OPERATIONS RESEARCH

Unit-
6
By: Dr. Abhishek Priyam
Assistant Professor-
Mechanical
Overview of Game Theory

Game theory is an approach to modelling behaviour in situations

where the outcome of your decisions depends on the decisions of
others.
Game theory is the study of strategic, interactive decision making
among rational individuals or organizations.
Game theory is a branch of applied mathematics that provides
tools for analyzing situations in which parties ( called players) make
decisions that are interdependent.
This interdependence causes each player to consider the other
player’s possible decisions( or strategies) in formulating strategy.
In addition, a player need not be an individual; it may be a nation,
a corporation, or a team comprising many people with shared
interests.
A solution to a game describes the optimal decisions of the
players, who may have similar, opposed, or mixed interests, and the
Classic examples of game theory

(i) The Prisoner’s Dilemma; where two suspects are in police

custody as accomplices for the same crime, but there is not
enough evidence for a felony conviction. They are held and
interrogated separately. If one prisoner testifies against the
other while the other stays silent, the testifying prisoner goes
free and the silent prisoner is convicted and serves ten years. If
both prisoners stay silent, both are convicted on a minor charge
and serve six years. If both prisoners testify against each other,
each serves five years. How should the prisoners act? . The
answer is that both prisoners should testify against the other,
an outcome that is known as a Nash equilibrium.

[i.e The players in each game depend on each other’s rationality

to make the optimal choices in every situation, thereby
maximizing their own utility]
(ii) Conflict of sales; Let us assume that the client had a drug
with dominant market share in a therapeutic area that is
competitive, yet has few players. One of their competitors was
behaving aggressively from a pricing perspective (e.g., continually
matching and beating the client’s price, even though the
competitor gained little or no market share from such actions). The
competitor was in the process of running a clinical trial to improve
their product’s label. The client wished to know how the
competitor might behave depending on the client’s next price
move and the outcome of the clinical trial. The conclusion of the
exercise was that engaging in a price war would not benefit any of
the client or competitors. Therefore, keeping the price high and
trading “market share for peace” would be the most profitable
strategy.
(iii) Advertising War: Coke vs. Pepsi :- Without any advertising, each
company earns

$5b/year from Cola consumers. Each company can choose to spend

$2b/year on advertising. Advertising does not increase total sales for Cola,
but if one company advertises while the other does not, it captures $3b
from the competitor

(iv) In your everyday life: Everything is a game, poker, chess,

soccer, driving, dating, stock market advertising, setting prices,
entering new markets, building a reputation bargaining,
partnerships, job market search and screening designing contracts,
auctions, insurance, environmental regulations international
relations, trade agreements, electoral campaigns, Most modern
economic research includes game theoretical elements.
Classification of game theory

It broadly classified into three main sub-categories of study

(i) Classical game theory

It focuses on optimal play in situations where one or more people must make a
decision and the impact of that decision and the decisions of those involved is
known.
Decisions may be made by use of a randomizing device like piping a coin .

It focuses on questions like, What is my best decision in a given economic

scenario, where a reward function provides a way for me to understand how
my decision will impact my result.
Examples:

Poker, Strategic military decision making, Negotiations.

(ii)Combinatorial game theory

It focuses on optimal play in two-player games in which each player takes turns
changing in pre-defined ways. In other word, combinatorial game theory does not
consider games with chance (no randomness).
 (iii) Dynamic game theory:

It focuses on the analysis of games in which players must make decisions over
time and in which those decisions will affect the outcome at the next moment in
time. It often relies on differential equations to model the behaviour of players over
time.

It can help optimize the behaviour of unmanned vehicles or it can help you capture
your baby sister who has escaped from her playpen.

In general games with time, Games with motion or a dynamic component.

Examples:

Optimal play in a dog fight, Chasing your brother across a room.

