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OPERATIONS RESEARCH-II

Game Theory
B.Sc. Industrial Engineering & Management
Semester: 6th 2015-2019
Lecture: 01
Date: 03-September-2018
 Prisoner’s Dilemma
• Two suspects arrested for a crime
• Prisoners decide whether to confess or not to
confess
• If both confess, both sentenced to 3 months of jail
• If both do not confess, then both will be sentenced
to 1 month of jail
• If one confesses and the other does not, then the
confessor gets freed (0 months of jail) and the non-
confessor sentenced to 9 months of jail
• What should each prisoner do?
Normal Form representation – Payoff Matrix

Prisoner 2
Confess Not Confess

Prisoner 1 Confess -3,-3 0,-9

Not Confess -9,0 -1,-1

Meaning
• Game Theory is a body of knowledge which is
concerned with the study of decision making in
situation where two or more rational opponents are
involved under condition of competition and
conflicting interests.
Essential Features of Game Theory
A competitive situation is called a game if it has
following features:
1. Finite number of competitors.
2. Finite number of action.
3. Knowledge of alternatives.
4. Choice.
5. Outcome or Gain.
6. Choice of opponent.
Economic applications of game theory
• The study of oligopolies (industries containing only a
few firms)
• The study of cartels, e.g., OPEC
• The study of military strategies
• The study of international negotiations
• Bargaining
• political campaigns,
• advertising and marketing campaigns by competing
business firms,
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Maximin & Minimax Equilibrium in a

zero-sum game
• Minimax - minimizing the maximum loss (loss-
ceiling, defensive)
• Maximin - maximizing the minimum gain (gain-
floor, offensive)
• Minimax = Maximin
Terms used
• Two Person Zero-sum game – It is the situation
which involves two persons or players and gains
made by one person is equal to the loss incurred by
the other.
• n-persons game – A game involving n persons is
called a n-person game.
• Pay offs - Outcome of a game due to adopting the
different courses of actions by competing players in
the form of gains or losses for each of the players is
known as pay offs.
• Pay off matrix – In a game, the gains or losses, resulting
from different moves and counter moves, when
represented in the form of a matrix are known as pay off
matrix.
• Maximin Criteria – The maximizing player lists his
minimum gains from each strategy and selects the
strategy which gives the maximum out of these
minimum gains.
• Minmax Criteria – The minimizing player lists his
maximum loss from strategy and selects the strategy
which gives him the minimum loss out of these
maximum losses.
• Value of Game – The maximum guaranteed gain to the
maximizing player if both the players use their best
strategy.
Saddle Point
Saddle point is the equilibrium point in the theory of
games. It is the smallest value in its row and largest
value in its column.
Steps to find out Saddle Point:-
1. Select the minimum value of each row & put a
circle O around it.
2. Select the maximum value of each column and put
square □ around it.
3. The value with both circle and square is the saddle
point.
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Pure strategy game: Saddle point

3 MaxiMin

4 3 MiniMax

A zero-sum game with a saddle point.

 Zero Sum Games
• Game theory assumes that the decision maker and
the opponent are rational, and that they subscribe
to the maximin criterion as the decision rule for
selecting their strategy
• This is often reasonable if when the other player is
an opponent out to maximize his/her own gains,
e.g. competitor for the same customers.
• Consider:
Player 1 with three strategies S1, S2, and S3 and
Player 2 with four strategies OP1, OP2, OP3, and
OP4.
 Zero Sum Games (Cont)
Player 2
OP1 OP2 OP3 OP4 Row
Minima
S1 12 3 9 8 3
Player 1 S2 5 4 6 5 4 maximin
S3 3 0 6 7 0
Column 12 4 9 8
maxima minimax

• Using the maximin criterion, player 1 records

the row minima and selects the maximum of
these (S2)
• Player 1’s gain is player 2’s loss. Player 2
records the column maxima and select the
minimum of these (OP2).
 Zero Sum Games (Cont)
• The value 4 achieved by both players is
called the value of the game
• The intersection of S2 and OP2 is called a
saddle point. A game with a saddle point
is also called a game with an equilibrium
solution.
• At the saddle point, neither player can
improve their payoff by switching
strategies
Other computer science applications
• Internet
• Routing
• Job scheduling
• Competition in client-server systems
• Peer-to-peer systems
• Cryptology
• Network security
• Sensor networks
• Game programming
Strategy
It is the pre-determined rule by which each
player decides his course of action from list
available to him. It is course of action taken by
one of the participants in a game.

