Mst541 Unit I

Theory of Games
Unit-I
Prof. Narinder Verma
Strategic Behavior- Uncertain

A lot of what we do, involves optimizing
against various alternatives:
What should I do after 10+2?
Should I do MBA after graduation?
What should be my major specialization?
What kind of job be my dream job?

Should I join family business?
School of Business Management
prof Narinder Verma
Strategic Behavior- Uncertain

Or at times against nature in general:
Should I take an umbrella today?
What crops should I plant this season?
How do we treat this disease or injury?
How do I fix my out of order car?
We sometimes imagine it as a game
against opponents
prof Narinder Verma
Prisoners Dilemma
Two suspects arrested for a crime were put into
prison separately.
prisoners decide whether to confess or not.
If both confess, both sentenced to 5 years of jail
If neither confesses, both will be sentenced to 1
year of jail
If one confesses and the other does not, then the
confessor goes free (no jail) and the nonconfessor sentenced to 9 years of jail
What should each prisoner do?
prof Narinder Verma
Battle of Seaes
A couple deciding how to spend the
evening
Wife would like to go for a movie

Husband would like to go for a cricket
match
Both however want to spend the time
together
Scope for strategic interaction
prof Narinder Verma
Understanding the Game

Game refers to a situation of conflict
and competition in which two or more
competitors are involved in the
decision-making process in anticipation
of certain outcomes over a period of
time.
1. Competitors are called players
2. Action is called Strategy
3. Anticipated outcome is the payoff
prof Narinder Verma
Understanding the Game

1. pricing of products is affected by
the price of the competitor.
2. Success of TV programme
depends upon the presence of
competing TV programmes in the
same time slot.
A basic feature here is that the final
outcome depends primarily upon
the combination of strategies
prof Narinder Verma
Defining Game Theory

Game theory is a series of mathematical
models that deal with interactive
decision-making situations under the
conditions of conflict and competition.
The study of oligopolies
The study of cartels; e.g. OPEC
The study of military strategies.
Study of effect of promotional campaigns
prof Narinder Verma
Game Theory
Game theoretic notions go back thousands
of years
Talmud
and Sun Tzu's writings.
Modern theory credited to John von

Neumann and Oskar Morgenstern 1944.
Theory
of Games and Economic Behavior.
John Nash (A Beautiful Mind fame)

generalized these results and provided the
basis of the modern field.
prof Narinder Verma
Classification of Games
2-person Game:
A
game that involves exactly two players
n-person Game
A
game that involves exactly n players
Zero-sum Game:
When
the sum of gains to one player is exactly

equal to the losses to other player, so that the sum
of the gains and the losses is equal to zero(0).
Non-zero sum Game:

A game whose sum is not equal to zero
10
prof Narinder Verma
Classification of Games
Simultaneous Move Game:
Each
player has to take action

simultaneously like Racing, Stone-paperScissors, Chidiya Ud etc
Sequential Move Game

One
player moves
Second
player observes and then moves
Like
Chess, Tic-Tac-Toe (naughts and

crosses), Discuss Throw, promotional
campaigns by competitors
11
prof Narinder Verma
Elements of a Game
A game consists of:
A set of players
A set of strategies for each player
The payoffs to each player for
every possible strategy
Strategy is a course of action that a
player adopts for every payoff
12
prof Narinder Verma
Strategies of Games
Optimal Strategy:
The
particular strategy that optimizes a

players gains or losses, without knowing
the competitors courses of action
Pure Strategy:
A
particular strategy that a player chooses

to play again and again regardless of other
players strategies
It
is a deterministic situation
13
prof Narinder Verma
Strategies of Games
Mixed Strategy:
A
set of strategies that a player chooses on

a particular move of the game with some
fixed probabilities
It is a probabilistic situation
Value of the Game:

It
is the expected gain or loss in a game

when a game is played a large number of
times
It
is represented by V
14
prof Narinder Verma
Two-person Zero-sum Game

payoff matrix to player A
Strategies of player A
Strategies of player B
B1
B2
Bn
A1
a11
a12
a1n
A2
a21
a22
........
a2n
amn
Am am1
aij
am2
15
prof Narinder Verma

