Decision Making Using Game Theory

Decision Making Using Game Theory
An Introduction for Managers
Dr Anthony Kelly
Decision Making using
Game Theory
An introduction for managers
Anthony Kelly
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, So Paulo
Cambridge University Press

The Edinburgh Building, Cambridge , United Kingdom
Published in the United States of America by Cambridge University Press, New York
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Cambridge University Press 2003
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Contents
Preface
1 Introduction
2 Games of skill
3 Games of chance
v
Contents
vi
4 Sequential decision making and cooperative games of

strategy
5 Two-person zero-sum games of strategy
6 Two-person mixed-motive games of strategy

Contents
vii
7 Repeated games
8 Multi-person games, coalitions and power
9 A critique of game theory
Appendix A Proof of the minimax theorem

Appendix B Proof of Bayess theorem
Bibiliography
Index
Preface
And, greatest dread of all, the dread of games!

John Betjeman 19061984 Summoned by Bells
Y Y
V
ix
Preface
x
V
1 Introduction
Man is a gaming animal. He must always be trying to get the better in something or other.
Charles Lamb 17751834 Essays of Elia
V
X
cooperative game
1
Introduction
2
zero-sum non-cooperative game
mixed-motive game
W X
V
V
W
Terminology
3
as if
W
W
Terminology
players
Introduction
4
Z
W
V
outcome
V V
V
Y
V
V
pure strategy
Terminology
5
Table 1.1 The unions pure strategies
complete information
V
incomplete information
V
perfect information
imperfect information
Introduction
6
Classifying games
skill chance
strategy W
X X

cooperative games of strategy
X
zero-sum games of strategy
V
Classifying games
7
GAME THEORY
Games of skill Games of chance Games of strategy
Games involving
risk
Games involving
uncertainty
Two-person Multi-person
Cooperative Mixed- motive Zero-sum

Coalitions not permitted
Purely Minimal Infinite Finite Non-cooperative Cooperative

cooperative social
situation
Perfect info
Essential Non-essential
Symmetric No saddle Saddle coalitions coalitions
Imperfect info games
Mixed strategy Power

indices
Have optimal Have no optimal

equilibrium points equilibrium points Dominance &
Shapley admissability Shapley
Snow
ShapleyShubik
Leadership
Johnston
Heroic
Duopoly
models DeeganPackel
Exploitation
Banzhaf
Repeated games
Martyrdom
Figure 1.1 Ataxonomy of games.
X
mixed-motive games of strategy
Introduction
8
A brief history of game theory
Uber eine
Anwendung der Mengenlehre auf die Theorie des Schachspiels
W
A History of the Mathematical Theory of Probability
9
W
W
W
W
V
Introduction
10
Mathematical Psychics
Theory of Games and Economic Behav-

iour
W V
W
X
11
Theory of Games and Economic Behaviour
V Games and Decisions
V
V
W
Introduction
12
V X
V V
W
13
V W
The Caretaker Tosca
Y
Introduction
14
W
W
Layout
W
Layout
15
W X
V W
V
Introduction
16
W X
W V
V
V
2 Games of skill
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our
dinner, but from their regard to their own interest.
Adam Smith 1789 The Wealth of Nations
V X
17
Games of skill
18
Linear programming, optimisation and basic calculus

linear programming optimisa-
tion
utility
function constraint
R

optimiser maximiser
W
optima V
derivative x x
y
x x
a p b p
a b p
a b p
second derivative x
W
p
W
p
p p
p p
19
p
y '(p) = 0
'(a) > 0 a b
'(b) < 0
y = x)
Figure 2.1 Afunction with a local maximum.
y
y = x)
'(b) > 0
a b
'(a) < 0
'(p) = 0
p
Figure 2.2 Afunction with a local minimum.

Games of skill
20
Example 2.1 Hospital in-patient and out-patient facilities
x
y
W
x y
x y
x y
x y
t W n W
V
t n
21
40
(40, 20)
x
60
Figure 2.3 The constraint set for the conversion of a nurses residence for in-patient and out-patient use.
Pay-off
(Profit)
tx + ny
(0, 40) 40ny
Strategy
(Patient mix) (40, 20 ) 40tx + 20ny
(60, 0) 60tx
Figure 2.4 Pay-off matrix for the conversion of a nurses residence for in-patient and out-patient use.
n t
n t
Games of skill
22
Profits per
month
If t = 1600 If t = 1400 If t = 1000
and n = 1500 and n = 1700 and n = 2100
(0, 40) 60 000 68 000 84 000
Patient
mix (40, 20) 94 000 90 000 82 000
(60, 0) 96 000 84000 60 000
Figure 2.5 Sample numerical prots for the conversion of a nurses residence for in-patient and out-patient use.
Example 2.2 Fundraising
R x x
R x x
x
23
R
W
R x
x 2
W
R
8 per ticket
R x
V
R x x
R
Example 2.3 Balancing full-time and part-time staff
Y
V
Y
Y
V
V V
x V
y V
x y
Games of skill
24
R (x)
.
. . 3200
. 3000
x = +4
2800
.
x
+2
Figure 2.6 Revenue function for Royal Ballet fundraising.
x / y
x y
V
30 full-time and 10 part-time V
25
80
x > 30
(30, 25)
20x + 8y > 680
20
(30, 10)
x
34 40
x + 2/5y < 40
Figure 2.7 The constraint set for balancing full-time and part-time staff.
Cost
40x + 14y
( 34, 0 ) 1360
Strategy ( 30, 10 ) 1340
( 30, 25 ) 1550
( 40, 0 ) 1600
Figure 2.8 Pay-offs for balancing full-time and part-time staff.

Games of skill
26
Example 2.4 Examination success and time given to tutoring
h
r
a W
n
/
n h h
r
a
n a r h
1/2
r' h n/a h 1]
Solving the equation r' h

1/2
h
/
h
h 4.25
r
/
rh n/a
n/a
n/a
The Lagrange method of partial derivatives
27
h
4 5 6 7
3.5
(4.25, 3.75)
4.0
4.5
5.0
r (h )
5.5
Figure 2.9 Agraphic representation of the solution to the problem of examination success and the time given to
direct tutoring.
n/a
Lagranges
method of partial derivatives
x, y g x, y
Lagrangian function W
Games of skill
28
x, y, x, y c g x, y
c
x y
x, y
g
x x
g
y y
g x, y c
x, y g x, y c
Example 2.5 Funding research and design
M
T
S TM /
29
m
t
s
c
c m t
tm /
c s
m m
c s
t t
20tm /
c
m
c
60
t
s 10t
m m/
s /
20m
t
Games of skill
30
S T
S
Figure 2.10 Relationship between modelling output and time units in the Creative Design department.
t
/
m
/
m
/
tm
/
m
W
m
t
t W
m 8.04
t 6.7
31
S 1/2
S M
Figure 2.11 Relationship between modelling output and materials units in the Creative Design department.
c
c 603
V
3 Games of chance
Chaos umpire sits, And by decision more embroils the fray By which he reigns; next him high
arbiter Chance governs all.
John Milton 16081674 Paradise Lost
risk
uncertainty
32
An introduction to basic probability theory
33
P
S R
. .
si P{si } = pi
Figure 3.1 Asample space and probability of an event.
probability space S sample space

