GAME THEORY

Trust None. For oaths are straws, mens faiths are wafer-cakes. William Shakespeare (Henry V) Prisoners Dilemma Sanya and Cinque: Two Players (Two robbers of Hibernia Savings Bank) Payoff Matrix
Cinque Confess Confess Sanya 5, 5 10, 0 Not Confess 0, 10 1, 1

A Beautiful Mind

Not Confess

Game Theory is basically a strategic interaction between mutually aware players. It is based on the fact that You are self-interested and selfish So is everyone else....

Terminology a) No. of players: Two-person game and n-person game b) Sum of gains and losses: zero-sum game and non-zero sum game c) Strategy: It is set of rules which a person should adopt at each play Pure-strategy - If a player knows what course of action he is going to adopt based on the knowledge about opponents course of action, then he always selects a particular course of action (known with certainty) Mixed-strategy - When both the players are guessing as to which course of action is to be selected on a particular occasion with certain probability then it is a mixed-strategy game

d) Two-person, Zero-sum games: A game with two players where the loss of one player is equal to gain of the other with net gain being zero. e) Payoff Matrix:Row designations are Player As strategies and Column designations are Player Bs strategies.

Player Bs Strategies B1 A1 A2 Player As Strategies . . a11 a21 . . B2 a12 a22 . . ............ ............ ............ Bn a1n a2n .. ..

............

Pure strategies
Maximin and Minimax Strategies
Payoff matrix for A B 1 2 -2 A 2 -3 -4 Firm Bs Strategy
1 2 -6 2

Firm As 1 Strategy 2
3

20 8

-1

-4

Player B Solve the following:

B1 B2 7 6 2 B3 3 4 0 B4 4 5 3

Player A A1
A2 A3

1 5 7

saddle point
If Maximin = Minimax = Value of the game, then we have a Saddle Point. Saddle Point of a payoff matrix is the position of an element which is minimum in its row and maximum in its column. Player B

Player A

8 9 10

7 14 12

15 8 14

12 10 13

Player B

Player A

-7 7

-4 -3

-2

2)
B1

Player B
B2 B3 B4 B5

Player A

A1
A2 A3 A4

-1
3 -4 5

0
2 -3 3

0
3 0 -4

5
2 2 2

3
2 6 6

3)
B1 B2 -1 8 8 11

Firm B
B3 4 2 6 -4 B4 6 4 14 2 B5 7 12 12 1

Firm A

A1 A2 A3 A4

3 -1 16 1

4) Assume that two firms are competing for the market share for a particular product. Each firm is considering what promotional strategy to employ for the coming period. Assume that the following payoff matrix describes the increase in market share of Firm A and the decrease in market share for Firm B. Determine the optimal strategies for each firm.
Firm B
No Promotion No Promotion Moderate Promotion More Promotion

5 10

0 6

-10 2

Firm A

Moderate Promotion

a) Which firm b) What might the two firms do to maximize their profits or minimize their losses?

More 20 terms Promotion would be winner, in

15 10 of market share?

Mixed strategies
Consider this problem
20 12 3 8 10 5 -6 2 6

1/2 1/2

1/3

2/3

Algebraic Method (2 x 2) games 5) Solve the following 2 x 2 games without saddle points B B A
5 3 1 4

6 -3

-3 0

6) Two players A & B without showing each other, put a coin on a table, with head or tail up. A wins Rs.8 when both coins show head and Re.1 when both are tails. B wins Rs.3 when the coins do not match. Given the choice of being a matching player (A) and non-matching player (B), which one would you choose and what would be your strategy?

The Rules of Dominance: If a row or column is dominated by another row or column in terms of pay-offs, then the dominated row or column can be deleted to reduce a n x m matrix to a 2 x 2 matrix. Player B For ex.:
I II 6 -3 -3 III 3 4 4 B1

Player A

I II III

-4 -3 2

Player B
B2 2 4 2 4 B3 4 2 4 0 B4 0 4 0 8

Player A

A1 A2 A3 A4

3 3 4 0

7) In an election campaign, the strategies adopted by the ruling and opposition party along with payoffs (ruling partys % share in votes polled) are given below. Assume a zero-sum game. Find optimum strategies for both parties and expected payoff to ruling party.
Opposition Partys Strategies
Campaigning one Campaigning two day in each city days in each city Campaigning one day in each city Campaigning two days in large rural area

55 70 75

40 70 55

35 55 65

Ruling Partys Strategie s

Campaigning two days in each city Campaigning two days in large rural area

8) A steel company is negotiating with its union for revision of wages to its employees. The management, with the help of a mediator, has prepared a payoff matrix shown below. Plus sign indicates a wage increase, while a negative sign indicates a wage decrease. Union has also constructed a table which is comparable to that developed by management. What strategies are best for the management and union and what is the value of the game?
Union Strategies
U1 C1 Steel Co. Strategies C2 C3 C4 2.5 2.00 1.40 3.00 U2 2.7 1.60 1.20 1.40 U3 3.5 0.80 1.50 1.90 U4 -0.2 0.80 1.30 0

Arithmetic Method 9) Solve the following game:

A1

Player B B1 1 6 B2 7 2 B3 2 7

Player A

A2

A3

10) Two breakfast food mfgers, ABC and XYZ are competing for an increased market share. The pay-off matrix, shown in the following table, shows the increase in market share for ABC and decrease in market share for XYZ. Simplify the problem by rule of dominance and find optimum strategies and value of game.
Decrease Price -2 Maintain Present Strategy 4 Increase advertising 1

Give coupons
Give coupons Decrease Price

2 6

12

Maintain Present Strategy Increase

-3
2

2
-3

0
7

6
1

graphical method
Graphical method is used to convert a m x 2 and 2 x n matrices to a 2 x 2 matrix. For a 2 x n matrix problem, we have to find a maximin point and for a m x2 matrix problem we have to find a minimax point. 2 x n matrix problem 11) Solve the 2 x 3 game graphically As strategies I 12) Solve the 4 x 2 game graphically m x 2 matrix problem A
II

Bs Strategies
I 1 8
I
I II III IV 2 2 3 -2

II 3 5

III 11 2
II
4 3 2 6

13) A soft drink company calculated the market share of two products against its major competitor having three products and found out the impact of additional advertisement in any one of its products against the other.
Competitor B

What is the best strategy for B1 B2 B3 the company as well as the competitor? what is the A1 6 7 15 Company payoff obtained by the A A2 20 12 10 company and the competitor in the long run? Use graphical method to obtain the solution.