A1,A2,..,Am are the strategies of
player A
B1,B2,...,Bn are the strategies of

player B
aij is the payoff to player A (by B)
when the player A plays strategy Ai
and B plays Bj (aij is ve means B got
|aij| from A)
16
prof Narinder Verma

Two boutiques A and B in Solan compete
such that each gets 50% of clientele. As
gain would be Bs loss. B moots an idea
to gain market share by:
1. Discount coupons
- B1
2. Decreasing price
B2
3. TV Advertisement
B3
4. 10% Cash Back
B4
17
prof Narinder Verma

A has an idea that B might do this. So A
also moots an idea to gain market share
by:
1. Discount coupons
- A1
2. TV Advertisement
A2
3. 10% Cash Back
A3
The payoff matrix in Rupees for boutique

A is given as:
18
prof Narinder Verma
Strategies of
player A
B1
B2
B3
B4
A1 8
-6
A2 4
A3 7
-5
-7
1.
Find the optimal strategies for both A and B.
2.
Find the value of the game.

19
prof Narinder Verma
Maximin and Minimax principle

Maximin principle:
For
each row, find the minimum, then
The
maximum out of these minimums is the

Maximin value for A
Minimax principle:
For
each column, find the maximum, then
The
minimum out of these maximums is the

Minimax value for B
20
prof Narinder Verma

Saddle point:
When
Maximin value is equal to the

Minimax value then the game is said to
have an equilibrium point.
Equilibrium
point is called the Saddle point.
The
corresponding strategies are called

optimal strategies. These are the pure ones.
At
saddle point,
Maximin = Minimax = Value of Game (V)

21
prof Narinder Verma

A
game may have more than one saddle point.
game may not have a saddle point at all.
In
general,
Maximin Value V Minimax Value
game is said to be a fair game if the

Maximin = Minimax = 0 (zero)
game is said to be strictly determinable if

the Maximin = Minimax = Value of the game (V)
22
prof Narinder Verma
Illustration Continues
B1
B2
B3
B4
Row min
A1 8
-6
-6
A2 4
A3 7
-5
-7
-7
Col 8
Max
maximin
minimax
23
prof Narinder Verma
Solution is based on the principle of securing

the best of the worst for each player. If the
player A plays strategy A1, then whatever
strategy B plays, A will get at least -6 (loses
at most Rs. 6).
If A plays strategy A2, then whatever B
plays, will get at least 4. and if A plays
strategy A3, then he will get at least -7(loses
at most Rs. 7) whatever B plays.
Thus to maximize its minimum returns, A
should play strategy A2.
24
prof Narinder Verma
Now if B plays strategy B1, then whatever

A plays, he will lose a maximum of 8.
Similarly for strategies B2,B3,B4. (These
are the maximum of the respective
columns).
Thus to minimize this maximum

loss, B should play strategy B3.
Maximin = Minimax = 4 = Saddle point
Thus here, 4 is value of the game and

appropriate strategies are A2, B3
25
prof Narinder Verma
Illustration 2
Two boutiques A and B in Solan compete
such that each gets 50% of clientele. As
gain would be Bs loss. B moots an idea
to gain market share by:
1. Discount coupons
- B1
2. Decreasing price
- B2
3. TV Advertisement
- B3
4. 10% Cash Back
- B4
5. Newspaper Inserts - B5
26
prof Narinder Verma
Illustration 2
A has an idea that B might do this. A also
moots an idea to gain market share by:
1. Discount coupons
- A1
2. Decrease price
- A2
3. TV Advertisement - A3
4. 10% Cash Back
- A4
The payoff matrix in Rupees for boutique
A is given as:
27
prof Narinder Verma
Strategies of
player A
B1
B2
B3
B4
B5
A1 3
-1
A2 -1
12
A3 16
14
12
A4 1
11
-4
1.
Find the optimal strategies for both A and B.
2.
Find the value of the game.