S s si sn
P si
P si pi
pi
S, P probability space P si pi
probability si
probability function P(s)
pi i
pi i n
A S P A pi si A
P
P S
S W Ps W
S
X
random variable X S
Games of chance
34
X s Xs s S
Xs R si
distribution function X
Fx
Fx PX X x x R
Example 3.1
P si pi /
X X X
X X X
F
Z si
Fx PX
Z si
X si
F xr / F xo / F xy /
F xg / F xb / F xw
35
y = F (x)
1
0.5
x
1 2 3 4 5 6
Figure 3.2 The graph of the distribution function of the random variable in Example 3.1.
Fx x R
F x
Fx x
Fx y
P X px Fb Fa a X b
P X a Fx x a
Expected value, variance and standard deviation
expected value E X X
E(X pi xi i n xi X si
E(X / / / / / /
3.5
Games of chance
36
variance V(X X
V(X pi xi E(X i n xi X si
V(X
EX / / /
/ / /
2.917
standard deviation X X
/
X VX
X
/
X
1.708
FX
W density function x
x
Fx x x x R
b
PX Fx x x
a
Fb Fa a X b
E(X x x x
Games of chance involving risk
37
V(X x EX x x
Example 3.2 Funding a new high-speed rail link
W V
W
Games of chance
38
Table 3.1 Pay-off matrix for a company applying for funding for a new high-speed rail link
this
A G any Q P G/ Gi E Q A
P
/
/
/
20 0.40 720
/
/
/
60 0.50 690
V X
Utility theory
utility
39
V
F
V
expected utility value c Uc
W
Uc pi ui i n
ui von NeumannMorgenstern utility function
E xi
V
Example 3.3 The viability of computer training courses

V
Y V
V
W
V
W
u xi E xi
u xi E xi
u xi E xi
Games of chance
40
The organisation is risk-neutral

UD
UD / 50
W
UC
UC / / 48
The organisation is averse to risk

UD
UD / 2.887
W
UC
UC / / 3.968
W
The organisation is willing to take risks
UD
UD / 15 000
W
UC
UC / / 7344
V
41
u(x) E(x)
[u(x ) = 0 ]
Figure 3.3 The von NeumannMorgensternutility function and the expected value have a linear relationship.
risk-neutral
u x

risk-averse
n
u xi E xi
u" x
Games of chance
42
y
n
ux Ex
u x
Figure 3.4 The von NeumannMorgensternutility function is proportional to a root of the expected value.
y
u(x) E(x)n
[ u(x) < 0 ]
Figure 3.5 The von NeumannMorgensternutility function is proportional to a power of the expected value.

risk-taking
n
u xi E xi
u x
43
Example 3.4 A portfolio for investment over a waiting period
m m
W m
m m
m
m m
m
/ /
U(x m m
/ /
m m
/ /
U x m m
U x
/ /
m m
m m
m 0.342
Games of chance
44
W
W U x
/ /
U x m 1131(1067 m
U x
V
Games of chance involving uncertainty
45
Example 3.5 Insurance against maternity leave
Note:

V

Games of chance
46
Nature
Strategy No maternity 1 maternity
leave leave
Bank Insure 5000 5000
Do not insure 0 13 500
Figure 3.6 Insurance against maternity leave: pay-off matrix.
V
Y
V
maximax
V
maximin
V
V
47
Nature
Strategy No maternity 1 maternity
leave leave
Bank Insure 5000 0
Do not insure 0 8500
Figure 3.7 Insurance against maternity leave: regret matrix.
W
W W

minimax
V W
regret matrix
V
V
V
not
4 Sequential decision making and
cooperative games of strategy
Awrong decision isnt forever; it can always be reversed. But the losses from a delayed
decision can never be retrieved.
J.K. Galbraith 1981 ALife in our Times
48
Representing sequential decision making
49
d f
a
e
c
Figure 4.1 Adirected graph.
directed graph
W N, E N W
nodes E W edges
N
E
e n n n predecessor parent
n n successor child n
path P n n n
W n
Pn n n n
n n n
ancestor n n descendent n
P
Sequential decision making and cooperative games of strategy
50
d
a
e
c
Figure 4.2 Abackward directed graph.
W terminal
n
root r
tree
V
N, E
N, E backward directed graph
N
E
n n n n
51
e n
A branch
o
f
a p
q
g
b r
r
s
h
t
i
u
c
v
j w
d
k x
y
Figure 4.3 Atree, also showing a branch or sub-tree.
ub-trees branches

52
Example 4.1 Decision tree for a proposed building programme
Sequential decision making in single-player games
decision-making
graph
Example 4.2 Decision graph for a system of sanction and reward
W
X
ni nt
method of backward induction

V
53
With sports fields
Without sports
fields
Green-field site
Disperse staff
to other offices
nearby
Existing site
Move
during Move en bloc to
New building another site
work
Stay in prefabs
on existing site
Extension
With indoor
sports With theatre or
facilities presentation facilities
With common rooms
With a full Art & Individual

Design centre studios
Computer
centre Networked
Stand alone
Figure 4.4 The planning process for a building programme.
Alpha stage
V
V
V
54
a e j
k
r b g
l
h
c
i m
Figure 4.5 Adecision-making graph.
Reprimand
Dealt
with
in-shop
Shift Re-do work

supervisor without overtime
Bad Referred
behaviour to Lower hourly rate
manager
Sacked
Good
behaviour Praise in weekly
meetings
Praise
Increased
hourly rate
Merit stars
Promotion to manager
Figure 4.6 Adecision-making graph for a system of sanction and reward.

55
V
Beta stage
V
V
Gamma stage et seq
Example 4.3 Organising sponsorship

Finan-
cial Times
V
V
ae
V
V
V
56
Classical
26
30
40 Pop
Music
32 Mixed
Drama 34 A run of one three-act play
30
Series of one-act plays
48
Concert series
40 Soccer
One meeting,
10 Rugby 56 all races
48
UK
Athletics 48 One race in a series
Sporting 5 14 of meetings
event Europe
6 48
Soccer Serie A (Italy)
N. America
4 56
Baseball 40 A European cup
Literary
prize
48 Boxing
Confined
to new
writers
36
Poets
36
30 Novelists
Open to all
40 27 Poets
30
Novelists
d stage g stage b stage a stage

(a)
Figure 4.7 (a) A backward induction process for organising three sponsored events. The backward induction
process after (b ) the stage; (c ) the and stages; (d ) the , and stages; and (e) all stages.
57
Classical
26
30
40 Pop
Music
32 Mixed
30
Series of one-act plays
48
Concert series
40 Soccer
10 Rugby
48
UK
Athletics 48 One race in a series
Sporting 5 14 of meetings
event Europe
6
Soccer
N. America
4 56
Baseball 40 A European cup
Literary
prize
48 Boxing
Confined
to new
writers
36
Poets
36
30 Novelists
Open to all
40 27 Poets
30
Novelists
d stage g stage b stage
(b)
Figure 4.7 (cont. )

