Game Theory

Terminology Of Games Theory

i) Players : The participants to the game who act as decision makers are called players. A game
requires at least two persons as one cannot play alone. A game having two players (or
competitions), one opposing the other, is know as "two person game" and a game having more
than 2 players is called "n-person game".
ii) Strategies : A finite number of possible course of action available to a player are called
strategies. For example, assume that a person A is faced with problem of deciding whether to
:
• Reduce his price
• Maintain his price
Similarly, opponent too has two strategies, namely.
i) Maintain price
ii) Reduce price
The strategies can be classified as "pure strategies" and "mixed strategies" A pure strategies
is a decision of the players to always select the same strategy. A mixed strategies is the decision
of the player, in advance of the play, to select more than one strategy with fixed probabilities.
A mixed strategy is advantageous since opponent is always kept guessing.
iii) Play : A play occurs when each player selects one of his strategies. Two basic assumptions
in a play are.
• The choice of strategy by players is made simultaneously.
• No player knows the choice of his opponents until he has decided on his own.
iv) Payoff : Every combination of strategies of players determines an outcome called payoff.
Each player in the previous example has two strategies namely. 'maintain price' and reduce
price' Possible combinations (here four) of their strategies shall be as under.
• X reduces his price while the opponent keeps his price constant.
• X reduces his price and the opponent also reduces his price.
• X keeps his price constant while the opponent too keeps his price constant.
• X keeps his price constant while the opponent reduce his price.
Each of above combination of strategies results in a gain to players (A loss is considered
a negative gain) called payoffs.
v) Payoff Matrix : The gains resulting from a game if presented in the from of a table is
called "payoff matrix".
A simple payoff matrix is given below.
Player B
I II III IV
I
I  14 12 14

13
Player A II
II  8 -4 12 0 
III
III
 13 -6 14 12 

• The above payoff matrix may be interpreted as under.

• There are two players. A and B in the game.
 • Player A has three strategies while player B has four strategies.
Elements such as 14, 12, 14 and 13 in first row. 8,-4, 12 and 0 in second row, and 13, -6,
14 and 12 in third row represent the payoff. Positive entry represent gain to A (i.e. payment
from B to A) while a negative entry denotes loss to A (i.e. payment from A to B). For
example. If player A uses his second strategy and player B uses first. A gains 8 units.
vi) Maximin A maximum element among the row minima (maximum element among the
minimum elements selected for each row) is called maximin.
vii) Minimax A minimum element among the column maxima (minimum element among the
maximum elements selected for column row) is called minimax.
viii)Saddle Point A saddle point that element of the matrix which represents the "maximum"
value of a player and "minimax" value of his opponent.

Table 5.1. Identifying a saddle point in a payoff matrix

Player B Row Maximin
Minima

Player  16 12 13  12
A  12 -11 -13  -13 14
 15 14 15 
14
Column maxima 16 14 15 Saddle
Minimax 14 Point

