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Unit12

Unit12
Structure

GameTheory

12.1. Introduction 12.2. Competitivesituations 12.2.1. Marketingdifferentbrandsofacommodity 12.2.2. Campaigningforelections 12.2.3. Fightingmilitarybattles 12.3. Characteristicsofcompetitivegames 12.3.1 nPersonGame 12.3.2 ZeroSumGame 12.3.3 TwoPersonZeroSumGame(RectangularGame). 12.3.4 Strategy 12.3.5 PureStrategy 12.3.6 MixedStrategy 12.4. MaximinMinimaxprinciple 12.4.1. SaddlePoint 12.4.2. SolutiontoaGamewithSaddlePoint 12.5. Dominance 12.5.1 SolvingGamesUsingDominance 12.6. Summary TerminalQuestions AnswerstoSAQsandTQs 12.1 Introduction GametheorywasdevelopedbyJohnVonNewman.Heworkedongametheoryrightfrom1928. But,itgainedprominenceonlyafter1944whenhepublished(alongwithMrogenstren)thework Theoryofgamesandeconomicbehaviour.Thisfieldofstudyisfastdevelopinganditishighly resourceful.

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LearningObjectives Afterstudyingthisunit,youshouldbeabletounderstandthefollowing

1. Thecompetitivesituations 2. ApplicationofGameTheorytosuchsituations 3. FindasolutionusingSaddlepointandDominanceprinciple

12.2 CompetitiveSituations Competitive situations occur when two or more parties with conflicting interests operate. The situationsmayoccurasfollows. 12.2.1. Marketingdifferentbrandsofacommodity. Two (or more) brands of detergents (soaps) try to capture the market by adopting various methods (courses) such as advertising through electronic media, providing cash discounts to consumersorofferinglargersalescommissiontodealers.

12.2.2. Campaigningforelections. Two(ormore)candidateswhocontestanelectionstrytocapturemorevotesbyadoptingvarious methods (courses) such as campaigning through T.V., door to door campaigning or campaigningthroughpublicmeetings. 12.2.3. Fightingmilitarybattles. Twoforcesfightingawartrytogainsupremacyoveroneanotherbyadoptingvariouscoursesof actionsuchasdirectgroundattackonenemycamp,groundattacksupportedbyaerialattackor playingdefensivebynotattacking. Weconsidereachoftheabovesituationstobeacompetitivegamewheretheparties(players) adoptacourseofaction(playthegame). SelfAssessmentQuestions1 Fillintheblanks

1. Competitive situation occur when ______ or ________ parties with ______ _________
operates.

2. Incompetitivegameprayershave_________numberofcoursesofactionavailabletothem.
12.3CharacteristicsofaCompetitiveGame
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Acompetitivegamehasthefollowingcharacteristics. 1. Thenumberofplayers(competitors)isfinite. 2. Eachplayerhasfinitenumberofcoursesofaction(moves). 3. Thegameissaidtobeplayedwheneachplayeradoptsoneofhiscourseofaction. 4. Everytimethegameisplayed,thecorrespondingcombinationofcoursesofactionleadstoa transaction(payment)toeachplayer.Thepaymentiscalledpayoff(gain).Thepayoffmay bemonetary(money)orsomesuchbenefitasincreasedsales,etc. 5.Theplayersdonotcommunicatetoeachother. 6.Theplayersknowtherulesofthegamebeforestarting.

12.3.1nPersonGame Agameinwhichnplayersparticipatesiscallednpersongame. Agameinwhichtwoplayersparticipateiscalled2person game(twopersongame). 12.3.2ZeroSumGame Ifagameissuchthatwheneveritisplayedthesumofthegains(payoff)oftheplayersiszero,it iscalledzerosumgame. A zerosum game which has two players is called twoperson zerosum game. It is called rectangulargame. Inatwopersonzerosumgame,thegainoftheoneplayerisequaltothelossoftheother. 12.3.3TwoPersonZeroSumGame(RectangularGame). Atwopersonzerosumgameisagameinwhich i) twoplayersparticipate ii) thegainofoneplayeritthelossoftheother.