58
Classical
26
40
(26)
Music
30
(34)
Concert series
40
Soccer
10 (40)
UK
5 (46)
Sporting
event Europe
6
Soccer
N. America
4 (48)
40 A European cup
Literary
prize
48 Boxing
Confined
to new
writers
(30)
36
30 Novelists
Open to all
27
40 Poets
(27)
d stage g stage
(c)
Figure 4.7 (cont. )

59
(64)
Drama 34 A run of one

three-act play
30
Concert series
40
Soccer
10
UK
Sporting
event
(50)
Literary
prize
Confined
to new
writers
36
(66) 30 Novelists
d stage
(d )
40
Soccer
10
UK
(50)
Sporting
event
(e)
Figure 4.7 (cont. )

60
Example 4.4 Appointment options
V a, b
Sequential decision making in single-player games involving uncertainty

61
Prepare Advertise Convene full

specifications externally appoint. board
3 20 5
Medical exam &
(43) reference take-up
(39) (40) (20)
3
15
1 manager & 2
programmers 22
4 6
(42) (21)
(36) (18)
4 full-time Prep. Convene
progrs spec internal board Appoint
4 Advertise 18
internally
(44) / (40)
6 part-time operators 6 8
28 10
(46)
(46) (20) (12)
(40)
20 8 2 Take up
Prepare Do not Appointment references
specifications advertise by managing
director
(a) stage stage stage stage
Prepare Advertise Convene full

specifications externally appoint. board
20 5
Medical exam &
reference take-up
(39) (40) (20)
3
15
1 manager & 2
programmers
(36) (18)
Prep. Convene
spec internal board Appoint
4 full-time 4 Advertise 18
progrs internally
(40)
6 part-time operators 8
10
(20) (12)
(40)
20 8 2 Take up
Prepare Do not Appointment references
specifications advertise by managing
director
(b) stage stage stage stage

Figure 4.8 Abackward induction process (a) for three possible appointments options, where time is the critical
factor; and (b) after discarding from four stages and showing the optimal strategy.
62
Example 4.5 A university research partnership
W V
W V
W
W
p p
q q
p p q q
63
9000
Continue involvement
Company
Produces
benefits
(9000) Discontinue involvement
p
Chance
2250
Fails to produce benefits
Give high commitment 1 p

2250
Company
8000
Give low commitment Company
Produces
benefits
q
Chance 150
1 q
150
b stage a stage
Figure 4.9 Decision tree for a company involved in a research partnership.
p q
p
64
9000
1 r
Company Continue involvement
Produces
benefits
p
Chance
2250
Give high commitment 1 p

2250
r
Company
8000
1 r
Give low commitment Company
Produces
benefits
q
Chance 150
1 q
150
stage stage stage
Figure 4.10 Decision tree for a company involved in a research partnership, with a priori probability.
W
V
r W
V
V a priori
65
r
a posteriori
Bayess formula
p /
p p
p / p
p /
p / p p / p
Example 4.6 Schools coming out of special measures

Y
p /
p
p
p /
p /
66
p / p
p /
p / p p / p
0.878
Sequential decision making in two-player and multi-player games
multi-player game tree n
equivalent
67
d (3, 1, 2, 0)
e (1, 0, 4, 3)
P1
f (1, 0, 5, 2)
b
r k (4, 2, 1, 7)
P1
P3 P4
g l (3, 1, 2, 5)
h (1, 2, 8, 4)
c
i (2, 3, 4, 1)
P2
j (2, 1, 1, 3)
Figure 4.11 Amulti-player game tree.
m
E
E Em
m
n
E n n n i
n
E n n n i
nm
Em nm nm nm i
68
Choose X a
n1
P2
Choose Y
b
Choose Y b
P2 a
n2 Choose X
n3
f
P3
g
Figure 4.12 An information set for player 2.
n i n i nm i i
information set W
n
n choice function
N
C
N C
69
strategy
X
V
Example 4.7 Proposing change
V V
V
V W
70
(2, 1)
Accept proposals
P2
Reject proposals
Propose change
( 2, 0)
P1
Propose no change
(0, 0)
Figure 4.13 Proposing change: a game of perfect information.
Example 4.8 Proposing change under uncertainty
Y
V
V
71
(4, 2)
P2 Accept proposals
Propose change
P1
Reject proposals
Propose no change
( 4, 0)
Accept resignation
( 1, 0)
Nature
(2, 1)
P2 Accept proposals
(P3)
Reject resignation
Propose change
Reject proposals
P1 Propose no change
( 2, 0)
(0, 0)
Figure 4.14 Proposing change under uncertainty: a game of imperfect information.
V
72
Cooperative two-person games
Purely cooperative games
X
73
Minimal social situation games

minimal social situation
V
X
winstay, losechange
V
V
V
W V
V
74
Kelley, Drye & Warren LLP

Strategy Supplier A Supplier B
Supplier
2 content; 1 content 2 content; 1 discontent
A
Clifford
Chance
LLP Supplier
2 discontent; 1 content 2 discontent; 1 discontent
B
Choosing supplier A makes the other player content,

whereas choosing supplier B has the opposite effect
Figure 4.15 Dealing with suppliers.
Example 4.9 Dealing with suppliers: acting successively

W V
Y
W W
V
W W
V W
V W
V
75
Example 4.10 Dealing with suppliers: acting simultaneously

W
W
W
76
V W
never
X V
V
5 Two-person zero-sum games of
strategy
He either fears his fate too much, Or his deserts are small, That puts it not unto the touch to
win or lose it all.
James Graham, Marquess of Montrose 16121650 My Dear and only Love
law of conservation of utility value
pareto-eY ciency Y
V
77
Two-person zero-sum games of strategy
78
Representing zero-sum games

W W
W
W
W
W
W solution
W
W V
value
W
V
V
normal form
V
V
Representing zero-sum games
79
Player 1
A B
Player 2 Player 2
A B A B
AA AB BA BB
Figure 5.1 Game-tree diagram for a two-person zero-sum game of imperfect information.
Player 1
A B
Player 2 Player 2
A B A B
Outcomes AA AB BA BB
Figure 5.2 Game-tree diagram for a two-person zero-sum game of perfect information.
80
Player 2
Strategy Strategy A Strategy B
Player 1 Strategy A AA AB
Strategy B BA BB
Figure 5.3 A pay-off matrix for a two-person zero-sum game.
Games with saddle points

V
V
maximin value
V V
saddle or equilibrium point

V
regret
Y
81
Figure 5.4 Asaddle point.
Player 2
Strategy A B C
A 5 2 3
Player 1 B 8 2 4
C 3 1 2
Figure 5.5 Apay-off matrix with two saddle points.
W
V
82
Surgeon
Incompetent Competent
Hospital board Hospital board
Dismiss Retrain Dismiss Retrain
20 000 10 000 50 000 0
Figure 5.6 Game-tree diagram for professional incompetence: retain and retrain.
Example 5.1 Medical incompetence: retain and retrain?
V
83
Hospital board
Dismiss with Retain
Strategy retirement &
package retrain
Accept
Surgeon incompetency 20 000 10 000
assessment
Reject
incompetency 50000 0
assessment
Figure 5.7 Pay-off matrix for professional incompetence: retain and retrain.
Example 5.2 Reforming a travel timetable