Key elements in game theory
Player: who is interacting
Strategies: what are the options of each player? In what order do players act?
Payoffs: How do strategies translate into outcomes? What are players’
preferences over possible outcomes?
Information/Beliefs: What do players know/believe about the situation and about
one another? What actions do they observe before making decisions?
Mathematical concept in Game Theory

The following the prerequisite required for game theory

Sum of gains and loss

If in a game sum of the gains to one player is exactly equal to the sum
of losses to another player, so that sum of the gains and losses equal
zero, the corresponding game is said to be zero sum game.
Types of games
Games can be classified according to certain significant features, the
most obvious of which is the number of players. Thus, a game can be
designated as being a one-person, two-person, or n-person (with n greater
than two) game, games in each category having their own distinctive
features.
One-person games
One-person games are also known as games against nature. With no
opponents, the player only needs to list available options and then choose
the optimal outcome. When chance is involved the game might seem to
 For example, a person deciding whether to carry an umbrella. While
this person may make the wrong decision, there does not exist a conscious
opponent. That is, nature is presumed to be completely indifferent to the
player’s decision, and the person can base his decision on simple
probabilities. One-person games hold little interest for game theorists.
Two person zero sum game (with two players)
The game in which there are exactly two player and the interest of the
players completely opposed are referred as two-person zero sum games.
They are called zero- sum games because one player wins whatever the
other player loses. In short it is denoted by TPZS game.
For example, All parlour game and sports, like Tic-tac-toe, chess, cribbage,
backgammon, and tennis ect., are TPZS games.
Two person zero sum game (with more than two players)
TPZS games with more than two people involved are
Team sports with only two sides, but with more than one player in
each side.Many people involved in surrogates for military conflict,
Games which are not TPZS

(i) Those parlour games in which the players cannot be clearly separated into two
sides are not TPZS games
(ii) Those poker and Monopoly games when played by more than two people are not
TPZS games.
(iii) Most real economic “games” are not TPZS, because there are too many players, and
also the interests of the players are not completely opposed.

Positive-sum game
In game theory, a term positive sum refers to situations in which the total of gains
and losses is greater than zero.

A positive sum occurs when resources are somehow increased and an approach is
formulated such that the desires and needs of all concerned are satisfied.
Perfect games
Games of perfect information in which each player knows everything
about the game at all times. It is called perfect games
For example, chess in which each player knows everything about the
game at all times. In chess exactly one of three outcomes must occur if
the players make optimal choices: (i) White wins (has a strategy that wins
against any strategy of black), (ii) Black wins (iii) White and black draw.
Imperfect games
Games of imperfect information in which each player do not knows
everything about the game at all times. It is also called imperfect games.
For example, Poker in which players do not know all of their opponents’
cards.
Finite games
Games in which each player has a finite number of options, the
number of players is finite, and the game cannot go on indefinitely.
For example, chess, checkers, poker, and most parlour games are finite.
Cooperative games
In game theory, a cooperative game (or coalitional game) is a
game with competition between groups of players ("coalitions")
due to the possibility of external enforcement of cooperative
behaviour (e.g. through contract law).
Non cooperative games
Those are opposed to cooperative games in which there is
either no possibility to forge alliances or all agreements need to be
self-enforcing (e.g. through credible threats).
Pay off
The outcome of the game resulting from a particular decision (or
strategy) is called pay off . It is assumed that pay off is also known
to the player in advance. It is expressed in times of numerical
values such as money, percent of market share or utility.
Remarks
For the zero sum games, the gain of one player is equal to the loss
of other and vice versa. i.e one player pay off table would contain
the same amounts in pay off table of other player with the sign
changed. Therefore it is enough to construct pay of table for one
player.
Strategy
The strategy for a player is the list of all possible actions (moves or
course of action) that he will take for every pay-off (outcome) that
might arise. It is assumed that all course of possible actions are
known in advance to the player.
Types of Strategy
Usually player in game theory uses two types of strategy namely
pure strategy and mixed strategy .
(i) Pure strategy:
Particular course of action that are selected by player is called pure
strategy (course of action). i.e each player knows in advance of all
strategies out of which he always selects only one particular strategy
regardless of the other players strategy, and objective of the player is to
maximize gain or minimize loss
(ii) Mixed strategy:
Course of action that are to be selected on a particular occasion with
some fixed probability are called mixed strategies. i.e there is a
probabilistic situation and objective of the players is to maximize expected
gain or minimize expected losses by making choice among pure strategy
with fixed probabilities.In mixed strategy, If there are 'n' number of pure
strategies of the player, there exist a set S={p1,p2, pn} where pj is the
probility with which the pure strategy, j would
be selected and whose sum is unity.

i.e p1+p2+.....+pn=1 and pj>=0 for all j=1,2, n.

