OPERATIONS RESEARCH

GAME THEORY
Ing. Daniel Orlando Rivera Royero

What is Game Theory ?

What is Game Theory?

Game theory is the study of multi-personal
decision problem, " conflict of interest" .
It helps to understand the phenomena
observed when agents interact.

Game Theory
We will only consider non-cooperative
games.
We will emphasize the effect of the
payments.

Cournot duopoly
performs an
analysis based on
game theory

1913

James
Waldegrave
proposed a
minimax solution
of the card game
"le Her"

1838

1713

Historical Development
Ernest Zermelo
shows that in
every finite zerosum game with
perfect
information
between two
people, there is at
least one strategy
for one player with
which you can not
lose

John von
Neumann and
Oskar
Morgenstern
published the
book " Theory
of Games and
Economic
Behavior

1950-1960

Von Neumann
's Minimax
theorem shows

1944

1928

Desarrollo Histrico
First use of
models of
game theory in
economics and
first checks the
predictions of
game theory in
experimental
economics.

John C. Harsanyi , John

F. Nash and Reinhard
Selten received the
Nobel Prize in
economics for his
pioneering analysis of
equilibria in the theory
of non- cooperative
games.

2007

1994

Desarrollo Histrico
Leonid Hurwicz , Eric
Maskin and Roger
Myerson receive the
Nobel Prize in
Economics for having
laid the foundations of
mechanism design
theory .

Nash equilibrium
http://youtu.be/AKJDlMolZBg

Assumptions
A set of N Players (2 Players)
Each player chooses an action
possible actions.
The player k gets a payment

of

Game Theory Componets

Player 2
A
B
C
Player 1

51

51.5 52.5

B 50.5 57.5
C

52

53

54
53.5

Assumptions
The players
profits.

are

rational

maximize

The players are intelligent They use

their knowledge or experience (they can
deduce and infer).

Game Types
Games complete information: Payment
information and action is published.
Games of complete and imperfect
information : games arent sequential.

Solution methods
Definition
There is public information of rationality
and each player knows that each player is
rational, and every player knows that each
player knows that each player is rational ...
Infinitum .

Solution methods
Games between 2 people, the strategies of
each of the opponents can be:

Pure strategies
Mixed strategies

Value Play
Average profit per game during many plays.
It corresponds to the minimum value that will
win Player A, always that play intelligently,
no matter how plays the Player B.
V* = Value Play

Solution a Game
Find how each competitor must combine
their strategies independently as play your
opponent to guarantee himself at least V * .

Solution a Game
1. Each competitor seeks:
(max(min E(profit))
(min(max E(losses))
2. Rationalization.
Establish strategies that are rational for the
player.

Saddle point
Is the point that Player A and Player B always
choose.
This point matches the strategy that maximizes the
minimum profit in Player A, and the strategy that
minimizes the maximum loss in Player B.
NOTE. It is the lowest of the row and the highest
value of the row column.

Saddle point
Player 2
A
B
C
Player 1

51

51.5 52.5

B 50.5 57.5
C

52

53

54
53.5

Saddle point
B1

B2

A1

-5

A2

-4

-8

Player B

Player A

Identify , if any, is the

Saddle point.
If there the Saddle
point, what would be
the value of the game
after a number of
moves ?

Player A

Player B

B1

B2

A1

A2

-3

-4

A3

-5

-6

Rationalization
Domain rule for the row: every value of the
dominant row must be greater than or
equal to the corresponding value in the
dominated row.
Rule domain for columns : each value of
the dominant column must be less than or
equal to the corresponding value of the
dominated column.

Rationalization
Player B

Find key strategies in

the following situations:
Player A

B1

B2

A1

A2

Player B
B2

B3

B4

A1

-4

-6

A2

-6

-3

Player A

Player A

B1

Player B
B1

B2

A1

-4

-2

A2

-6

-3

Steps.

Find Saddle Point.

If (Saddle Point Exists){
Define=> Pure Strategies (Players A & B)
} else {
Rationalize
Define=> Mixed Strategies (Players A & B)
}

Example MARKET GAME

Strategies A

% Market A

Strategies B

% Market B

Difference

a1

47

b1

53

-6

a2

54,5

b1

45,5

a3

53

b1

47

a1

56

b2

44

12

a2

48,5

b2

51,5

-3

a3

47

b3

53

-6

a1

48,5

b3

51,5

-3

a2

56

b3

44

12

a3

54,5

b3

45,5

Example

PLAYER 1

PLAYER 2

A1
A2

A3

B1

B2

47, 53

56, 44

54.5,
45.5

48.5,
51.5

56, 44

47, 53

54.5,
45.5

53, 47

B3
48.5,
51.5

Example
Does saddle point ?

A1

B1
-6

B2
12

B3
-3

A2

-3

12

A3

-6

Are there key strategies ?

Example
Reduced matrix

A1

B1
-6

B2
12

A2

-3

Mixed strategies
Whenever a game has no saddle point,
game theory, each player can assign a
probability distribution for the set of
strategies .

Mixed strategies
Play intelligently is:
Find a combination of strategies indifferent of
how your opponent plays.
Otherwise, your opponent might try to take
advantage of the way you are playing.

Example
B1 y

B2 1-y

A1 x

-6

12

A2 1-x

-3

Example
Player A
6 + 9 1 = 12 3 1
= 0.4
Player B

6 + 12 1 = 9 3 1
= 0.5

Example
B1 0.5

B2 0.5

A1 0.4

-6

12

A2 0.6

-3

= 6 0.4 0.5 + 12 0.4 0.5 + 9 0.6 0.5 3 0.6 0.5

=3

Question 1

What is the
meaning of Value
Play?

Pregunta 2

What is the saddle

point ?

Question 2

What is a fair game

?

Exercise 1

Exercise 2