Classification of games

Game

Two-person-game Multiple (or n) person game

Two-person-zero Two-person-non-sum game zero-sum game

Pure strategy games Mixed strategy game

22 2  n or mn
game m  2 game game
Fig. 5.3 : Classification of games
1. Two Person Game: Where these are two Competitors playing a game, it is known as
two-person game.
2. N-Person Game: When the number of competitors are n (N > 2), then the game in known
as N-Person game.
3. Zero Sum Game: When the sum of amounts won by all winners is equal to the sum of
amounts lost by all losers, the game in known as zero-sum game.
4. Non-Zero-Sum Game: When the sum of gains or losses is not equal to zero, it is known
as non-zero-sum game.
5. Pure Strategy Game with Saddle Point: When the best for each player is to play one
strategy throughout the game it is known as pure Strategy game.
6. Mixed Strategy game: When the optimum plan for each player is to employ different
strategies at different times, it is known as mixed strategy game.
ix) Value of the game: The value of the game is the "expected gain to a player" if he and his
opponent use their best strategies"
x) Principle Of Dominance
The concept of dominance can be applied to any two-person zero-sum game with any number
of strategies for each player. For a payoff matrix of large size, the rule of dominance can be
used to reduce its size by carefully eliminating certain rows and/or columns prior to final
analysis to determine the optimum strategy selection for each player.
In general the following rules of dominance are used to reduce the size of pay-off matrix.
Rule 1
If all the element in a row (say ith row) of a pay-off matrix are less than or equal to the
corresponding elements of the other row(say jth row) then the player A will never choose the
ith strategy or in other words the ith strategy is dominated by the j th strategy.
Rule 2
If all the elements in a column (say rth column) of a pay-off matrix are greater than or
equal to the corresponding element of the other column (say sth column (then the player B will
never choose the rth strategy or in the other words the rth strategy is dominated by the sth
strategy.
Rule 3
A pure strategy may be dominated if it is inferior to average of two more other pure
strategy.
xi) Steps for pure Strategy Game
Steps involved to solve a pure strategy game are independent of the size of the game (i.e.
irrespective of whether the game is 2  2 size, m  2 size, 2 n or m x n size). The steps involved
are as under.
i) Construct a payoff matrix
ii) Check for the presence of a saddle point.
iii) If the game has a saddle point, the game is a pure strategy game.
iv) Read off the optimal strategy of the players and the value of the game. In a pure
strategy game (i.e. game with a saddle point)
• The players stay with one strategy, the one corresponding to the row or column with
the saddle point.
• The value of the game equals value of the saddle point.
 Illustration 1 ( 2  2 game )
The payoff matrix of a zero-sum-two-person-game is given below.
Find the best strategy for each player and the value of the game.
Player B
3 5
Player A  
5 7
Ans :
Player A know that if he plays his first strategy (i.e. row 1) he
may gain 3 or 5 units depending upon which strategy (i.e. which
column) player B Plays. Player A also knows that he will gain at
least 3 units (minimum of 3 and 5 units) irrespective of which
strategy player B follows. Similarly, player A know that he will
gain at least 5 units if he adopts second strategy (i.e. he plays
row 2) regardless of which strategy (i.e. which column) player B
adopts.
Therefore, player A will gain at least 5 units if he plays the row
that will maximize the minimum of the payoff, namely row 2. The
payoff of 5 units is called maximin value of the game and the
decision to play row 2 is called the maximin pure strategy.
Player B Row minimum
3 5 3
Player A   5 Maximin
5 7
Column 5 7
Maximum
Minimax
If player A aims to maximize gain, player B will naturally try to
minimize his maximum Loss. He too, therefore, examines each column
to determine his loss that he would incur if he plays that column.
That is, player B knows that a maximum of 5 units would be lost if
he plays column I and a maximum of 7 units would be lost if he
plays column 2. Therefore, player B's minimax pure strategy is to
play column 1 so that his loss is smallest of the maximum losses.
The minimum payoff (i.e. loss of 5 units), from column 1 represents
minimax value of the game.
Since, minimax value = maximin value = 5, therefore, 5 units
represents a saddle point, which becomes the value of the game i.e.
gain of 5 units to player I.
 Optimal strategy of player are.
Players A (0, 1), Player B (1, 0)
And optimal value of the game = 15
 Illustration 2
Find the optimal strategy for X and Y in the following game. Also
find value of the game.
Y
1 2 3 4 5
1 1  19 13 11 18 10

X 2 2
X3  16 15 15 16 17

3 4  -12 14 13 13 18 

4  15 16 12 12 11 

Ans: Game has a saddle point of 5 (Table 5.2 ) and as such it is a

pure strategy game. Both the players, therefore, would stick to only
one strategy (the strategy corresponding to the saddle point)
throughout.

Y Minimum Maximin
1 2 3 4 5

1  19 13 11 18 10
 10
X
2  16 15 15 16 17
 15
15
3
4  -12 14 13 13 18  -12
11
 15 16 12 12 11 
Maximum 19 16 15 18 18 Saddle
point
Minimax 15
 Optimal strategy of = (0, 1, 0, 0)
player X
Optimal strategy of = (0, 0, 1, 0, 0)
Player Y
Value of the game = v  = 5
Illustration 3
Solve the following game to determine the optimal strategies for
M and N. Also obtain the value of the game.