28
prof Narinder Verma
Illustration 2
B1
B2
B3
B4 B5 Row min
A1 3
-1
-1
A2 -1
12
-1
A3 16
14
12
A4 1
11
-4
-4
Col 16
max
11
14 12
minimax
29
maximin
prof Narinder Verma
Illustration 3
The following game gives As payoff.
Determine p, q that will make the entry a22
a saddle point.
B1
B2
B3
Row min
A1
A2
10
A3
Col max
6
6
2
5
3
10
30
prof Narinder Verma
Illustration 3
Find row minimums and column
maximums with considering the
values of unknowns
Since a22 must be a saddle point,
There for p has to be at least as large
as 5, so p 5
And also q has to be at least as small
as 5, so q 5
31
prof Narinder Verma
Illustration 4
Specify the range for the value of the
game in the following case assuming
that the payoff is for player A.
B1
B2
B3
A1
A2
A3
-5
-5
Col max
32
Row min
prof Narinder Verma
Illustration 4
maximin minimax (2 3)
Hence the game has no saddle point.
When there is no saddle point, then

Maximin Value V Minimax Value i.e.,
2 V 3.
Thus the value of the game lies

between 2 and 3.
33
prof Narinder Verma
Principles of Dominance
These are used to reduce the size of the
payoff matrix by deleting certain inferior
rows and or columns
Dominance rules are especially used for the
evaluation of the two-person zero-sum games
without a saddle point
1. For player B who is assumed to be a loser, if
each element in a column Cr is greater than or
epual to the corresponding element in another
column Cs then the column Cr is said to be
dominated by Cs (or inferior to) and there
column Cr can be deleted
34
prof Narinder Verma
Principles of Dominance
2. For player A who is assumed to be a gainer,
if each element in a row Rr is less than or
equal to the corresponding element in another
row Rs then the row Rr is said to be dominated
by Rs (or inferior to) and there row Rr can be
deleted
3. A strategy k can also be dominated if it is
inferior to an average of two or more other
pure strategies
Dominance rules are framed assuming that the
payoff matrix is a profit matrix for player A
35
prof Narinder Verma
Principles of Dominance:Ex1
Strategy A3 is dominated by the
strategy A2 and so can be eliminated.
B1
B2
B3
B4
A1 8
A2 8
A3 7
5
3
5
Eliminating the strategy A3 , we get:
36
prof Narinder Verma
B1
A1 8
B2
6
B3
2
B4
8
A2 8
For player B, strategies B1, B2, and B4 are

dominated by the strategy B3.
Eliminating the strategies B1 , B2, and
B4 we get the reduced payoff matrix:
37
prof Narinder Verma
B3
A1
A2
Now , for player A, strategy A1 is dominated

by the strategy A2
Eliminating the strategy A1
38
prof Narinder Verma
B3
A2
We thus see that A should always play A2

and B always B3 and the value of the game
is 4 as before.
39
prof Narinder Verma
Strategy B3 is dominated by the
Strategies B1 and B2 and so can be
eliminated
B1
B2
B3
B4
A1 -5
10
20
A2 5
-10
-10
A3 5
-20
-20
7
B4 is inferior to B1 so is deleted., we get:
40
prof Narinder Verma
B1
A1 -5
B2
10
A2 5
-10
-20
A3 5
For player A, strategy A3 is dominated by
the strategy A2.
Eliminating the strategy A3 we get the
reduced payoff matrix:
41
prof Narinder Verma
B1
B2
A1 -5
10
A2 5
-10
The game has no saddle point as

was the case originally.
42
prof Narinder Verma
Mixed Strategies:
Graphical Method
Used for (2 a n) or (m a 2) games, i.e.,

for two-person zero-sum games where
at least one player has only 2 strategies
It is assumed that the player with two

strategies, chooses a mixture of both
the strategies with some fixed but
unknown probabilities, to be calculated
43
prof Narinder Verma
Graphical Method: 2 x n Game

player A B1
player B
B2
.
Bn Probability
A1
a11
a12
a1n
p1
A2
a21
a22
a2n
p2
p2
..
pn
Probability p1
player A selects two strategies A1 and A2
with probabilities p1 and p2 respectively

