THEORY OF GAMES

THEORY OF GAMES
P.Vidyut Chandra
Introduction
Game theory was developed for the purpose of
analyzing competitive situations involving
conflicting interests. In other words, game theory
is used for decision making under conflicting
situations where there are one or more
opponents (i.e., players).
For example, chess, poker, etc., are the games
which have the characteristics of a competition
and are played according to definite rules. Game
theory provides solutions to such games,
assuming that each of the players wants to
maximize his profits and minimize his losses.
Game theory models
The game theory models can be classified into
Two-person & N-person games:

If the number of players is two, it is known as two-person game. On the
other hand, if the number of players is N, it is known as N-person
game.
Zero sum & Non-zero sum game:

In a zero sum game, the sum of the points won equals the sum of the
points lost, i.e., one player wins at the expense of the other. To the
contrary, if the sum of gains or losses is not equal to zero, it is either
positive or negative, then it is known as non-zero sum game. An
example of non-zero sum game is the case of two competing firms
each with a choice regarding its advertising campaign. In such a
situation, both the firms may gain or loose, though their gain or loss
may not be equal.
Game theory models
Games of Perfect and Imperfect information:
If the strategy of a player can be discovered by his
competitor, then it is known as a perfect information
game. In case of imperfect information games no player
has complete information and tries to guess the real
situation.
Pure & Mixed strategy games:

If the players select the same strategy each time, then it is
referred to as pure strategy games. If a player decides to
choose a course of action for each play in accordance
with some particularly probability distribution, it is called
mixed strategy game.
• There are finite number of competitors (players).
• The players act reasonably.
• Every player strives to maximize gains and minimize
losses.
• Each player has finite number of possible courses of
action.
• The choices are assumed to be made simultaneously, so
that no player knows his opponent's choice until he has
decided his own course of action.
• The pay-off is fixed and predetermined.
• The pay-offs must represent utilities.
Player
Each participant (interested party) is called a player.
Strategy
The strategy of a player is the predetermined rule by which a player
decides his course of action from the list of courses of action during
the game. A strategy may be of two types:
Pure strategy. It is a decision, in advance of all plays, always to choose a

particular course of action. In other words, if the best strategy for each
player is to play one particular strategy throughout the game, it is
called pure strategy.
Mixed strategy. It is a decision, in advance of all plays, to choose a

course of action for each play in accordance with some particular
probability distribution. In other words, if the optimal plan for each
player is to employ different strategies at different times, we call it
mixed strategy.
Optimal strategy
The course of action which maximizes the profit of a player
or minimizes his loss is called an optimal strategy.
Saddle point
A saddle point is an element of the matrix that is both the
smallest element in its row and the largest element in its
column. Furthermore, saddle point is also regarded as
an equilibrium point in the theory of games.
Pay-off
The outcome of playing the game is called pay-off.
Pay-off Matrix
It is a table showing the outcomes or payoffs
of different strategies of the game.
Value of the Game
It refers to the expected outcome per play,
when players follow their optimal strategy.
It is generally denoted by V.
Saddle Point
The simplest type of game is one where the
best strategies for both players are pure
strategies.
This is the case if and only if, the pay-off
matrix contains a saddle point. To
illustrate, consider the following pay-off
matrix concerning zero sum two person
game.
Example-1
(With Saddle Point )
Example 1 –Cont
We use the maximin (minimax) principle to analyze the
game.
Example -1 cont
Select minimum from the maximum of columns.
Minimax = 1
Player A will choose II strategy, which yields the
maximum payoff of 1.
Select maximum from the minimum of rows.
Maximin = 1
Similarly, player B will choose III strategy.
Since the value of maximin coincides with the value of the

minimax, therefore, saddle point (equilibrium point) = 1.
Example-1 Conclusion
The optimal strategies for both players are:
Player A must select II strategy and player B
must select III strategy.
The value of game is 1, which indicates that
player A will gain 1 unit and player B will
sacrifice 1 unit.
Example -2
In situations where a saddle point does not
exist, the maximin (minimax) principle for
solving a game problem breaks down. The
concept is illustrated with the help of
following example.
Example -2
Two companies A and B are competing for the same
product.
Their different strategies are given in the following pay-off
matrix:
Determine the optimal strategies for both the companies.

Example -2
First, we apply the maximin (minimax) principle to
analyze the game.
Minimax = -2
Maximin = -2
Example -2
There are two elements whose value is –2. Hence,
the solution to such a game is not unique.
In the above problem, there is no saddle point. In

such cases, the maximin and minimax principle
of solving a game problem can't be applied.
Under this situation, both the companies may

resort to what is known as mixed strategy.
Methods for solution
A mixed strategy game can be solved by

following methods:
• Algebraic Method
• Calculus Method
• Linear Programming Method

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THEORY OF GAMES

Two-person & N-person games:

Zero sum & Non-zero sum game:

Pure & Mixed strategy games:

Pure strategy. It is a decision, in advance of all plays, always to choose a

Mixed strategy. It is a decision, in advance of all plays, to choose a

Select maximum from the minimum of rows.

Since the value of maximin coincides with the value of the

Determine the optimal strategies for both the companies.

In the above problem, there is no saddle point. In

Under this situation, both the companies may

A mixed strategy game can be solved by

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