1.

Introduction to Game Theory

Game theory is a type of decision theory in which one’s choice of action is determined after taking
into account all possible alternatives available to an opponent playing the same game, rather than just
by the possibilities of several outcome results. Game theory does not insist on how a game should be
played but tells the procedure and principles by which action should be selected. Thus it is a decision
theory useful in competitive situations.

Game is defined as an activity between two or more persons according to a set of rules at the end of
which each person receives some benefit or suffers loss. The set of rules defines the game. Going
through the set of rules once by the participants defines a play.

2. Properties of a Game
a) There are finite numbers of competitors called ‘players
b) Each player has a finite number of possible courses of action called ‘strategies’
c) All the strategies and their effects are known to the players but player does not know which
strategy is to be chosen.
d) A game is played when each player chooses one of his strategies. The strategies are assumed
to be made simultaneously with an outcome such that no player knows his opponents strategy
until he decides his own strategy.
e) The game is a combination of the strategies and in certain units which determines the gain or
loss.
f) The figures shown as the outcomes of strategies in a matrix form are called ‘pay-off matrix’.
g) The player playing the game always tries to choose the best course of action which results in
optimal pay off called ‘optimal strategy’.
h) The expected pay off when all the players of the game follow their optimal strategies is
known as ‘value of the game’. The main objective of a problem of a game is to find the value
of the game.
 i) The game is said to be ‘fair’ game if the value of the game is zero otherwise it s known as
‘unfair’.

3. Characteristics of Game Theory

a) Competitive game: A competitive situation is called a competitive game if it has the following
four properties
 There are finite number of competitors such that n ≥ 2. In case n = 2, it is called a two-
person game and in case n > 2, it is referred as n-person game.
 Each player has a list of finite number of possible activities.
 A play is said to occur when each player chooses one of his activities. The choices are
assumed to be made simultaneously i.e. no player knows the choice of the other until he
has decided on his own.
 Every combination of activities determines an outcome which results in a gain of
payments to each player, provided each player is playing uncompromisingly to get as
much as possible. Negative gain implies the loss of same amount.
b) Strategy: The strategy of a player is the predetermined rule by which player decides his course
of action from his own list during the game.
The two types of strategy are
 Pure strategy
 Mixed strategy
Pure Strategy: If a player knows exactly what the other player is going to do, a deterministic
situation is obtained and objective function is to maximize the gain. Therefore, the pure
strategy is a decision rule always to select a particular course of action.
Mixed Strategy: If a player is guessing as to which activity is to be selected by the other on
any particular occasion, a probabilistic situation is obtained and objective function is to
maximize the expected gain. Thus the mixed strategy is a selection among pure strategies with
fixed probabilities.
c) Number of persons: A game is called ‘n’ person game if the number of persons playing is ‘n’.
The person means an individual or a group aiming at a particular objective.
 Two-person, zero-sum game: A game with only two players (player A and player B) is called
a ‘two-person, zero-sum game’, if the losses of one player are equivalent to the gains of the
other so that the sum of their net gains is zero.
Two-person, zero-sum games are also called rectangular games as these are usually
represented by a payoff matrix in a rectangular form.
d) Number of activities: The activities may be finite or infinite.
e) Payoff: The quantitative measure of satisfaction a person gets at the end of each play is called
a payoff
f) Payoff matrix: Suppose the player A has ‘m’ activities and the player B has ‘n’ activities.
Then a payoff matrix can be formed by adopting the following rules
 Row designations for each matrix are the activities available to player A
 Column designations for each matrix are the activities available to player B
 Cell entry Vij is the payment to player A in A’s payoff matrix when A chooses the
activity i and B chooses the activity j. With a zero-sum, two-person game, the cell entry in
the player
 B’s payoff matrix will be negative of the corresponding cell entry Vij in the player A’s
payoff matrix so that sum of payoff matrices for player A and player B is ultimately zero.
g) Value of the game: Value of the game is the maximum guaranteed game to player A
(maximizing player) if both the players uses their best strategies. It is generally denoted by
‘V’ and it is unique.

4. Classification of Games
All games are classified into
 Pure strategy games
 Mixed strategy games
Strategy: It is the pre-determined rule by which each player decides his course of action from his list
available to him. How one course of action is selected out of various courses available to him is
known as strategy of the game.
Types of Strategy: Generally two types of strategy are employed
(i) Pure Strategy
(ii) Mixed Strategy
 (i) Pure Strategy: It is the predetermined course of action to be employed by the player. The
players knew it in advance. It is usually represented by a number with which the course of
action is associated.
(ii) Mixed Strategy: In mixed strategy the player decides his course of action in accordance
with some fixed probability distribution. Probability is associated with each course of
action and the selection is done as per these probabilities.
In mixed strategy the opponent cannot be sure of the course of action to be taken on any particular
occasion. Pure strategy games can be solved by saddle point method.Decision of a Game. In Game
theory, best strategy for each player is determined on the basis of some rule. Since both the players
are expected to be rational in their approach this is known as the criteria of optimality. Each player
lists the possible outcomes from his action and selects the best action to achieve his objectives. This
criterion of optimality is expressed as Maximin for the maximising player and Minimax for the
minimising player.

