OPERATIONS RESEARCH

Amity School of Business

Game Theory

Introduction
Game theory is the study of decision making in situations where two or more rational opponents are involved under competition & conflicting interests. Decision making can be an individual, a group, a formal or informal organization, or a society who are not in complete control of the other decision making units.

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Introduction
The main objective is to determine the rules of rational behavior. It is a mathematical theory that deals with the general features of competitive situations. It places particular emphasis on the decisionmaking of the adversaries.

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Terminology

Game It refers to a situation in which two or more players are competing, with different goals or objectives. Players It refers to decision makers (Competitors). No. of Players If a game involves only two players, then it is called two person game. If the number of players are more, the game is referred to as n-person game.

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Terminology

Payoff Outcome of a game when different alternatives are adopted by the competing players are called the payoffs. The games payoff can be either a win, lose or draw.

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Terminology

Strategy It is the set of rules or alternative courses of action available to players in advance to decide the course of action that should be adopted . (a) Pure Strategy If the players select the same strategy each time, then it is referred to as pure strategy. In this case each player know exactly what the other player is going to do. There is deterministic situation. Objective of the players is to maximize the gains & minimize the losses.

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Terminology

(b) Mixed Strategy When the players use a combination of strategies and each player always kept guessing as to which course of action is to be selected by the other player at a particular occasion then this is known as mixed strategy. There is probabilistic situation. It is selection among pure strategies with fixed probabilities.

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Terminology
(c) Optimum Strategy A course of action or play which puts the player in the most preferred position, irrespective of the strategy of his competitors is called optimum strategy. Any deviation from this strategy results in a decreased pay off for the players.

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Terminology

Value of the Game It is the expected payoff of play when all the players of the game follow their optimum strategies. The game is called fair if the value of the game is zero. The game is called unfair if the value of the game is non zero.
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Terminology
Payoff Matrix The payoffs in terms of gains or losses, when players select their particular strategies (course of action), represented in matrix form, is called payoff matrix. Firm B Advertise Dont Advertise Advertise 20:10 30:0 Firm A Dont Advertise 12:16 10:5

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Terminology

Two-person Zero-sum Game A game of two persons, in which the gains of one player are the losses of the other player is called a Two-person Zero-sum Game. It is also known as rectangular games since they are represented by rectangular payoff matrix.
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Terminology

Maxi-min Principle Player A (the maximizing player) adopts a pessimistic attitude & plays safe. The strategy is to obtain results in the best out of the worst outcomes. Mini-max Principle Player B (the minimizing player) selects the strategy which corresponds to the minimum of the maximum losses.

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Terminology

Saddle Point It is also known as equilibrium point. It is the point at which maxi-min value equals the mini-max value. It is the solution or value of the game.

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Characteristics

The number of players are finite. The players are rational & intelligent. Each player has a finite number of possible courses (strategies). The number of choices for each players need not be the same. All relevant information, i.e., the different strategies of each player and the amount of gain or loss on an individuals move are known to each player in advance. The players select their individual decisions without direct communication. The players select their respective course of action simultaneously. The payoff is fixed & determined in advance.

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Assumptions
Competitors are fully aware of the strategies open to each player, and the resultant pay offs. The pay offs must represent utilities.

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Limitations
The assumptions that the players have the knowledge about their own players and pay offs is rather unrealistic. In reality, there are number of players and complicated situations. The assumptions of max-min and min-max show that the players are risk averse.

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Steps (For Two Players)

Develop the payoff matrix. Identify the row minimums & select the largest of these. Identify the column maximums & select the smallest of these. If the maxi-mim value equals the mini-max value, the game has saddle point. This value is the game value.
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Thanks