Types of
Strategy

Pure Mixed
Strategy Strategy
Pure Strategy
It is predetermined course of action to be
employed by the player. The players knew it in
advance. It is usually represented by a number
with which the course of action is associated.
Games with Pure Strategy
• In pure strategy, the maximizing player arrives at his
optimal strategy on the basis of maximin criterion.
The game is solved when maximin value equals
minimax value.
Firm Y

Y1 Y2

0 3
X1
Firm X
X2 6 3
Mixed Strategy
• In mixed strategy the player decides his course
of action in accordance with some fixed
probability distribution. Probabilities are
associated with each course of action and the
selection is done as per these probabilities.
• In mixed strategy the opponent can not be sure
of the course of action to be taken on any
particular occasion.
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Two-Person, Zero-Sum Games: Summary

• Represent outcomes as payoffs to row player

• Find any dominating equilibrium
• Evaluate row minima and column maxima
• If maximin=minimax, players adopt pure strategy
corresponding to saddle point; choices are in stable
equilibrium -- secrecy not required
• If maximin minimax, find optimal mixed strategy;
secrecy essential
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All you need to know about Probability

If E is an outcome of action, then P(E) denotes the
probability that E will occur, with the following
properties:
1. 0  P(E)  1 such that:
If E can never occur, then P(E) = 0
If E is certain to occur, then P(E) = 1
2. The probabilities of all the possible outcomes
must sum to 1
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Mixed strategy
• In some zero-sum game, there is no pure
strategy solution (no Saddle point)
• Play’s best way to win is mixing all
possible moves together in a random
(unpredictable) fashion.
• E.g. Rock-Paper-Scissors
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Mixed strategies
Some games, such as Rock-Paper-Scissors, do not have a pure
strategy equilibrium.
In this game, if Player 1 chooses R, Player 2 should choose p, but if
Player 2 chooses p, Player 1 should choose S. This continues with
Player 2 choosing r in response to the choice S by Player 1, and so
forth.
In games like Rock-Paper-Scissors, a player will want to randomize
over several actions, e.g. he/she can choose R, P & S in equal
probabilities.
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A soccer penalty shot at 12-yard

left or right?
payoffs are winning probability
Goalie
Left Right

Left 42 5
Kicker 58 95
Right 7 30
93 70
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A penalty shot at 12-yard

left or right?
If you are the kicker, which side you use?
The best chance you have is 95%. So you kick left.
But the goalie anticipates that because he knows that’s
your best chance. So his anticipation reduces your
chance to 58%.
What if you anticipate that he anticipates … so you kick
right & that increase your chance to 93%.
What if he anticipates that you anticipate that he
anticipates …
If you use a pure strategy, he always has a way to reduce
you chance to win.
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A penalty shot at 12-yard

left or right?
• To end this circular reasoning, you do something that
the goalie cannot anticipate.
• What if you mix the 2 choices randomly with 50-50
chance?
• Your chance of winning is
(58+93)/2 if the goalie moves to left
(93+70)/2 if the goalie moves to right
Is this better?
Games with Mixed Strategies
All game problems where saddle point does not
exist are taken as mixed strategy problems.
Following are the methods of Mixed strategies:-
1. ODDS Method (2*2 game without saddle point)
2. Dominance Method
3. Sub Games Method
4. Equal Gains Method
5. Linear Programming method – Graphic solution
6. Algebraic Method
7. Linear Programming – Simplex Method
8. Iterative Method