W
W V
W
V
X
Y
84
Table 5.1 Nine congurations for reforming a travel timetable
V
/
/
/
/
/
/
/
/
/
/
Operations
manager
Strategy 20 journeys 21 journeys 28 journeys
4 drivers 21 20 21
Personnel
manager 5 drivers 21 20 18 / 45
6 drivers 18 / 54 18 18
Figure 5.8 Pay-off matrix for reforming a travel timetable.
W
85
Player 2
a b c d e f g
a 6 7 5 11 8 12 10
b 14 12 12 11 10 12 13
c 10 7 8 13 4 10 9
Player 1 d 8 4 2 13 8 14 10
e 13 7 8 14 5 14 10
f 12 9 8 13 9 12 8
g 10 7 3 14 7 14 10
Figure 5.9 Alarge matrix with a saddle point.
Strategy Column 1 Column 2
Row 1 a b
Row 2 c d
Figure 5.10 Dominanceand admissability.
V
V fair
Dominance and inadmissibility in large saddle point games

dominates
inadmissible
a c b d
a b c d R
86
Player 2
b c d e g
b 12 12 11 10 13
Player 1 d 4 2 13 8 10
e 7 8 14 5 10
f 9 8 13 9 8
g 7 3 14 7 10
Figure 5.11 First elimination of dominated rows and columns.
W W
Games with no saddle points

87
Player 2
c e g
b 12 10 13
Player 1
f 8 9 8
g 3 7 10
Figure 5.12 Second elimination of dominated rows and columns.
Player 2
e
b 10
Player 1
Figure 5.13 Final elimination of dominated rows and columns.
Example 5.3 Re-allocation of duties
W
88
Cabin crews (UFO)

Change Change
Strategy now later
Change
now 0 100%
Pilots
(Cockpit e.V.) Change
later 25% 0
(Pay-offs for the row player only are shown)

Figure 5.14 Pay-off matrix for two groups in conict over re-allocation of duties.
ad nauseam
mixed
89
Cabin crews (UFO)

Change Change
Strategy now later Probability
Change
now 0 100% p = 0.2
Pilots Change
(Cockpit e.V.) later 25% 0 1 p = 0.8
Probability q = 0.8 1 q = 0.2
(Pay-offs for the row player only are shown)
Figure 5.15 Pay-off matrix for the re-allocation of duties, with assigned probabilities.
strategy
W minimax
mixed strategies
W
p
p V
p p p p
p p
W
q
q V
q q) q q
90
q q
W
W
W V
W
p q
p p
Large matrices generally

W
Large matrices generally
91
or one
W
Example 5.4 Student attendance
W p
p
V
p p p p
92
Teachers
Passively Actively
Strategy Teach on supervise give revision
group study workshops
Attend
lessons 12 0 5
Students Do not attend

lessons 8 2 1
Figure 5.16 Pay-off matrix for attendance of students during public examination period.
p / p /
q q
V
q q) q q
q / q /
W
/ /
/ / /
not
p q
Interval and ordinal scales for pay-offs
93
p / p /
q / q /
/
/
/
/ / /
/ /
/ /

V
V
V V
V
V
V
x V
x' x
x' W V
94
Operations
manager
Strategy 20 journeys 21 journeys 28 journeys
4 drivers 2100 2000 2100
Personnel
manager 5 drivers 2100 2000 1875
6 drivers 1890 1800 1800
Figure 5.17 Transformation of the pay-off matrix in Figure 5.8 (each pay-off multiplied by 100).
Teachers
Passively Actively
Attend
Students lessons 20 8 13
Do not attend
lessons 0 10 9
Figure 5.18 Transformation of the pay-off matrix in Figure 5.16 (each pay-off has 8 added).
x' x
V
x' x
V
95
Hospital board
Dismiss with Retain
Strategy retirement &
package retrain
Accept
Surgeon incompetency g b
assessment
Reject
incompetency vg vb
assessment
Figure 5.19 Arecongured matrix with ordinal pay-offs.
V
V
Games with ordinal pay-offs and saddle points

V
W V
V W
Games with ordinal pay-offs, but without saddle points

W
V
p p
q q
96
Cabin crews
Change Change
Strategy Probability
now later
Change
now w e p
Pilots Change
later b w 1 p
q 1 q Assigned
probabilities
Figure 5.20 Arecongured ordinal pay-off matrix, with probabilities.
p p p p
q q) q q
p /
p /
p p
V
V
p
p
q /
q /
97
q q
6 Two-person mixed-motive games of
strategy
Consider what you think is required and decide accordingly. But never give your reasons; for
your judgement will probably be right, but your reasons will certainly be wrong.
Earl of Mansfield 17051793 Advice to a new governor
X
V
V V
variable-sum games
W W
not
98
Representing mixed-motive games and the Nash equilibrium
99

V
V
V V
W
W
two-player mixed-motive game W
W S r r rm
S m
W c c cn
S n
V u u
V r, c u r, c S S
W ri
dominate rj
Two-person mixed-motive games of strategy
100
Player 2
Strategy c1 c2
Player r1 u1(r1,c1) , u2(r1,c1) u1(r1,c2), u2(r1,c2)
1
r2 u1(r2,c1), u2(r2,c1) u1(r2,c2), u2(r2,c2)
Figure 6.1 Amixed-motive game with two players.
Player 2
Strategy c1 c2
Player r1 2, 2 4, 3
1
r2 3, 4 1, 1
Figure 6.2 Amixed-motive game with no dominant strategies.
u ri c u rj c c S
rj inadmissible
ri rj strict
u ri, c u rj, c c S
weak
u ri c u rj c c S
method of iterated elimination of
dominated strategies
r c S S
Nash equilibrium
101
Player 2
Strategy c1 c2 c3
r1 1, 0 0, 3 3, 1
Player
1
r2 0, 2 1, 1 4, 0
r3 0, 2 3, 4 6, 2
Figure 6.3 ANash equilibrium.
u r c u r c r S
u r c u r c c S
r r c
c
V
1 6 (3, 4)
r r
c c
r c
102
Player 2
Strategy c1 c2
r1 4, 4 2, 3
Player
1
r2 3, 2 1, 1
Figure 6.4 Pay-off matrix for a two-person mixed-motive game with a single Nash equilibrium point.
Mixed-motive games without single equilibrium points: archetype 1

leadership games
V
V
Example 6.1 A leadership game
V
W
W
V
Mixed-motive games without single equilibrium points: archetype 1 leadership games
103
Nominee 2
Decline Accept
Strategy nomination nomination
Decline 2, 2 3, 4
nomination
Nominee
1
Accept 4, 3 1, 1
nomination
Figure 6.5 Pay-off matrix for leadership games.
W
V
both
W
104
College 2
Submit Submit
Strategy preferred unpreferred
calendar calendar
Submit
preferred 2, 2 4, 3
College calendar
1 Submit
unpreferred 3, 4 1, 1
calendar
Figure 6.6 Pay-off matrix for heroic games
V
W
but self more

