Game Theory 1

GAME THEORY
The term game represents a conflict between two or more

parties. A situation is termed as a game when it possesses the
following properties.
(i) The number of competitors is finite.

(ii) There is a conflict in interests between the participants.
(iii) Each of the participants has a finite set of possible courses
of action.
(iv) The rules governing these choices are specified and known
to all players.
(v) The outcome of the game is affected by the choices made
by all the players.
(vi) The outcome for all specific set of choices by all of the
players is known in advance and numerically defined.
PAY OFF MATRIX

It is the outcome of a game. The games payoff can be either a win, lose
or draw, or winning or losing a sum of money. The payoff depends on
the strategies used by the players.
Payoff Matrix : Advertising game
Firm B
Advertise Don’t Advertise
Advertise 20 , 10 30, 0

Firm A
Don’t Advertise 12 , 16 10, 5

Game Theory is a theory of conflicts.
This is the mathematical theory based on which strategic

steps are taken to win a game played in a conflicting situation
to maximize the benefits (or profit) or minimize the damage (or
loss).
Assumptions in a Game :
1. Existence of conflicts
2. Desire to dominate the other
3. Existence of a set of rules
4. Parties act in good faith with fair means
5. Rational and intelligent moves
6. Existence of strategies and plans on each side.
7. No information gap or communication gap between the
parties
8. Decisions once taken are not reversed
9. Simultaneous application of strategies by both parties.
10. Payoff is fixed before the game.

1. Strategy: A plan of action conceived and carefully
executed by each party to win over the game.
Strategy are of two types viz. Pure strategy and mixed
strategy.
2. Pure Strategy: This is a pre - determined plan of Action
based on which game is played. The strategy does not
change during the game.
3. Mixed Strategy: This is the case when the strategy get
changed while the games is in progress.
4. Players: The opposing sides or competition who play the
game
5: Pay -off: Outcome of game is known as payoff
6. Fair Game: Game is said to be fair when total value of the
game is zero.
7. Solution of a Game: When the best strategy of both players
are found and the value of the game is determined, we say
the game is solved.
8. Maximin: Maximum value of the minimum payoffs in each
Row.
9. Minimax: Minimum value of the maximum payoffs in each
column.
10. Saddle Point: This is the value at which minimax =
maximin.
11. Game-with Saddle Point: A game for which maximin for A =
minimax for B is called a game with a saddle point.
TYPES OF GAMES
1. Two-person games and n-person games : In two person
games, the players may have many possible choices open to
them for each play of the game but the number of players
remain only two. Hence it is called a two person game. In case
of more than two persons, the game is generally called n-
person game.
2. Zero Sum Game : A zero sum game is one in which the sum
of the payment to all the competitors is zero. I.e., the sum of
the points won equals the sum of the points lost.
3. Two person zero sum game : A game with two players,

where the gain of one player equals the loss to the other is
known as a two person Zero sum game. It is also called a
rectangular game because their payoff matrix is in the
rectangular form.
The characteristics of such a game are
(i) Only two players participate in the game
(ii) Each player has a finite number of strategies to use
(iii) Each specific strategy results in a payoff
(iv) Total payoff to the two players at the end of each play is
zero.

PURE STRATEGY GAMES

When there is one strategy for player X and one strategy for
player Y that will eventually be played each time, then such a
strategy for each player is his pure strategy.
In case of a pure-strategy game, the maximizing player arrives

at his optimal strategy on the basis of maximin criterion, while
the minimizing player's strategy is based on the minimax
criterion.
The game is solved when the maximin value equals minimax

value. This point of equilibrium is known as the saddle point.
The saddle point does not exist in cases where the maximin and
minimax values are not equal.
Solution of games with no saddle point is possible only through

the use of mixed strategies.
Example for 2-person zero-sum pure-strategy game :
Let firm X has two strategies and firm Y has three strategies.
These strategies and their corresponding pay - offs are:

In the table firm X is a maximizing player and firm Y a
minimizing player.
In pure strategy game, saddle point exists.

Example 1
For the following payoff matrix for firm A, determine

the optimal strategies for both firm A and firm B and
the value of the game:
Firm B
Firm 3 -1 4 6 7
A -1 8 2 4 12
16 8 6 14 12
1 11 -4 2 1
Example 2
Solve the game whose payoff matrix is given by:

Player B’s Strategy
A1 B1 B2 B3 B4
Player A2 16 -60 56 -58
A’s A3 -20 28 -18 -24
Strate
gy A4 24 8 0 24
A saddle point is a position in the payoff matrix-where the
maximum of row minima coincides with the minimum of
column maxima. The payoff at the saddle point is called the
value of the game.