5. The Maximin-Minimax Principle

a) Maximin Criteria: The maximising player lists

b) his minimum gains from each strategy andselects the strategy which gives the maximum out
of these minimum gains.
c) Minimax Criteria : The minimising player lists his maximum loss from each strategy and
selects the strategy which gives him the minimum loss out of these maximum losses.
For Example Consider a two person zero sum game involving the set of pure strategy for Maximising
player A say Al A2 & As and for player B, B1 & B2, with the following payoff
Player B
B1 B2 Row MaxMin
A1 9 2 2
Player A A2 8 6 6* Maximin
A3 6 4 4
Column MiniMax 9 6* Minimax

Since Maximin = Minimax V = 6

Suppose that player A starts the game knowing fully well that whatever strategy he adopts B will
select that particular counter strategy which will minimise the payoff to A. If A selects the strategy Al
then B will select B2 so that A may get minimum gain. Similarly if A chooses A2 than B will adopt
the strategy of B2. Naturally A would like to maximise his maximin gain which is just the largest of
row minima. Which is called 'maximin strategy'. Similarly B will minimise his minimum loss which
is called 'minimax strategy'. We observe that in the above example, the maximum if row minima and
minimum of column maxima are equal. In symbols.
Maxi [Min.] = Mini [Max]
The strategies followed by both the p1ayersarecalled ‘optimum strategy’.
Value of Game. In game theory, the concept value of game is considered as very important. The
value of game is the maximum guaranted gain to the maximising player if both the players use their
best strategy. It refers to the average payoff per play of the game over a period of time. Consider the
following the games.
Player Y Player Y
3 4 -7 2
Player X -6 -2 Player X -3 -1

(With Positive Value)

(With Negative Value)

In the first game player X wins 3 points and the value of the value is three with positive sign and in
the second game the player Y wins 3 points and the value of the game is -ve which indicates that Y is
the Winner. The value is denoted by 'v.
The different methods for solving a mixed strategy game are
• Analytical method
• Graphical method
• Dominance rule
6. Two-Person and Zero-Sum Game

Two-person zero-sum games may be deterministic or probabilistic. The deterministic games will
have saddle points and pure strategies exist in such games. In contrast, the probabilistic games will
have no saddle points and mixed strategies are taken with the help of probabilities.
Definition of saddle point
A saddle point of a matrix is the position of such an element in the payoff matrix, which is
minimum in its row and the maximum in its column.
Procedure to find the saddle point
 Select the minimum element of each row of the payoff matrix and mark them with
circles.
 Select the maximum element of each column of the payoff matrix and mark them with
squares.
 If their appears an element in the payoff matrix with a circle and a square together then
that position is called saddle point and the element is the value of the game.
Solution of games with saddle point
To obtain a solution of a game with a saddle point, it is feasible to find out

 Best strategy for player A

 Best strategy for player B
 The value of the game
The best strategies for player A and B will be those which correspond to the row and column
respectively through the saddle point.

Example 1: Solve the payoff matrix

Player B
I II III IV V
I -2 0 0 5 3
II 3 2 1 2 2
Player A III -4 -3 0 -2 6
IV 5 3 -4 2 -6

Solution:
Player B
I II III IV V Row MaxMin
I -2 0 0 5 3 -2
Player A II 3 2 1 2 2 1 Maxmin Value
III -4 -3 0 -2 6 -4
 IV 5 3 -4 2 -6 -6
Column MiniMax 5 3 1 5 6
Minimax value

Strategy of player A – II
Strategy of player B - III
Value of the game = 1

Example -2: Solve the payoff matrix

B1 B2 B3 B4

A1 1 7 3 4

A2 5 6 4 5

A3 7 2 0 3

Solution

B1 B2 B3 B4 Row MaxMin

A1 1 7 3 4 1

A2 5 6 4 5 4 Maximin Value

A3 7 2 0 3 0

Column MiniMax 7 7 4 5

Minimax Value
Strategy of player A= A2
Strategy of player B = B3
Value of the game = 4

Points to remember
(i) Saddle point mayor may not exist in a given game.
 (ii) There may be more than one saddle point then there will be more than one solution. (Such
situation is rare in the rea1life).
(iii) The value of game may be +ve or -ve.
(iv) The value of game may be zero which means 'fair game'.

II GAMES WITH MIXED STRATEGIES

All game problems, where saddle point does not exist are taken as mixed strategy problems. Where
row minima is not equal to column maxima, then different methods are used to solve the different
types of problems. Both players will use different strategies with certain probabilities to optimise. For
the solution of games with mixed strategies, any of the following methods can be applied.

1. ODDS METHOD (2x2 game without saddle point)

2. Dominance Method.
3. Sub Games Method. – For (mx2) or (2xn) Matrices
4. Equal Gains Method.
5. Linear Programming Method-Graphic solution
These methods are explained one by one with examples, in detail.