 13 11 12 10

M  16 17 14 16

 14 15 14 16 
 16 12 12 11 
Ans: The game has a saddle point, infect two saddle points (Table
10.3) and as such it is a pure strategy game. Both the players,
therefore, will stick to one strategy throughout. However, player M
has also an alternative strategy for the same value of game.
Ans:
N Minimum Miximin

 13 11 12 10
 010
M  16 17 14 16
 414 14
 14 15 14 16  -4
1
14
14

 16 12 12 11 
Maximum 16 17 14 16 11 Saddle
Element point
Minimax 14

 optimum strategy = (0, 1, 0, 0) or (0, 0, 1, 0)

of player M
Optima strategy = (0, 0, 1, 0)
Of player N
Value of the game = 14

Illustration 4
A company management and the labour union are negotiating a new 2
years settlement. Each of these has 4 strategy.
I. Hard and aggressive bargaining.
II. Reasoning and logical approach
III. Legalistic strategy
IV. Conciliatory approach.
The costs to the company are given for every pair of strategy
choice.
Company Strategies
I II III IV
I 200 150 120 350
Union Strategy II 250 140 80 100
III 400 20 100 50
IV -50 40 110 00
What strategy will the two sides adopt? Also determine the value
of the game.

Ans: We first find out the saddle point by encircling each row minima
and putting squares around each column maxima. Thus, we obtain the
saddle the saddle point which is enclosed by a circle and a square
both, as shown below.
 Company Strategy Row minima Maximin
I II III IV
I 200 150 120 350 120 120
Union Strategy II 250 140 80 100 80
III 400 20 100 50 20
IV -50 40 110 00 -50
Column maxima 400 150 120 350
Minimax 120
Maximum = Minimax = Value of game = 120.
Since there exists a saddle point, strategy are pure and the strategy
adopted are: company will always adopted strategy III–Legalistic
strategy and union will always adopt Strategy I–Hard and aggressive
bargaining.

Illustration 5
What is the optimum strategy in the game described by the matrix
by applying dominance principle.
-5 3 1 20
 
 5 5 4 6 
 -4 -2 0 -5 
Ans:
Suppose the given game is played by players A and B. Then it can
be written as:
Player B
I II III IV
-5 3 1 20
I  
Player A II  5 5 4 6 
III
 -4 -2 0 -5 
From the above pay-off matrix, 3rd row is dominated by 2nd row and
the reduced pay-off matrix is :
Player B
I II III IV
I  -5 3 1 20 
Player A II  
 5 5 4 6 
2nd column and 4th column are dominated by 1st column and the
reduced pay-off matrix is :
Player B
I III Row min Maximin
I  -5 1 -5
Player A II   4 4
 5 4
Col. Max. 5 4
Minimax 4
 From the above, it is apparent that the value of maximin coincides
with the value of minimax, therefore a saddle point exists
Hence the solution to the game is :
i) The optimum strategy for player A is II
ii) The optimum strategy for player B is III.
iii) The value of the game is 4.

Illustration 6
Apply the Principle of dominance in Game Theory and solve the
8 10 9 14
 
Adjoining game : 10 11 8 12 
 13 12 14 13 

Ans: B1 B2 B3 B4
A1 8 10 9 14
A2 10 11 8 12
A3 13 12 14 13
From the above pay-off matrix, 2nd row is dominated by 3rd row.
B1 B2 B3 B4
A1 8 10 9 14
A3 13 12 14 13
From the above pay-off matrix 3rd column and 4th column is
dominated by 1st column.
B1 B2 Row Minima Maximin
A1 8 10 8
A3 13 12 12 12
Column maxima 13 12
Minimax 12
 Minimax = Maximin = 12 = saddle point
 Optimum strategy A3 and B2