heroic games
V
Example 6.2 An heroic game
V V
Mixed-motive games without single equilibrium points: archetype 3 exploitation games
105
X
V
W
V
V heroic
W but beneWts the other

player more W
its
own
V

exploitation games
V
106
Ericsson
Strategy Issue Issue

shares shares
later now
Issue
shares 3, 3 2, 4
later
Nokia
Issue
shares 4, 2 1, 1
now
Figure 6.7 Pay-off matrix for exploitation games.
Example 6.3 An exploitation game
X
W
W
W
W V
V
Mixed-motive games without single equilibrium points: archetype 4 martyrdom games
107
V exploitation
W at the expense of
the other player V
W W
perceived to be
perceived

martyrdom games
V
prisoners dilemma
108
Stockbroker
Refuse to Cooperate with
Strategy cooperate investigators
with
investigators
Refuse to
cooperate 3, 3 1, 4
with
Lawyer investigators
Cooperate
with 4, 1 2, 2
investigators
Figure 6.8 Pay-off matrix for martyrdom (or prisoners dilemma) games.
Example 6.4 A martyrdom game
Y
Y
Y
V
W
V /
109
martyrdom
W the other as much as self
V W
W
110
Stockbroker
Refuse to Cooperate Choose Choose
cooperate regardless same opposite
Strategy regardless of lawyer strategy as strategy to
of lawyer lawyer lawyer
Refuse to
cooperate
3, 3 1, 4 3, 3 1, 4
Lawyer with the
investigators
Cooperate
with the 4, 1 2, 2 2, 2 4, 1
investigators
Figure 6.9 Pay-off matrix for the level-one martyrdom metagame.
Metagame theory
meta-strategies
V
111

W
W
W

W

W

W V
112
Broker
Refuse to Cooperate Choose Choose
cooperate regardless same opposite
Strategy regardless of the strategy as strategy to
of the lawyer the lawyer the lawyer
lawyer
Refuse no matter
which column 3, 3 1, 4 3, 3 1, 4
the broker choses
Refuse unless the
broker chooses 4 3, 3 1, 4 3, 3 4, 1
Refuse unless the
broker chooses 3 3, 3 1, 4 2, 2 1, 4
Refuse unless the
broker chooses 2 3, 3 2, 2 3, 3 1, 4
Refuse unless the
broker chooses 1 4, 1 1, 4 3, 3 1, 4
Refuse unless the
broker chooses 1 or 3, 3 1, 4 2, 2 4, 1
2
Refuse unless the
3
Refuse unless the
Lawyer 3
Refuse unless the
4
Refuse unless the
4
Refuse unless the
4
Cooperate unless
the broker chooses 1 3, 3 2, 2 2, 2 4, 1
Cooperate unless
Cooperate unless
Cooperate unless
Cooperate no matter
which column 4, 1 2, 2 2, 2 4, 1
the broker choses
Figure 6.10 Pay-off matrix for the level-two martyrdom metagame.

Summary of features of mixed-motive prototypes
113
V
W
W
W
Summary of features of mixed-motive prototypes

Leadership games

Heroic games

114
Exploitation games

W
V
Martyrdom games

V
TheCournot, von Stackelberg and Bertrand duopolies: an application of mixed-motivegames
115

W
W
V W

The Cournot, von Stackelberg and Bertrand duopolies: an interesting

application of mixed-motive games
Oligopoly
V W
W
W duopoly
W
V
116
static
simultaneous
V
as if
dynamic sequential
The Cournot duopoly
Example 6.5 The paper and packaging sector as a Cournot and von Stackelberg duopoly
W
V W R
R
P
total R R R
P R) A R A W
117
c W
c
W
W W
W
W
W
W W
W
V W V
V
W R cR
R cR
W W
A RR c R1
A R)R c R2
W W
W W
W R R R
R
A R R R cR
AR R RR cR
A R R R c R2
AR R RR cR
W
V
W reaction function
118
W
W V
W
A R R c
R
A R R c
R
R R
R R A c
R R A c
A c c
W
R R
R R A c
R R A c
A c c
R
119
A c c
R
R R R
2A c c
V
PR A R
A A c c
A c c
c c
W
W
W
iso-proWt curves V
W W
W W
A c / A c /
W W
A c c / A c c /
W W
N W
W
120
R2
A c1
Reaction function for
Smurfit-Stone
(A c 2 ) /2
Nash equilibrium (also the Cournot
C equilibrium)
N
(A + c 1 2c 2 ) / 3

T International Paper
R1
(A c 1) / 2 A c2
(A 2c 1 + c 2) / 3
Figure 6.11 The CournotNash equilibrium.
V
W
W
W
A c /
W
V
W W
W
W
121
R2
A c1

Smurfit-Stone
(A c2 ) / 2
Cournot equilibrium
C

International Paper
R1
(A c1 ) /2 A c2
Figure 6.12 Arriving at the Cournot equilibrium.
balance imbalance
Y
V
W
W Y
W
W V
V W
T
W
T W V
W V V
contract line C
Y
W
W
T
122
C T
W
W
V
C T
W
The von Stackelberg duopoly
W W
W
X
W
sub-game perfect
W
A R)R cR
123
A R R R cR
AR R RR c
V R
A R R c
R2
R R c
W
W
A R)R cR
A R R R cR
R R RR cR
R
R R R A c R / cR
V R
A/2 R c c/
R
W
R c c /
R c c /
W c R
124
R2
A c1
Smurfit-Stone
(A c 2 ) / 2
(A + c1 2c 2 ) / 3 (CN) ( Cournot Nash equilibrium )
SN von Stackelberg Nash equilibrium

(A + 2c1 3c 2 ) / 4
Reaction function for International Paper
R1
(A c1 ) / 2
(A 2c1 + c 2) / 3 A c2
Figure 6.13 The von StackelbergNash equilibrium
R A c/
W
W W W
W R
A c /
W W
SN V
W
125
CN
W
W W
W V
W V
W W
The Bertrand duopoly

W
R
P W
Example 6.6 The UK supermarket sector as a Bertrand duopoly
W W
W R
P R
P W
W W
126
V
V lower prices and makes higher than normal proWts
oVers lower prices and makes lower

than normal proWts
W
V
W
charge the
same prices, and if each supermarket is making higher or lower than
normal proWts
W
W W
W charge the same
prices and make normal proWts W
W
Bertrand paradox
W
P P
R A P BP
R A P BP
A
B X
demand functions
W
127
B
W
PR cR
PR cR
R R
A P BP P c A P BP
AP P BP P cA cP c BP
A P BP P c A P BP
AP P BP P cA cP c BP
V
W
A P BP c
P
A P BP c
P
P R
P A BP c /
P A BP c /
2
P P
128
P2 Reaction function
for Tesco
A+c
2 B
BN Bertrand Nash equilibrium
(A + c ) / 2
(B = 0)
Reaction function for Sainsbury
P1
A+c
(A + c ) / 2
2 B
(B = 0) (Assumes c1 = c 2 = c)
Figure 6.14 The BertrandNash equilibrium.
2P BP A c
BP P A c
AB c Bc
P
B
A(B Bc c
P
B
c c
P P A c/ B
B
Solving games without Nash equilibrium points using mixed strategies
129
complement strategi-
cally
W
W
substitute strategically
W
W
BN
Y
W
T
W
V
Y
W
Y
Solving games without Nash equilibrium points using mixed