1. ODDS Method - For 2 x 2 Game

Use of odds method is possible only in case of games with 2 x 2 matrix. Here it should be ensured
that the sum of column odds and row odds is equal.
METHOD OF FINDING OUT ODDS
Step 1: Find out the difference in the value of in cell (1, 1) and the value in the cell (1,2) of the first
row and place it in front of second row.
Step 2: Find out the difference in the value of cell (2, 1) and (2, 2) of the second row and place it in
front of first row.
Step 3: Find out the differences in the value of cell (1, 1) and (2, 1) of the first column and place it
below the second column.
Step 4: Similarly find the difference between the value of the cell (1, 2) and the value in cell (2, 2) of
the second column and place it below the first column.
The above odds or differences are taken as positive (ignoring the negative sign)

Strategy  Y
 Y1 Y2 ODDS
X X1 a1 a2  (b1 – b2)
X2 b1 b2  (a1 – a2)
 
ODDS (a2 – b2) (a1 – b1)

The value of game is determined with the help of following equation.

2. Dominance Method. Dominance method is also applicable to pure strategy and mixed strategy
problem. In pure strategy the solution is obtained by itself while in mixed strategy it can be used for
simplifying the problem.

Principle of Dominance. The Principle of Dominance states that if the strategy of a player dominates
over the other strategy in all condition then the later strategy is ignored because it will not effect the
solution in any way. For the gainer point of view if a strategy gives more gain than another strategy,
then first strategy dominates over the other and the second strategy can be ignored altogether.
Similarly from loser point of view, if a strategy involves lesser loss than other in all condition then
second can be ignored. So determination of superior or inferior strategy is based upon the objective of
the player. Since each player is to select his best strategy, the inferior strategies can be eliminated. In
other words, ineffective rows & column can be deleted from the game matrix and only effective rows
& columns of the matrix are retained in the reduced matrix.

For deleting the ineffective rows & columns the following general rules are to be followed.
1) If all the elements of a row (say ith row) of a pay off matrix are less than or equal to ( ) the
corresponding each element of the other row (say jth row) then the player A will never choose
the ith strategy OR ith row is dominated by jth row. Then delete ith row.

2) If all the elements of a column (say jth column are greater than or equal to the corresponding
elements of any other column (say jth column) then ith column is dominated by jth column.
Then delete ith column.

3) A pure strategy of a player may also be dominated if it is inferior to some convex combination
of two or more pure strategies. As a particular case, if all the elements of a column are greater
than or equal to the average of two or more other columns then this column is dominated by
the group of columns. Similarly if all the elements of row are less than or equal to the average
of two or more rows then this row is dominated by other group of row.
4) By eliminating some of the dominated rows a columns and if the game is reduced to 2 x 2
form it can be easily solved by odds method.
Since there is no saddle point, so we apply dominance method. Here Row II dominates Row II so we
will delete Row II.
B
I II III
I 5 20 -10
A
III 20 15 18

Since column III dominates column I, we delete column I we get:

B
II III odds
I 20 -10 3
A
III 15 18 30
Odds 28 5 33
Using the dominance property obtain the optimal strategies for both the players and determine the
value of the game. The pay off matrix for player A is given.
 Graphical method
The graphical method is used to solve the games whose payoff matrix has
 Two rows and n columns (2 x n)
 m rows and two columns (m x 2)
Algorithm for solving 2 x n matrix games
 Draw two vertical axes 1 unit apart. The two lines are x1 = 0, x1 = 1
 Take the points of the first row in the payoff matrix on the vertical line x1 = 1 and the
points of the second row in the payoff matrix on the vertical line x1 = 0.
 The point a1j on axis x1 = 1 is then joined to the point a2j on the axis x1 = 0 to give a
straight line. Draw ‘n’ straight lines for j=1, 2… n and determine the highest point of the
lower envelope obtained. This will be the maximin point.
 The two or more lines passing through the maximin point determines the required 2 x 2
payoff matrix. This in turn gives the optimum solution by making use of analytical
method.
Example 1
Solve by graphical method

Solution:
 V = 66/13
SA = (4/13, 9 /13)
SB = (0, 10/13, 3 /13)

Example 2

Solve by graphical method

Solution:
 V = 8/7
SA = (3/7, 4/7)
SB = (2/7, 0, 5 /7)

Algorithm for solving m x 2 matrix games

 Draw two vertical axes 1 unit apart. The two lines are x1 =0, x1 = 1
 Take the points of the first row in the payoff matrix on the vertical line x1 = 1 and the
points of the second row in the payoff matrix on the vertical line x1 = 0.
 The point a1j on axis x1 = 1 is then joined to the point a2j on the axis x1 = 0 to give a
straight line. Draw ‘n’ straight lines for j=1, 2… n and determine the lowest point of the
upper envelope obtained. This will be the minimax point.
 The two or more lines passing through the minimax point determines the required 2 x 2
payoff matrix. This in turn gives the optimum solution by making use of analytical
method.

Example 1
Solve by graphical method
Solution