44
prof Narinder Verma

Such that 1, 2 0 and 1 + 2 = 1
Expected Payoff for Player A
Bs pure Strategies
As Expected Payoff
B1
+
B2
B3
.
.
.
Bn
+
+
.
.
.
+
45
prof Narinder Verma
Now plot probabilities on a- axis and

Expected payoff on Y- axis
Choose the lower envelope if initial

payoff was for A, and
player A has two strategies (as here)
46
prof Narinder Verma
Graphical: Illustration 1
B2
B3
B4 B5
A1 2
A2 5
A3 10
A4 4
B1
A1 and A4 are dominated by A3

47
prof Narinder Verma
B1
B2
B3
B4 B5
A2 5
A3 10
B1 is dominated by B3,so B1 gets deleted
48
prof Narinder Verma
B2
B3
B4
B5
A2 6
p1
A3 5
p2
Probability
Assume that player A selects Strategies

A2 and A3 with probabilities p1 and p2
respectively
49
prof Narinder Verma
Graphical : Illustration 1
Such that 1, 2 0 and 1 + 2 = 1
Bs pure Strategies
As Expected Payoff
B2
+
+
+
+
B3
B4
B5
50
prof Narinder Verma
As Expected payoff, A1
B5
B3
B4
As Exapected payoff, A2
9
8
7
8
7
N 5
4
4
3L
(0, 0)
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
p1=1, p2=0
probability
51
(0, 0)
p1=0, p2=1
prof Narinder Verma
B2
Out of three points L, M and N; M

represents Maximin, so M is the
optimal mixed strategy
Solve payoff equations for B2 and B3
+ = + , and
=
52
prof Narinder Verma
+ ( ) = + ( )
= + = +
= + = +
= =
There for = and = and =

53
prof Narinder Verma
Illustration 1: Calculation for B

B2
B3
A2 6
A3 5
probability q2
q3
54
prof Narinder Verma
Such that 2, 3 0 and 2 + 3 = 1
Expected Payoff for Player B
As pure Strategies
Bs Expected Payoff
A2
+
A3
55
prof Narinder Verma
+ ( ) = + ( )
= + = +
= + = +
= =
There for = and = and =

56
prof Narinder Verma
Simplex Method
Probability
B1
B2
Bn
A1
a11
a12
a1n
A2
a21
a22
........
a2n
aij
Am
am1
am2
amn
q2
qn
Probability q1
57
prof Narinder Verma
Simplex Method
,
:
= , , , . . ,
=
58
prof Narinder Verma
Simplex Method
,
a11 p1+ a21 p2+ ... + am1 pm V

a12 p1 + a22 p2 + ... + am2 pm V
:
a1n p1 + a2n p2 + ... + amn pm V
p1 + p2 + ... + pm = 1
pi 0 (Non-negativity constraints)
= 1,2, 3, . . ,
59
prof Narinder Verma
Simplex Method
Divide all constraints by V
1
2
a11 + a21 + ... + am1

1
1
2
a12 + a22 + ... + am2

1
:
1
2
a1n + a2n + ... + amn

1
1
2
1
+ + ... +
=
0 = 1,2, 3, . . ,
60
prof Narinder Verma
Simplex Method
Let
= so that
a11 1+ a21 2+ ... + am1 1

a12 1+ a22 2+ ... + am2 1
:
a1n 1+ a2n 2+ ... + amn 1
1+2+
1
... +=
0 = 1,2, 3, . . ,
61
prof Narinder Verma
Simplex Method
=
=
there for,
= 1+2+ ... + ,
a11 1+ a21 2+ ... + am1 1

a12 1+ a22 2+ ... + am2 1
:
a1n 1+ a2n 2+ ... + amn 1
0 = 1,2, 3, . . ,
62
prof Narinder Verma
Simplex Method
Probability
B1
B2
Bn
A1
a11
a12
a1n
A2
a21
a22
........
a2n
aij
Am
am1
am2
amn
q2
qn
Probability q1
63
prof Narinder Verma
Simplex Method
,
:
= , , , . . ,
=
64
prof Narinder Verma
Simplex Method
,
a11 q1+ a12 q2+ ... + a1n qn V