strategies
r c
c r
c
r
V
130
Player 2
Strategy c1 c2
r1 1, 4 3, 0
Player
1
r2 2, 1 1, 2
Figure 6.15 Atwo-person mixed-motive game with no Nash equilibrium point.
Player 2
Strategy c1 c2 ........ cn
r1 u1(r1, c1) , u2(r1, c1) u1(r1, c2 ), u2(r1, c2 ) ........ u1(r1, c3 ), u2(r1, c3)
Player r2 u1(r2, c1), u2(r2, c1) u1(r2, c2 ), u2(r2, c2) ........ u1(r2, c3) , u2(r2, c3)
1 : : : : :
: : : : :
: : : : :
rm u1(rm, c1), u2(rm, c1) u1(rm, c2 ), u2(rm, c2 ) ........ u1(rm, cn) , u2(rm, cn)
Figure 6.16 The general matrix for mixed strategies in mixed-motive games.
m
S r r rm
n
S c c cn
u ri cj V
ri cj
m n
Uij V ri cj
Vij V ri cj
W
131
Player 2
Strategy c1 c2 ........ cn
r1 U 11, V 11 U 12, V 12 ........ U1n , V1n
Player r2 U 21, V 21 U 22, V22 ........ U2n , V2n
1 : : : : :
: : : : :
: : : : :
rm Um 1, Vm 1 Um1, Vm1 ........ U m n , Vm n
Figure 6.17 The abbreviated general matrix for mixed strategies in mixed-motive games.
ri cj
Uij cj
Vij ri
pi
pi
pi i m
qj
qj
qj j n
pure pi qj
p q
V
cj V
piuij i m
cj qj
V
piq juij i m j n
132
piq jvij i m j n
pi
pi
Example 6.7 Mutual societies and life companies changing status: a case study
ordinal
V
V
133
V
V
p q q
p p q q
V
V
pq pq pq pq
pq p q p q p q
pq p q
pq pq pq pq
4p q p q p q
5p q p q
q
p
p
q
134
Pro-mutual lobby
Strategy Community-focused Criterion-based

business business
Community-
focused 1, 4 3, 0 p1
business
Pro-change
lobby
Criterion-
based 2, 1 1, 2 p2 = 1 p1
business
q1 q2 = 1 q1 Assigned
probabilities
Figure 6.18 Pay-off matrix for a mutual society changing status.
p / p / q / q /
V
/
/
W
X
7 Repeated games
Life is an offensive, directed against the repetitious mechanism of the universe.

A.N. Whitehead 1933 Adventures of Ideas
V
Y
W
V
W
W V
Infinitely repeated games
V
135
Repeated games
136
BUPA
Large Small
Strategy subsidy subsidy
for NHS for NHS
Large
subsidy 20, 20 40, 10
GHG for NHS
Small
subsidy 10, 40 30, 30
for NHS
Figures represent profits in millions of pounds sterling.
Figure 7.1 Pay-off matrix for two private healthcare rms.
Example 7.1 Funding publicity

W
W W
W
W
W W
W
V
W W
W V V
W V
V W W
Infinitely repeated games
137
W
W
W
W
W V
W W
Y
punishing strategy
Y
Y
W
W
W
trigger
strategy
W
W
W
Y
W W
W
Repeated games
138
W
W
W
V W
W W
W
W discount the future

W
V V
r d / r
rate of discount V
V
V d d
dV d d d
dV
Vnow(small) 30/(1 d)
Finitely repeated games
139
V
V d d
dV d d d
dV d d d d
d d
Vnow(large) 40 20d/(1 d)
V V
W
/ d d/ d
d d
d
W
W
Y
/ /
W
Y
W W
W

W
W V
V
Repeated games
140
Backward induction and its inherent paradox

W
V
W W
W
W V
W W
V
W
W
W
V
paradox of backward induction

W
W
W W
141
W
Y
V W W
Avoiding the paradox of backward induction: bounded rationality
W
W
t V
W
V
W W Y
V
V
V
tR
V W
tR W
V W W Y
Repeated games
142
BUPA
Large Moderate Small

subsidy subsidy Subsidy
Large 20, 20 40, 10 0, 0

subsidy
GHG Moderate
10, 40 30, 30 0, 0
subsidy
Small 25, 25
0, 0 0, 0
subsidy
Figure 7.2 The NHSsubsidy game with multiple Nash equilibria.
tR
W
/tR W
/tR
tR W
/tR
Avoiding the paradox of backward induction: multiple Nash equilibria

143
BUPA
Large Moderate Small

subsidy subsidy Subsidy
Large 40, 40 60, 30 20, 20

subsidy
GHG Moderate 30, 60 55, 55 20, 20

subsidy
Small 20, 20 20, 20 45, 45

subsidy
Figure 7.3 The extended NHSsubsidy pay-off matrix for the entire game played over two iterations.
V
Y
V
W
V
V V
W
V
V
V
W
Repeated games
144
Avoiding the paradox of backward induction: uncertainty
W
W
W
W
d
W
r
W
d p/ r
p
Avoiding the paradox of backward induction: incomplete information

W
V
a
b
V
a
W
145
GHG
Large subsidy Small subsidy
BUPA BUPA
Large sub. Small sub. Large sub. Small sub.
(20, 20) (40, 10) (10, 40) (30, 30)
BUPA
Strategy Large Small
subsidy subsidy
Large
GHG subsidy 20, 20 40, 10
Small
subsidy 10, 40 30, 30
(a)
Figure 7.4 GHGis (a) free of any additional constraints and (b, overleaf ) bound by some internal constraints.
V
b
p
p
Repeated games
146
GHG
Large subsidy Small subsidy
BUPA BUPA
(0, 20) (5, 10) (10, 20) (30, 30)
BUPA
Strategy Large Small
subsidy subsidy
Large
GHG subsidy 0, 20 5, 10
Small
subsidy 10, 20 30, 30
(b)
Figure 7.4 (cont.)
p
p
W
W
p p
W
p p
147
Nature
GHG is free of GHG is bound

constraints by constraints
GHG GHG
BUPA BUPA
Large Smalll Large Small Large Small Large Small

sub. sub. sub. sub. sub. sub. sub. sub.
(20, 20) (40, 10) (10, 40) (30, 30) (0, 20) (5, 10) (10, 20) (30, 30)
BUPA
Large Small
Strategy subsidy subsidy
Free &
Prob. = p large 20, 20 40, 10
subsidy
Free &
Prob. = p
small 10, 40 30, 30
subsidy
GHG
Bound &
Prob. = 1 p large 0, 20 5, 10
subsidy
Bound &
Prob. = 1 p small 10, 20 30, 30
subsidy
Figure 7.5 The game transformed by introducing nature.

