Game theory

Introduction
Game
• Decision-making in a competitive situation (game) where
there are two or more opposing parties with conflicting
interests and the action of one depends upon the action
taken by the opponent.
(eg)
– Advertising and marketing campaigns by competing design firms
– Candidates for an election
– Two companies competing for tenders
– Countries involved in military battles
– Two persons bidding in a game
Player
• Competitors taking part in a game.
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Strategy (Alternative)
• It is a course of action taken by a player.
(eg) Giving special discounts
Giving 20% additional quantity free on purchase
Pure strategy
• A strategy is called pure if one decides in advance of the
play, a certain strategy to be adopted irrespective of
strategy the other may choose(a player is selecting a
particular strategy alone ignoring his remaining strategies).
Mixed strategy
• If a player follows more than one strategy, then the player
is said to follow a mixed strategy.
• In a mixed strategy, the sum of the probability of selection
of the individual strategies will be equal to one.
• (eg) p1 = 0.4; p2 = 0.5; p3 = 0.1 then p1+ p2 + p3 = 1
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Payoff matrix
Each combination of the alternatives of players A and B is
associated with an outcome, aij , ith strategy of player A and jth
strategy of player B(aij is positive represents a gain to Player A and
a loss to Player B, aij is negative represents a loss to Player A and a
gain to Player B) represented in a matrix form.
(eg) consider two person tossing a coin, payoff matrix to Player A is

Player B
H T
Player A H 7 -3
T -3 4
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(eg) 3x2 payoff matrix for Player A

Player B
B1 B2 Row min.
A1 9 2 2
Player A A2 8 6 6 (v)
A3 2 4 2
Column max. 9 6
(¯v)
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Maximin principle
• It maximises the minimum guaranteed gains of Player A.
• The minimum gains with respect to different alternatives of Player
A irrespective of Player B’s alternatives are obtained first. The
maximum of these minimum gains is known as the Maximin value
(v).
Minimax principle
• It minimises the maximum losses of Player B.
• The maximum losses with respect to different alternatives of Player
B irrespective of Player A’s alternatives are obtained first. The
minimum of these maximum losses is known as the Minimax value
(¯v).
Saddle point
• In a game, if Maximin value = Minimax value, then the game is said
to have a Saddle point.
• The intersecting cell corresponding to these values is known as
Saddle point.
• If the game has a Saddlepoint, then each player has a Pure strategy.
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Value of the game
• If the game has a Saddle point, then the value of
the cell at the Saddle point is called the Value of
the game(v) . Otherwise the Value of the game is
computed based on expected value calculations.
Two-person zero-sum game
• In a game with two players, if the gain of one
Player is equal to the loss of another Player then
that game is called Two-person zero-sum game.
• A game is said to be a fair game if v = 0 = ¯v.
• A game is said to be strictly determinable if v = v
= ¯v.