a21 q1 + a22 q2 + ... + a2n qn V
:
am1 q1 + am1 q2 + ... + amn qn V
q1 + q2 + ... + qn = 1
qj 0 (Non-negativity constraints)
= 1,2, 3, . . ,
65
prof Narinder Verma
Simplex Method
1
2
a11 + a12 + ... + a1n
1
2
a21 + a22 + ... + a2n
1
1
:
1
2
am1 + am2 + ... + amn
1
2
1
+ + ... +
=
0 = 1,2, 3, . . ,
66
prof Narinder Verma
Simplex Method
Let
= so that
a11 1+ a12 2+ ... + a1n 1

a21 1+ a22 2+ ... + a1n 1
:
am1 1+ am2 2+ ... + amn 1
1+2+
1
... +=
0 = 1,2, 3, . . ,
67
prof Narinder Verma
Simplex Method
=
=
there for,
= 1+2+ ... + ,
a11 1+ a12 2+ ... + a1n 1

a21 1+ a22 2+ ... + a2n 1
:
am1 1+ am2 2+ ... + amn 1
0 = 1,2, 3, . . ,
68
prof Narinder Verma
Simplex Method
Solve for ys as there are only slack

variables
X values will be calculated from dual

values of slack in the primal for y
For x values, take the absolute value of

(cj-zj), i.e., | cj -zj| against slack variables
For x1 take | cj -zj| against s1, for x2 take

| cj -zj| against s2 and like wise
69
prof Narinder Verma
Simplex Method
= 0 and
= 0
Note: As
For this, value must be nonnegative, i. e., 0 ,there for all aij 0
For this, add {| largest negative aij | +1}

to all aij . If value of the game now is
.
Original value of the game ( ) now is
= { | | +1}
70
prof Narinder Verma
Simplex Method: Illustration

B1
B2
B3
A1 1
-1
-1
A2 3
-3
-3
A3 6
-2
-2
Col 6
Max
Row min
maximin
minimax
71
prof Narinder Verma
Clearly there is no saddle point
Value of the game follows
Here V can be negative, so add

{| largest negative aij | +1} i.e., {| -3| +1}
= 4 to all aij
72
prof Narinder Verma

Modified Payoff Matrix
B1
B2
B3
A1 5
A2 7
A3 10
Probability
73
Probability
1
prof Narinder Verma
Simplex Method : Illustration

F ; , , and + + =
Bs pure Strategies
As Expected Payoff
B1
+ +
+ +
+ +
B2
B3
74
prof Narinder Verma
Simplex Method
,
5 p1+7 p2+ 10 p3 V
3 p1+9 p2+ 6 p3 V
7 p1 + p2 + 2 p3 V
p1 + p2 + p3 = 1
p1, p2 , p3 0
75
prof Narinder Verma
Simplex Method
5 + 7 + 10 1
3 +9 +6 1
7 + +2 1
+ + =

, , 0

76
prof Narinder Verma
Simplex Method
Let
= ,
= and
= so that
5 + 7 + 10 1
3 + 9 + 6 1
7 + + 2 1
++ =
, , 0
77
prof Narinder Verma
Simplex Method
=
there for,
= ++ ,
5 + 7 + 10 1
3 + 9 + 6 1
7 + + 2
1
, , 0
78
prof Narinder Verma
Simplex Method : Illustration

F ; , , and + + =
Expected Payoff for Player B
As pure Strategies
Bs Expected Payoff
A1
+ +
+ +
+ +
A2
A3
79
prof Narinder Verma
Simplex Method
,
5 q1 + 3 q2 + 7 q3 V
7 q1 + 9 p2 + q3
V
10 q1 + 6 q2 + 2 q3 V
q1 + q2 + q3 = 1
q1, q2 , q3 0
80
prof Narinder Verma
Simplex Method
5 +3 +7 1
7 +9 + 1
10 + 6 + 2 1
+ + =