Repeated games
148
p p p p
/ V
/
W Y
p /
V
V
W
W
V
Y
8 Multi-person games, coalitions and
power
The management of the balance of power is a permanent undertaking, not an exertion that
has a forseeable end.
Henry Kissinger 1979 The White House Years
149
Multi-person games, coalitions and power
150
V
W
Non-cooperative multi-person games
V
equivalent V interchangeable
Mixed-motive multi-person games
151
Mixed-motive multi-person games

multi-person game n
i W Si, i n
i V ui S S Sn R
i si Si
V ui
S S Sn V u u un
V ui n
Nash equilibrium for a mixed-motive multi-person game

W s s sn
ui s s s n u s s sn si Si
s s s n
ui
s s s n)
si
ui/ si
s i ui
ui
i
si
152
Example 8.1 Maximising funding

Y
u
u
u
V
u a, b, c a bc a
/
u a, b, c a b c a b
u a, b, c c ab ac
a W b
c
u
a
a
u /
/ a b
b
u
ac
c
/
/ b
b
c
Partially cooperative multi-person games
153
u
u
u
u
a
u /
/
b
u
c
a b
c
maximises
Partially cooperative multi-person games
characteristic function
C
C
C C
G i Ci i
154
Ci security level
Ci W
V Ci
W
C
V
C
minimal winning coalition theory
V
W
W minimum resource theory

W
Indices of power: measuring influence
155
V
imputation
core
whole pot V
factions
W
W pivotal
156
its critical
Underlying assumptions: sincerity, completeness and transitivity
sincere
Completeness
Transitivity
The Shapley value
G n
C
C fi
C s
G f f f fn C f f fi fs C G
f s n
157
n
s n s
i
s n s
n
sizes
/n
s i n
s n s
n
C
C
fi C C i
fi C
C C i
S fi W
s n
s n s
S fi s C C i
n
The ShapleyShubik index
G n C
158
G f f f fn C f f fi fs C G
SS fi W
Ci
i fi
SS fi
iCi i n
SS fi
weighted
V V
Example 8.2 Power and school governance in a divided society
Voluntary maintained

Controlled secondary

159

Out-of-state
An analysis of power on voluntary maintained boards (Model A)

W
160
C
L
P
V T
D
C L P T D

C

C

Three-faction coalitions
C W
C C
C L P T D
Four-faction coalitions
C
W
L P T D C
C
C
C L P T D
Grand coalitions
161
Table 8.1 Summary table for voluntary maintained boards
C L P T D
Table 8.2 Shapley values for voluntary maintained boards
s n s
C L P T D
n
/
/
/
/
/
The Shapley value for each faction

n s
fi
C C i
fi
The ShapleyShubik index for each faction

162
Table 8.3 ShapleyShubik index for voluntary maintained boards
C L P T D
An analysis of power on controlled secondary boards (Model B)
C
L
P
V T
C L P T
Two-faction coalitions
C C
W
C W
L P T C
C
C
C L P T
163
Table 8.4 Summary table for controlled secondary boards
C L P T
Table 8.5 Shapley values for controlled secondary boards
s n s
C L P T
n
/
/
/
/
Grand coalitions
W
W
n s
fi
C C i fi
An analysis of power on out-of-state boards (Model C)

W
164
Table 8.6 ShapleyShubik index for controlled secondary boards
C L P T
L
P
R
r
V T
L P R r T
W

LP
PL

TrR

W
L P
R T r PL LP L
P R T r
Four-faction coalitions
W
L W P P
165
Table 8.7 Summary table for out-of-state boards
L P R T r
R T r
W P
P P
L
R T r
Grand coalitions
W
W
n s fi
C C i
fi

166
Table 8.8 Shapley values for out-of-state boards
s n s
L P R T r
n
/
/
/
/
/
Table 8.9 ShapleyShubik index for out-of-state boards
L P R T r
Conclusions
The relative power of major and minor players

X
167
The relative power of the minor players

W
X
V
The pay-oVfor winning coalitions

V
per se
X V
X
168
Table 8.10 Most pivotal position in the voting sequence for voluntary maintained board factions
C
L
P
T
D
The order of voting or coalescence

Minimal winning coalitions

169
Table 8.11 Most pivotal position in the voting sequence for controlled secondary board factions
C
L
P
T
Table 8.12 Most pivotal position in the voting sequence for out-of-state board factions
L
P
R
T
r
Other applications
170
V
W
Implications for forming committees

V
V
X V
The Johnston index
n
C
C fi
C s
171
C f f fi fs
k
fi
fi C C Ci Ck
m
m s m C m
C mi
C i mk Ck
j p fi /m /m /mi /mk
J fi
j p fi
J fi
i j p fi i n
J fi
The DeeganPackel index
k
m
m C m
C mi C i mk
Ck
W
dp fi /m /m /mi /mk
D fi
dp fi
D fi
i dp fi i n
172
D fi
The Banzhaf index
b fi W
fi
B fi
b fi
B fi
i b fi i n
B fi
Summary
W
173
X
V
X
9 A critique of game theory
How selsh soever man may be supposed, there are evidently some principles in his nature
which interest him in the fortunes of others, and render their happiness necessary to him,
though he deserves nothing from it except the pleasure of seeing it.
Adam Smith 1795 The Theory of Moral Sentiments
perception
W
W
W
Rationality
W
174
Rationality
175
W
V
W
W Instrumental rationality
W
not W
collective
W
W
categorical imperatives
A critique of game theory
176
W
V
W
W W
W
W
bounded rationality
W
Indeterminacy
177
W
W
V V
V
Indeterminacy
Harsanyi doctrine
178
A B A B B
Pass 1 Pass 2 Pass 3 Pass 50 (0, 0)
Take 1 Take 2 Take 3 Take 4 Take 50
(1, 0) (0, 2) (3, 0) (0, 4) (0, 50)
Player A pay-offs shown first

Figure 9.1 The centipede game.
Inconsistency
centipede game
V
V
W
Inconsistency
179
W
W
W
180
trembling hand assumption
W
procedural stopping
rules
W V
Conclusion
W
W
X
V
Conclusion
181
V
V
A Proof of the minimax theorem
Preamble
V m
n
ri cj
V uij
p
q
p p p pi pm
pi i m
q q q q j, . . . , qn
qj n
ri pi c
qj
V wij pi q j
V
wij pi q j i m j n
182
Appendix A
183
c
V
p wic pi qc
r
V
q wrj pr q j
V
p q wij pi q j
V
q p wij pi q j
p q wij pi q j q p wij pi q j
V wij
Proof: step 1
W
p q wij pi q j q wrj pr q j wrc pr qc p wic pi qc

q p wij pi q j
maxp min q wij pi q j min q maxp wij pi q j

Appendix A
184
Teachers
Passively Actively
Attend
Students lessons 20 8 13
Do not attend
lessons 0 10 9
Figure A.1
A graphic model for the game
V
w q w q w n qn w jqj
V
w j qj
m
m
W m
w jqj w j qj wmj q j
q q q3 q3 q q
Appendix A
185
Player 2 Player 2 Player 2

chooses chooses chooses
column 1 column 2 column 3
Player 1
chooses 20 8 3
row 1
Player 1
chooses 0 10 9
row 2
Vertex ( 20, 0 ) ( 8, 10 ) ( 3, 9 )
Figure A.2
Player 1
chooses
row 2
b
10

