilities.
Game theory helps in finding out the best course of action for a firm in view of the anticipated
counter-moves from the competing organizations.

Characteristics of a game
A competitive situation is a competitive game if the following properties hold good
1. The number of competitors is finite, say N.
2. A finite set of possible courses of action is available to each of the N competitors.
3. A play of the game results when each competitor selects a course of action from the set of
courses available to him. In game theory we make an important assumption that all the players
select their courses of action simultaneously. As a result,no competitor will be in a position to
know the choices of his competitors.
4. The outcome of a play consists of the particular courses of action chosen by the individual
players. Each outcome leads to a set of payments, one to each player, which may be either
positive, or negative, or zero.

TERMINOLOGIES

Zero Sum game because the Gain of A – Loss of B = 0. In other words, the gain of Player A is
the Loss of Player B.

Pure strategy If a player knows exactly what the other player is going to do, a deterministic
situation is obtained and objective function is to minimize the gain Therefore the pure strategy is
a decision rule always to select a particular course of action.

Mixed strategy If a player is guessing as to which activity is to be selected by the other on any
particular occasion, a probabilistic situation is obtained and objective function is to maximize the
expected gain. Thus, the mixed strategy is a selection among pure strategies with fixed
probabilities.

Optimal strategy The strategy that puts the player in the most preferred position irrespective of
the strategy of his opponents is called an optimal strategy Any deviation from this strategy would
reduce his payoff

Saddle Point : If the Maxi (min) of A = Mini (max) of B then it is known as the Saddle Point
Saddle point is the number, which is lowest in its row and highest in its column.When minimax
value is equal to maximin value , the game is said to have saddle point. It is the cell in the payoff
matrix which satisfies minimax to maximin value

Value of the Game : It is the average wining per play over a long no. of plays.It is the expected
pay off when all the players adopt their optimum strategies .If the value of game is zero it is said
to be a fair game , If the value of game is not zero it is said to be a unfair game .

In all problems relating to game theory, first look for saddle point, then check out for rule of
dominance and see if you can reduce the matrix.

Rule of Dominance:

The dominance and modified dominance principles and their applications for reducing the size of
a game with or without a saddle point. If every value of one strategy of A is lesser than that of
the other strategy of A,Then A will play the strategy with greater values and remove the strategy
with the lesser payoff values.

If every value of one strategy of B is greater than that of other strategy of B , B will play the
lesser value strategy and remove the strategy with higher payoff values.

Dominance rule for the row

If all the elements in a particular row is lower than or equal to all the elements in another row,
then the row with the lower items are said to be dominated by row with higher ones, Then the
row with lower elements will be eliminated.

Dominance rule for the column

If all the elements in a particular column is higher than or equal to all the elements in another
column, then the column with the higher items are said to be dominated by column with lower
ones, Then the column with higher elements will be eliminated.

Modified Dominance Rule

In few cases, if the given strategy is inferior to the average of two or more pure strategies, then
the inferior strategy is deleted from the pay-off matrix and the size of the matrix is reduced
considerably. In other words , if a given row has lower elements than the elements of average of
two rows then particular row can be eliminated. Similarly if a given column has higher elements
than the elements of average of two columns then particular column can be eliminated. Average
row/column cannot be eliminated under any circumstances.. This type of dominance property is
known as the modified dominance property

Graphical Method

If one of the players, play only two strategies or if the game can be reduced such that one of the
players play only two strategies. Then the game can be solved by the graphical method.

In case the pay-off matrix is of higher order (say m x n ), then we try to reduce as much as
possible using dominance and modified dominance ,f we get a pay-off matrix of order 2 x n or n
x 2 we try to reduce the size of the pay-off matrix to that of order 2 x 2 with the graphical
method so that the value of game could be obtained
.
Managerial Applications of the Theory of Games
The techniques of game theory can be effectively applied to various managerial problems as
detailed below:
1. Analysis of the market strategies of a business organization in the long run.
2. Evaluation of the responses of the consumers to a new product.
3. Resolving the conflict between two groups in a business organization.
4. Decision making on the techniques to increase market share.
5. Material procurement process.
6. Decision making for transportation problem.
7. Evaluation of the distribution system.
8. Evaluation of the location of the facilities.
9. Examination of new business ventures and
10. Competitive economic environment.

MODEL QUESTION PAPER

PART – A (2 Marks)

1. What is meant Game theory?

2. What do you mean by pay-off matrix?

3. What do you mean by i) Saddle point ii) Zero-Sum game?

4. Write short notes on i) pure strategy ii) Mixed strategy.

5. What are the methods available to solve game theory?

6. What do you mean by Dominance principle?

7. Write the rules of dominance principle?

8. What is meant by i) Maximin principle ii) Minimax principle?

9. Find the value of game Player B

B1 B2
Player A A1 6 -3
A2 -3 7
10. Solve the gmae for the given matrix. Player B
B1 B2 B3
A1 0 -4 -2
Player A A2 3 -5 1
A3 -2 -1 6
A4 1 0 4

PART B (12 Marks)

1. What is meant by Game theory? Discuss about pure and mixed strategy with examples.

OR

2. Solve the game whose payoff matrix is given below using dominance principle.

Player B
B1 B2 B3
A1 -2 5 -3
Player A A2 1 3 5
A3 -3 -7 11

3. Give short notes on a) Saddle point b) Pure strategy and Mixed strategy
c) Minimax principle and Maximin principle d) Pay-off matrix.

OR

4. Solve the game using dominance property.

Player B
B1 B2 B3
Player A A1 -3 7 4
A2 -2 -2 5
A3 3 -2 5
5. Write about Game theory. What do you mean by dominance principle and mention the
rules for dominance principle.

OR
6. Using dominance principle, solve the game.

Player B
B1 B2 B3 B4
A1 3 2 2 0
Player A A2 2 4 4 2
A3 2 4 4 0
A4 0 4 0 8

7. Solve the game for the given pay-off matrix

Player B
B1 B2 B3
A1 -1 2 8
Player A A2 7 5 -1
A3 6 0 -12
OR

8. Solve the game using graphical method.

Player B
B1 B2 B3 B4
Player A A1 2 4 -2 8
A2 3 6 5 -5

9. Solve the game for the given pay-off matrix.

Player B
B1 B2 B3
A1 19 20 23
Player A A2 10 5 9
A3 21 14 10
OR

10. Solve the game for the given pay-off matrix using graphical method.

Player B
B1 B2
A1 1 -3
A2 3 5
Player A A3 -1 6
A4 4 1
A5 2 2
A6 -5 0