Game theory

Competition is a watchword of modern life. A competitive situation exists when two or more opposing parties are making decisions involving conflicting interests and whereinthe action of one depends on the action which the opponent takes. Each opponent acts ina rational manner and tries to resolve the conflict in his own favour. Such situations arisein business, military operations, etc. Game theory is used to handle such conflictingsituations. It seeks to provide a rational course of action in a conflicting situation.The term game represents a conflict between two or more parties. There can be severaltypes of games, e.g. two-person and n-person games, zero-sum and non-zero-sum games,constant-sum games, co-operative and non-co-operative games, pure strategy games andmixed strategy games, etc.When there are two competitors playing a game, it is called a two-person game. If thenumber of competitors are N (N > 2), it is known as an N person game. When the sum of amounts won by all winners is equal to the sum of the amounts lost by all losers, we callit a zero-sum game. In a non-zero-game there exists a jointly preferred outcome. In other words, in a zero-game or a constant-sum game the sum of gains and losses of the game iszero. As opposed to this, if the sum of gains or losses is not equal to zero, we call it anon-zero-sum game. When the best strategy for each player is to play one particular strategy throughout the game, it is known as a pure strategy game. In case the optimum plan for each player is to employ different strategies at different times, it is called amixed strategy game. When there is communication between the participants they mayreach agreement and increase their pay-off through some forms of co-operative game,otherwise it is a non-co-operative game.Game theory may be defined as a body of knowledge that deals with making decisionswhen two or more intelligent and rational opponents are involved under conditions of conflict and competition. Instead of making inferences from the past behaviour of theopponent, the approach of game theory is to try and determine a rivals most profitablecounter-strategy to ones own best moves and to formulate the appropriate defensivemeasures. For example, if two firms are locked up in a war to maintain their marketshare, then a price cut by the first firm will invite reaction from the second firm in thenature of a price cut. This will, in turn, affect the sales and profits of the first firm, whichwill again have to develop a counter-strategy to meet the challenge from the second firm.The game will thus go on. Game theory helps to determine the best course of action for afirm in view of the expected counter moves from the competitors. Game theory dealswith competitive situations of decision-making under uncertainty. Rules of the Game Game theory is applicable to situations that satisfy the following conditions. The number of competitors is finite. The players act rationally and intelligently. Each player has available to him a finite set of possible courses of action. There is a conflict of interests between the participants.

The players make individual decisions without directly communicating.

The rules governing the choice are specified and known to the players. The players simultaneously select their respective courses of action. The payoff (outcome) is fixed and determined in advance.

A strategy for a player has been defined as a set of rules or alternative courses of action available to him in advance, by which player decides the courses of action that he should adopt. There are two types: A) Pure Strategy( games with saddle point) If the player selects the same strategy each time, then it is a purestrategy. In this case each player knows exactly what the other is goingto do, i.e. there is a deterministic situation and the objective of the players is to maximize gains or to minimize losses. B) mixed strategy(games without saddle point) When the players use a combination of strategies and each player is always kept guessing as to which course of action is to be selected by the other, then it is known as a mixed strategy. Thus, there is a probabilistic situation and the objective of the player is to maximize expected gains or to minimize losses. Thus, mixed strategy is a selection among pure strategies with fixed possibilities.

Solution methods of games without saddle points In certain cases when there is no pure strategy solution for games, i.e. no saddle pointexists, both the players must determine an optimum mixture of strategies to find a saddle point. The optimum strategy mixture for each player may be determined by assigning toeach strategy its probability of being chosen. Since strategies so determined are probabilistic combinations of available choices of strategy, they are mixed strategies. Amixed strategy can be solved by the following methods

1) Algebraic method . 2) Graphical method. 3) Linear programing.

Algebraic method
Arithmetic method for 2*2 games:
Arithmetic method provides an easy technique for obtaining the optimum strategies for each player in 2*2 games without saddle point. This method consists of the following steps: Step 1: find the difference of two numbers in coloumn 1 and put it under column 2, neglecting the negative sign if occurs. Step2: find the difference of two numbers in coloumn 2 and put it under the coloum 1, neglecting the negative sign if occurs. Step3: Repeat the above steps for two rows also. The values thus obtained are called the oddments. These are the frequencies with which the players must use their courses of action in their optimum strategies.

Consider the zero sum two person game given below: Player B I II Player A I a b II c d Formulas: The solution of the game is: A where: d -------------------(a + d) - (b + c) c plays (p, 1 p)

p =

B plays (q, 1 - q) where: d ------------------(a + d) - (b + c) b

q =

ad Value of the game, V = -------------------(a + d) - (b + c)

bc

Example 1: Consider the game of matching coins. Two players, A & B, put down a coin. If coins match (i.e., both are heads or both are tails) A gets rewarded, otherwise B. However, matching on heads gives a double premium. Obtain the best strategies for both players and the value of the game. Player B I II Player 2 -1 I A II -1 1 Solution. This game has no saddle point. 1 p = ----------------------(2 + 1) - (-1 - 1) 1 p = 3/5 1 q = ----------------------(2 + 1) - (-1 - 1) 1 q = 3/5 2 X 1 - (-1) X (-1) 1 V = -------------------------= ---(2 + 1) - (-1 - 1) 5 (-1) 2 = ---5 (-1) 2 = ---5

Example 2 Solve the game whose payoff matrix is given below: Player B I II Player A 1 7 I

II Solution.

This game has no saddle point. 2 p = ----------------------(1 + 2) - (7 + 6) 1 p = 3/5 2 q = ----------------------(1 + 2) - (7 + 6) 1 q = 1/2 1 X 2 - (7 X V = -------------------------(1 + 2) - (7 + 6) 6) =4 7 1 = ---2 6 2 = ---5