W
a Player 1
Q 20 chooses
row 1
Figure A.3
w jqj q q q q
w jqj q q q q
q q
q q
Appendix A
186
q / q / q3 /
/ /
/
Proof: step 2
q p wij pi q j
W both
Q W
a a a am Q W b b
b bm W a ai
ai a Q
W
b a b a bm a m) 2 b a
b a bm am
W
b a b a
b a b a1 b1 a
b
b a b b a
W (b1 a 1) a a b
a b
Proof: step 3
t w W
tw tb tw t b tw tb
twm t bm
Appendix A
187
w b
w b w b W
W
tw tb
tw tb W a
b
tw tb a tw tb a
twm t bm am b a b a
bm a m
t
w a w b a wm bm am
b a b a bm a m
w1(b1 a 1) w2(b2 a 2) wm(bm a m) 0
Proof: step 4
b a b a bm am
a
b V all
bi ai
bi ai / bi ai i m
i bi ai /
bi ai
m W
bi ai
a a am m w W
W W
w
w w jqj w jqj wmj q j
Appendix A
188
w j qj w jqj m wmj q j
q
q wij i q j
p
q wij pi q j
p q wij pi q j
if min q maxp wij pi qj 0, then maxp min q wij pi qj 0
Proof: step 5
k V wij k
wij V k
p q wij pi q j p q wij pi q j k
q p wij pi q j q p wij pi q j k
q p wij pi q j k p q wij pi q j k
q p wij pi q j k p q wij pi q j k
k q p wij pi q j
Appendix A
189
B Proof of Bayess theorem
Preamble
p / p
p /
p / p p / p
p p
conditional
p /
i n
p(B/Ai) p(Ai)
p(Ai/B)
ip(B/Ai) p(Ai)
Ai
p / p
p /
p / p p / p
190
Appendix B
191
p / p
p /
p / p p / p
p p
Proof
W
p i p / i p i
p i p i / p
p(B/Ai) p(Ai)
p(Ai/B)
p(B)
p p i / p / i p i
i
p i p i / i p / i p i
i p /
i
p i p / i p i
p(B/Ai) p(Ai)
p(Ai/B)
i p(B/Ai) p(Ai)
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Theory
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The New
Palgrave: Game Theory The New
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Augustin Cournot, 1838
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A Commentary on Kants Critique of Practical Reason
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Kant Selections
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Game Theorywith EconomicApplications
Economics and Philosophy
Essays on the Foundation of Game Theory
Fun and Games: A Text on Game Theory
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Econometrica
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Recherches sur les Principes Mathematiques de la theorie des Richesses
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n
International Journal of Game Theory
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Politics, and Everyday Life
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Game Theory for Applied Economists
Contributions to the Theory of Games Vol.IV, Annals of Mathematics Studies

Number 40
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Philadelphia Inqui-
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Game Theory: A Critical Introduction
Psychological Reports
Economet-
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Management Science
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Mathematical Economics
Experiments in Economics
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Readings in Microeconomics
W Oxford Review of
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The Handbook of Experimental Economics
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Psychological Monographs,
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Game Theory and Economic Modelling
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Convention: a Philosophical Study
V Games and Decisions: Introduction and Critical Survey
Current Issues in Microeconomics
Game Theory and Related Approaches to Social Behaviour

Evolution and the Theory of Games
Econometrica,
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Number 39
X
Economics and National Security
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Handbook of ConXict Resolution: the Analytical Problem-

Solving Approach
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A Beautiful Mind: The Life of Mathematical Genius and Nobel Laureate
John Nash
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European Journal of Social Psychology
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Puzzle of the Bomb
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ScientiWc American
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An Introduction to Positive Political Theory
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Interna-
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The Foundation of Statistics
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Handbook of Industrial Organisation

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International Journal of Game Theory

Theory and Decision
X
Journal of Theoretical Biology
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International Economic Review
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Contribu-
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Experimental Psychology
Models of Bounded Rationality, Vol.3: Empirically Grounded Economic
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Mayhew, L.F.X. (1974) The Post-Industrial Society
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Review of Economic Studies
Marktform und Gleichgewicht

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Congress of Mathematicians, Cambridge, 2228 August, 1912,
Index
see / /
/
/
/
/
et seq
see
/
see also
see also
199
Index
200
X see
/ /
/ V
W
W
/
Index
201
/
/
see also
see also /
/
/
/
V
Y
/
Y
Y
Index
202
see under
W see also
/
V
X
/ /
/
see W
W
/
/
/
/
see also
/
see
/ /
/ V
Index
203
/ V
/ /
/
/
/ V
see
Index
204
cont
see also
W W
V
/ /
see
V
Y
V

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An Introduction for Managers

Cambridge University Press

Cambridge University Press 2003

This book is in copyright. Subject to statutory exception and to the provision of

First published in print format 2003

Cambridge University Press has no responsibility for the persistence or accuracy of

4 Sequential decision making and cooperative games of

5 Two-person zero-sum games of strategy

6 Two-person mixed-motive games of strategy

8 Multi-person games, coalitions and power

9 A critique of game theory

Appendix A Proof of the minimax theorem

And, greatest dread of all, the dread of games!

zero-sum non-cooperative game

Table 1.1 The unions pure strategies

Games of skill Games of chance Games of strategy

Cooperative Mixed- motive Zero-sum

Purely Minimal Infinite Finite Non-cooperative Cooperative

Mixed strategy Power

Have optimal Have no optimal

Figure 1.1 Ataxonomy of games.

A brief history of game theory

Theory of Games and Economic Behav-

Theory of Games and Economic Behaviour

V Games and Decisions

The Caretaker Tosca

Linear programming, optimisation and basic calculus

Figure 2.1 Afunction with a local maximum.

Figure 2.2 Afunction with a local minimum.

Example 2.1 Hospital in-patient and out-patient facilities

(0, 40) 40ny

(0, 40) 60 000 68 000 84 000

(60, 0) 96 000 84000 60 000

Example 2.2 Fundraising

Example 2.3 Balancing full-time and part-time staff

Figure 2.6 Revenue function for Royal Ballet fundraising.

20x + 8y > 680

Strategy ( 30, 10 ) 1340

Figure 2.8 Pay-offs for balancing full-time and part-time staff.

Example 2.4 Examination success and time given to tutoring

Solving the equation r' h

The Lagrange method of partial derivatives

Example 2.5 Funding research and design

Figure 3.1 Asample space and probability of an event.

An introduction to basic probability theory

probability space S sample space

Expected value, variance and standard deviation

Games of chance involving risk

Example 3.2 Funding a new high-speed rail link

Example 3.3 The viability of computer training courses

The organisation is risk-neutral

The organisation is averse to risk

Example 3.4 A portfolio for investment over a waiting period

Games of chance involving uncertainty

Example 3.5 Insurance against maternity leave

Bank Insure 5000 5000

Do not insure 0 13 500

Figure 3.6 Insurance against maternity leave: pay-off matrix.

Bank Insure 5000 0

Do not insure 0 8500

Figure 3.7 Insurance against maternity leave: regret matrix.

Figure 4.1 Adirected graph.