1.

Basic concepts• The payoff matrix• Nash equilibrium• Dominant strategies• Maximin
strategies• Mixed strategies
2. Game Theory And Oligopoly• Non cooperative games the prisoner dilemma•
Cooperative games dealing with cheaters• Sequential games the ad of being first
3. IntroductionIntroduced by• In 1950s , By John von Neumann and Oskar
Morgenstern• Application –1. political, courtship, economic issues2. It could be used
to analyze the bargaining• process between two parties : Wage rate• negotiation:
unions and firms Peace talks:• between 2 countries.
4. Assumptions• Assumptions Finite sets of possible action• Awareness of availability
competitors strategies too Intelligent and rational• Maximize gain and minimize loss
If a’s gain is b’s loss,its 0-sum game (amt of gain=amt of loss) Players act; select their
stategies simultaneously
5. Types of games Cooperative Non-cooperative when players can when game is not
negotiate a binding cooperative it is said tocontract to play joint be non-cooperative
strategies. game.
6. The Payoff Matrix It is a course of action taken by 1 of the participants in a game Mixed
strategies-Pure strategies don’t selects theSelects the same strategy same stategy
Payoff: It is the result or outcome of the strategy Example: 2 children engaged in coin-
flipping 2 competing firms whose objective is to increse their profits by price changes
7. Payoff matrix Consider the competition between two department stores, each of which
must what kind of clothing to promote Store 2 Promote girl’s Promote women’s cloth
cloth Promote girl’s cloth 0,0 4,2Store 1 Promote 2,2 2,4 women’s cloth Profit in
millions
8. NASH EQUILIBRIUMA Nash Equilibrium is defined as a set of strategies such that
none of the participants in the game canimprove their payoff (profits), given the
strategies of the other participants. Dominant Strategies : Dominant Strategies The
dominant strategy is the optimal choice for a player no matter what the opponent does.
One firm will be in dominant position in terms of change in strategy. Dominant
Strategy(in millions) Firm Firm 2 Firm 1 Strategy No Price Change Price Change No
Price Change 10,10 100,-30 Price Change -20,30 140,25
9. Max min StrategyFirm Firm 2Firm 1 Strategy No New Product New Product No New
Product 4,6 3,6 New Product 6,3 2,2
10. Maxmin Strategy Firm 2 Strategy No New Product New Product 4, 6 3 ,6 No NewFirm
1 Product New Product 6, 3 2 ,2 Equilibrium Nash
11. Maxmin Strategy Firm 2 Strategy No New Product New Product Maximum Minimum
4, 6 3 ,6 6 3 No NewFirm 1 Product New Product 6, 3 2 ,2 6 2 Maximum Minimum 3
6 6 2 Profit in millions
12. Nash Equilibrium & Maximin Point Isnt Same • Decision Criterion is not Profit-
Maximisation Why So? • Its for avoiding highly unfavourable outcome • Its for
avoidance of risks
13. Just Remember that its 2 Step Process 1.Find Minimum(Least) Profit 2.Select
maximum Out of Minimum Profit Mixed Strategy Why We Should Study This?
14. Game Table• The Game of Tennis 1. For Striker: Striker chooses to serve • Best
response to defend either left or right left is to Strike right Receiver defends either •
Best response to defend left or right right is to Strike left• Better chance to get a 2. For
receiver: Just the good return if you opposite defend in the area the striker is serving
to
15. Receiver - 70-30 Striker - 60-40 Percent of Payoff Chances ofExpects Throws Receiver
Striker Probability Matrix Success Left Left 0.70 0.60 0.42 75% 0.315 Left Right 0.30
0.40 0.12 25% 0.030 Right Left 0.70 0.60 0.42 25% 0.105 Right Right 0.30 0.40 0.12
75% 0.090 Total Success 0.540
16. Receiver – 50-50Striker - 70-30 Percent of Chances Receive Probabli Payoff of Expects
Throws r Striker ty Matrix Success Left Left 0.50 0.70 0.35 75% 0.263 Left Right 0.50
0.30 0.15 25% 0.038 Right Left 0.50 0.70 0.35 25% 0.088 Right Right 0.50 0.30 0.15
75% 0.113 Total Success 0.500
17. Receiver – 50-50Striker - 40-60 Percent Chances Probabli of Payoff of Expects Throws
Receiver Striker ty Matrix Success Left Left 0.50 0.60 0.3 75% 0.225 Left Right 0.50
0.40 0.2 25% 0.050 Right Left 0.50 0.60 0.3 25% 0.075 Right Right 0.50 0.40 0.2 75%
0.150 Total Success 0.500
18. Mixed Strategy Equilibrium•A mixed strategy equilibrium is a pair of mixed strategies
that are mutual best responses.• In the tennis example, this occurred when any player
chose a 50-50 mixture of left and right.
19. Receiver’s Best Response Suppose p is the probability of Strikers Serving towards left
Clearly•If p = 1, then the receiver should defend to the left •If p = 0, the receiver should
defend to the right.
20. LeftRight 1/2 P
21. Best Response Suppose that the receiver goes left with probability q. Clearly,•if q = 1,
the server should serve right•If q = 0, the server should serve left Server’s
22. q1/2 Right Left
23. Putting Things Together q Mutually best R’s best response response1/2 S’s best
response 1/2 p
24. Noncooperative GamesA game is considered non cooperative if it not possible
tonegotiate with other participants and enter into some form ofbinding agreement.
Example : Prisoners Dilemma Prisoner Prisoner 2 Prisoner 1 Strategy Don’t Confess
Confess Don’t Confess 0,0 15,5 Confess 5,15 5,5
25. Prisoner Prisoner 2 Remain SilentPrisoner 1 Strategy Confess Confess 5,5 0,20
Remain Silent 20,0 1,1
26. cooperative Games A game is considered cooperative if it possible tonegotiate with
other participants and enter intosome form of binding agreement. Firm Firm 2 Firm 1
Strategy No New New Product Product No New 30,30 10,40 Product New Product
40,10 20.20 Profit in millions
27. Repeated Games•A repeated game is a game that the sameplayers play more than once
In repeated games• the sequential nature of the relationshipallows for the adoption of
strategies that arecontingent on the actions chosen in previousplays of the game
28. Firm Firm 2Firm 1 Strategy Low-level Advertising High-level Advertising 30,30 10,40
Low-level Advertising High-level 40,10 20.20 Advertising Profit in millions
29. • Any 1 Firm breaks the agreement• Adopts High-Level Advertising• Temporary Loss
to other firm due to cheating• In next period, Other firm will do the same (Tit- For-
Tat)• If One Firm Cuts price-Other firm will cuts price in next period.• If One firm
Raise Price-Other firm will do so in next period.• Tit-For-Tat is Win-Win Situation
30. Advantages•Easy to understand•Never initiates cheating•Never rewards cheating
cause it punish in someway•Its about forgiving because cooperation is quicklyrestored
31. Sequential Games•One Player acts First & Then other responds.•Games where players
choose actions in aparticular sequence are sequential movegames.Examples: Chess,
Bargaining/Negotiations.•Must look ahead in order to know what actionto choose now
32. Benifits to the one Who acts firstFirm Firm 2 Strategy Low-level High-level
Advertising Advertising 2,2 -5,10 Low-levelFirm 1 Advertising High-level 10,-5 -7,7
Advertising Profit in millions
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