, , 0

81
prof Narinder Verma
Simplex Method
Let
= ,
= and
= so that
5 + 3 + 7 1
7 + 9 + 1
1 + 6 + 2 1
++ =
, , 0
82
prof Narinder Verma
Simplex Method
=
there for,
= ++ ,
5 + 3 + 7 1
7 + 9 + 1
1 + 6 + 2 1
, , 0
83
prof Narinder Verma

The Standard form of LPP with constraints is:
= 1 + 2 + + 01 + 02 + 03
Subject to
5 1 + 3 2 + 7 3 + 1 1 + 0 2 + 0 3
= 1
7 1 + 9 2 + 3 + 0 1 + 1 2 + 0 3
= 1
10 1 + 6 2 + 2 3 + 0 1 + 0 2 + 1 3 = 1
1 0, 2 0, 3 0, 1 0, 2 0, 3 0
84
prof Narinder Verma

Final Tableau with optimal solution:
Cj
Basic
Basic
CB Variable
Soln(YB)
(B)
1
y3
1/10
1
y2
1/10
0
s3
1/5
Zq= 1/5
Zj
(Net Evaluation)Cj - Zj
y1
y2
y3
s1
s2
s3
2/5
11/15
24/5
17/15
-2/15
0
1
0
0
0
1
0
0
0
0
3/20
-1/60
-1/5
2/15
-2/15
-1/10
7/60
-3/5
1/15
-1/15
0
0
1
0
0
85
prof Narinder Verma

Optimal strategy for B:
= , =
There for =
= there for = = =
= there for = =
= there for = =
86
=
=
prof Narinder Verma
As =
Original value of the game ( ) now is
= { | | +1}
= { } =
87
prof Narinder Verma
Simplex Method
X values will be calculated from dual

values of slack in the primal for y
For x values, take the absolute value of

(cj-zj), i.e., | cj -zj| against slack variables
For x1 take | cj -zj| against s1, for x2 take

| cj -zj| against s2 and like wise
, =
=
88
prof Narinder Verma

Optimal strategy for A:
= there for = =
= there for = =
=
=
= there for = = =

( , ,

), = ,
89
, = 1
prof Narinder Verma
End of Unit - I
90
prof Narinder Verma

Mst541 Unit I

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Mst541 Unit I

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Theory of Games

Strategic Behavior- Uncertain

What kind of job be my dream job?

prof Narinder Verma

Strategic Behavior- Uncertain

prof Narinder Verma

prof Narinder Verma

Wife would like to go for a movie

prof Narinder Verma

Understanding the Game

prof Narinder Verma

Understanding the Game

prof Narinder Verma

Defining Game Theory

prof Narinder Verma

and Sun Tzu's writings.

Modern theory credited to John von

of Games and Economic Behavior.

John Nash (A Beautiful Mind fame)

prof Narinder Verma

game that involves exactly two players

game that involves exactly n players

the sum of gains to one player is exactly

Non-zero sum Game:

prof Narinder Verma

player has to take action

Sequential Move Game

player observes and then moves

Chess, Tic-Tac-Toe (naughts and

School of Business Management

prof Narinder Verma

prof Narinder Verma

particular strategy that optimizes a

particular strategy that a player chooses

School of Business Management

prof Narinder Verma

set of strategies that a player chooses on

Value of the Game:

is the expected gain or loss in a game

School of Business Management

prof Narinder Verma

Two-person Zero-sum Game

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prof Narinder Verma

Two-person Zero-sum Game

B1,B2,...,Bn are the strategies of

prof Narinder Verma

Two-person Zero-sum Game

4. 10% Cash Back

School of Business Management

prof Narinder Verma

Two-person Zero-sum Game

3. 10% Cash Back

The payoff matrix in Rupees for boutique

prof Narinder Verma

Find the optimal strategies for both A and B.

Find the value of the game.

prof Narinder Verma

Maximin and Minimax principle

each row, find the minimum, then

maximum out of these minimums is the

each column, find the maximum, then

minimum out of these maximums is the