GAME THEORY

PRESENTED BY
J.PRAVEENA

Introduction

Game theory attempts to study decision-making in situations

where two or more intelligent and rational opponents are
involved under conditions of conflict and cooperation.
The approach game theory is to seek to determine a rivals most
profitable counter-strategy to ones own best moves and to
formulate the appropriate defensive measure.
Game theory came into existence in early 20 th century.
However, the mathematical treatment of the Game Theory was
made available only in 1944, when John Von Neumann and Oscar
Morgenstern published a book Theory of Games and Economic
Behavior.
Authors approach was based on the principle of best out of the
worst,i.e., he utilized the idea of minimization of the maximum
losses.

BASIC TERMINOLOGY.
No. of Players.
Payoff.
Strategy.
Value of the Game.
Payoff Matrix.
Two-Person Zero-sum Game.
Maximin & Minimax Principle.

Solution Methods of Pure Strategy

Games(with saddle point)
In case of a pure strategy game, the maximizing player
arrives at his optimal strategy on the basis of the maximum
criterion, while the minimizing players strategy on the
minimax criterion. The game is solved when the maximin
value equals minimax value.

The difference b/w pure and mixed strategy games is that

pure strategy games possess a saddle point whereas mixed
strategy games do not . A presence of a saddle point is
identified by comparing the values of each players

Principle of Dominance
In general the following rules of dominance are used to
reduce the size of payoff matrix:
Rule 1:- If all the elements in a row of a payoff matrix are less
than or equal to the corresponding elements of the other row
then the player A will never choose the ith strategy or in
other words the ith strategy is dominated by the jth strategy.
Rule 2:- If all the elements in a column of a payoff matrix are
greater than or equal to the corresponding elements of the
other column then the player B will never choose the rth
strategy or in other words the rth strategy is dominated by
the sth strategy.

Cont.
Rule 3:- A pure strategy may be dominated ifnit is
inferior
to average of 2
or more other pure strategies.
Nash Equilibrium:It is a set of strategies such that each
player believes (correctly)that it is doing the best
it can, given the strategy of the opponents.
For Example:-

Solution Methods of Mixed

Strategy Games (Games without
saddle Point)

All problems of game where saddle point does not exist ,

are taken as mixed strategy problems. In order to solve
such a game ,each player adopts the concept of chance
move and starts to play in random manner & in such a
way that his avg. payoff over a large no. of plays of the
game should be optimal, even though he may lose more
in any individual play of the game. In other words, the
player adopts a certain strategy having probability P1 for
some time and then shifts over to another strategy
having probability P2 and then after sometime to the
third strategy having probability P3 and so on , such that
the sum of his all probabilities is equal to one & payoff
over a large no. of plays of the game becomes optimal

Cont
A mixed strategy game can be solved by
following three methods:

Algebraic Method
Graphical Method
Linear Programming Method

The 2-Person, Non Zero Sum

Games
Unlike zero-sum games when one firms loss is
necessarily the other firms gain and vice-versa,
the non-zero sum refer to a situation where there
exists a jointly preferred outcome. The existence
of jointly preferred outcome means that both
players may be able to increase their payoffs
through some form of co-operation or agreement
concerning the actions to be chosen.

Limitations of Game
Theory

The assumption that the players have the

knowledge about their own payoffs & payoffs of
others is rather unrealistic. He can only make a
guess of his own & his rivals strategies.

As the no. of players increases in the game, the

analysis of the gaming strategies becomes
increasingly complex 7 difficult. In Practice , there
are many firms in an oligopoly situation and the
game theory cannot be very helpful in such
situations.

Cont.

The assumptions of maximin & minimax show that the

players are risk-averse & have complete Knowledge of the
Strategies. These do not seem practical.

Rather than each player in an oligopoly situation working

under uncertain conditions, that players will allow each
other to share the secrets of business in order to work out a
collusion. Thus , the mixed strategy are also not very
useful.

THANK YOU