Optimal strategy
The particular strategy (or complete plan) by which a player optimizes his
gains or losses without knowing the competitor's strategies is called
optimal strategy.
Value of the game
The expected outcome when players follow their optimal strategy is called
the value of the game, It is denoted by V.
Minmax-Maxmin principle
The selection of an optimal strategy by each player without the knowledge
of the competitor's strategy is the basic problem of playing games. The
objective of the study is to know how these players select their respective
strategy so that they may optimize their pay off. Such a decision making
criterion is referred to as the minmax -maxmin principle
Remarks
Minmax-Maxmin principle given the best possible selection of strategy for
both players in pure strategy problem.
Saddle point
 Tutorial
1. Solve the payoff matrix

2. A machine shop has five machines A, B, C, D and E. Two jobs must be

processed through each of these machines. The time (in hours) taken on
each of these machines and the necessary sequence of jobs through the
shops are given below:
Use the graphical method to obtain the total minimum elapsed time.

3
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 Graphical method
The graphical method is used to solve the games whose payoff matrix has
Two rows and n columns (2 x n)
m rows and two columns (m x 2)
Algorithm for solving 2 x n matrix games
1. Draw two vertical axes 1 unit apart. The two lines are x1 = 0, x1 = 1
2. Take the points of the first row in the payoff matrix on the vertical line
x1 = 1 and the points of the second row in the payoff matrix on the
vertical line x1 = 0.
3. The point a1j on axis x1 = 1 is then joined to the point a2j on the axis
x1 = 0 to give a straight line. Draw ‘n’ straight lines for j=1, 2… n and
determine the highest point of the lower envelope obtained. This will be
the maximin point.
4. The two or more lines passing through the maximin point determines
the required 2 x 2 payoff matrix. This in turn gives the optimum solution
by making use of analytical method.
Example 1 Solve by graphical
method

Soluti
on:
Algorithm for solving m x 2 matrix games
1. Draw two vertical axes 1 unit apart. The two lines are x1 =0, x1 = 1
2. Take the points of the first row in the payoff matrix on the vertical line x1
= 1 and the points of the second row in the payoff matrix on the vertical
line x1 = 0.
3. The point a1j on axis x1 = 1 is then joined to the point a2j on the axis x1
= 0 to give a straight line. Draw ‘n’ straight lines for j=1, 2… n and
determine the lowest point of the upper envelope obtained. This will be
the minimax point.
4. The two or more lines passing through the minimax point determines the
required 2 x 2 payoff matrix. This in turn gives the optimum solution by
making use of analytical method.
Dominance Method
Dominance method is also applicable to pure strategy and mixed strategy
problem. In pure strategy the solution is obtained by itself while in mixed
strategy it can be used for simplifying the problem.
Principle of Dominance.
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 because it will not effect the solution in any way. For the gainer
point of view if a strategy gives more gain than another strategy, then first
strategy dominates over the other and the second strategy can be ignored
altogether. Similarly from loser point of view, if a strategy involves lesser
loss than other in all condition then second can be ignored. So
determination of superior or inferior strategy is based upon the objective of
the player. Since each player is to select his best strategy, the inferior
strategies can be eliminated. In other words, ineffective rows & column can
be deleted from the game matrix and only effective rows & columns of the
matrix are retained in the reduced matrix.
For deleting the ineffective rows & columns the following general rules
are 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 j th row. Then delete ith row.
2) If all the elements 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. As a
particular case, if all the elements of a column are greater than or
equal to the average of two or more other columns then this column is
dominated by the group of columns. Similarly if all the elements of row
are less than or equal to the average of two or more rows then this row
is dominated by other group of row.
Solutio
n

Since there is no saddle point, so we apply dominance method. Here Row III dominates Row
II so we will delete Row II.
Since column III dominates column I, we delete column I we get:

3
3
0
2 5 3
8 3