We shall denote the maximin value by , the minimax value of
the game by  and the value of the game by .
Note :
(i) A game is said to be fair if
maximin value = minimax value = 0, i.e., if  =  = 0
(ii) A game is said to be strictly determinable if

maximin value = minimax value 0,  =  = 
Solution :

Maxi (minimum)=Max (1,-4,-1) = 1

Mini (maximum)=Min (1, 5,1) = 1
ie., Maximin value  =1 = Minimax value = 
Saddle point exists. The value of the game is the saddle point
which is 1. The optimal strategy is the position of the saddle
point and is given by (A1B1).

Maxi (minimum) =  = Max (1, - 3) = 1.
Mini (maximum) =  = Min(4, I)= 1.
Since  =  = 1  0, the game is strictly determinable. The
value of game is 1. The optimal strategy is (A1, B2).
Example 7 :
Solve the game whose payoff matrix is given below.
Solution :
Maxi (minimum)= =Max (-2, 1, -4, -6) = 1.

Mini (maximum) =  = Min(5, 3, 1, 5, 6) = 1.
Since  = = 1 0, there exists a saddle point. The value of the
game is 1. The position of the saddle point is the optimal
strategy and is given (A2, B3).
Example 5 : Case of Multiple Saddle Points :
Find out the saddle point for the following pay-off matrix.
Solution :
Let us find row Minima and column Maxima of the Pay - off Matrix.
In this case there is more than one saddle point. Given B's minimax
strategy b4, player A could employ either strategy a2 or a3, as all of
them give the same pay-off i.e., (- 24).
GAMES WITHOUT SADDLE POINTS
(MIXED STRATEGIES)
A game without saddle point can be solved by various solution
methods.

2 x 2 Games without saddle point :
Consider a 2 X 2, two-person zero sum game without any
saddle point having the payoff matrix for player A

The optimum mixed strategies

The value of the game is 

SIMS
Games other than 2x2 can be reduced

to 2x2 game by using the rule of
Dominance.
According to this if strategy I of any
player is dominated by strategy II then
strategy I is said to be inferior to
strategy II, and then strategy I can be
deleted from the pay-off matrix.
Dominance in Games
P.S. Aithal
SIMS
In general
If all elements of ith Column of a pay-off
matrix are greater than the corresponding
elements of jth column then ith column is
said to be dominated by the jth column and
can be deleted from the pay-off matrix.
If all the elements of ith Row are greater
than the corresponding elements of the jth
Row, then ith Row is said to be dominated.
Hence jth Row can be deleted.
P.S. Aithal
1. Solve the game whose pay-off matrix is given by
Player B
I II III
I 1 7 2
II 6 2 7
Player A III 5 1 6
Solution :
Step 1 : Reduce the 3x3 matrix to 2x2 by rule of Dominance.
Here elements of column I are less than the elements of column III. Thus
column I dominates column III. Hence the reduced pay-off matrix becomes :
1 7
6 2 => Column Reduction
5 1
Here elements of row II are more than elements of row III. Thus row II
dominates row III. Thus row III can be deleted.
1 7 => Row Reduction
6 2
Step 2 : Check the existence of saddle point
In the reduced 2x2 matrix, the largest elements 6 and 7 lies in diagonal. So there is
a no saddle point.
A game for which maximin for A = minimax for B is called

a game with a saddle point.
Maximin for A = 2
Minimax for B = 6
No saddle point.
Step 3 : Apply the method of Mixed Strategy
P2 = 3/5, P1 = 2/5
Q2 = ½, Q1 = ½
The value of the game is
V = a11P1 + a21P2 = 1(2/5) + 6(3/5) = 20/5 = 4

Example 3
For the following game, find the optimal strategies of

A and B and value of game using principle of
dominance.
Player B
B1 B2 B3 B4
Player A1 7 6 8 9
A A2 -4 -3 9 10
A3 3 0 4 2
A4 10 5 -2 0

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GAME THEORY

The term game represents a conflict between two or more

(i) The number of competitors is finite.

Payoff Matrix : Advertising game

This is the mathematical theory based on which strategic

3. Two person zero sum game : A game with two players,

In case of a pure-strategy game, the maximizing player arrives

The game is solved when the maximin value equals minimax

Solution of games with no saddle point is possible only through

In pure strategy game, saddle point exists.

For the following payoff matrix for firm A, determine

Solve the game whose payoff matrix is given by:

(ii) A game is said to be strictly determinable if

Maxi (minimum)=Max (1,-4,-1) = 1

Maxi (minimum)= =Max (-2, 1, -4, -6) = 1.

The optimum mixed strategies

The value of the game is 

Games other than 2x2 can be reduced

A game for which maximin for A = minimax for B is called

The value of the game is

V = a11P1 + a21P2 = 1(2/5) + 6(3/5) = 20/5 = 4

For the following game, find the optimal strategies of

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