Inatwopersonzerosumgame,lettheplayersbeAandB.Let A , 2 ,...A bethemcourses 1 A m of action for player A. Let B ,B ,... n be the n courses of action for player B. Let B 1 2
aij (i=1, , mj=1, , n)bethepayoff(gain)ofplayerAwhenheplaysthecourseofaction, 2 ..... 2 ....

A and player B plays the course of action Bj. Then, thefollowing matrix is the payoff (gain) i
matrixofplayerA.

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PlayerB
B B2 .......... .......... n B 1
A A2

a 11 a .......... .......... 1n a 12 a21 a22 .......... .......... 2n a . . . . . . . . . am1 am2 .......... .......... mn a

PlayerA

. . . Am

Thisisa m n(readasmbyn)game. Here, aij isthegainofA.Also, aij isthelossofB.Therefore,(aij )isthegainofB.Andso,the payoffmatrixofBisobtainedby writing(a )intheplaceof a intheabovematrixand then ij ij writingthetransposeofthematrix. 12.3.4Strategy Inagame,thestrategyofaplayeristhepredeterminedrulebywhichhechooseshiscourseof actionwhileplayingthegame. Thestrategyofaplayermaybepurestrategyormixedstrategy. 12.3.5 PureStrategy Whileplayingagame,purestrategyofaplayerishispredecisiontoadopta specifiedcourseofaction(sayA )irrespectiveofthestrategyoftheopponent. r 12.3.6MixedStrategy Whileplayingagame,mixedstrategyofaplayerishispredecisiontochoosehiscourseofaction accordingtocertainpreassignedprobabilities. Thus,ifplayerAdecidestoadoptcoursesofaction A andA withperspectiveprobabilities0.4 2 1 and0.6,itismixedstrategy. Example1:(2fingermorragame). Two persons A and B play a game they should simultaneously raise their hand and exhibit either onefingeror two fingers. If both ofthem show onefingeror ifboth show two fingers, A shouldpayRs.10toB.Ontheotherhand,ifoneplayershowsonefingerandtheotherplayer

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showstwofingers,BshouldpayRs.5toA. Here,thepayoffmatrixofAis PlayerB B1(onefinger) fingers) A1(onefinger) PlayerA A2 (twofingers) 10 5 B2 (two 5 10

Here, supposeplayer Adecidesto show onefinger(A1 ), his strategy ispure strategy. On the other hand, suppose A decides to play A with probability 0.5 and A with probability 0.5, his 1 2 strategyismixedstrategy.(Thismeans,ifheistoplayrepeatedly,sometimesheshouldplay A 1 and at other times he should play A . He should mix A and A randomly almost equal 2 1 2 numberoftimes.)

SelfAssessmentQuestions2 Writeonelineanswer

1. Stateanyonecharacteristicsofacompetitivegame. 2. WhendowecallagameasZerosumgame. 3. Whatisarectangulargame? 4. Whatispurestrategy?

12.4MaximinMinimaxPrinciple (ofsolvingatwopersonzerosumgame) SupposeplayerAandplayerBaretoplayagamewithoutknowingwhatthe otherplayerwoulddo.However,playerAwouldliketomaximizehisprofitandplayerBwouldlike tominimizehisloss.Andthus,eachplayerwouldexpecthisopponenttobecalculative. Supposeplayer A playsA .Then,hisgainwouldbe a , 12 ,... 1naccording a 1 11 a asBschoiceisB , 2 ,... n .Let 1 = min a , 12 ,... 1n }.Then, a 1 istheminimumgainofA B a { 11 a a 1 B whenheplays A .(Here, a 1 istheminimumpayoffinthefirstrow.)Similarly,ifAplays A ,his 1 2 minimumgainis a 2 whichistheleastpayoffinthesecondrow.Thusproceeding,wefindthat corresponding to As playA , 2 ,......Am, 1 A the minimum gains are the row

minimums 1 ,a 2 ,.. m.SupposeAchoosesthatcourseofwhicha i ismaximum.Thismaximum a a

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oftherowminimuminthepayoffmatrixiscalledmaximin.Themaximinis

a=

max min (aij i j

Similarly,whenBplays,hewouldminimizehismaximumloss.ThemaximumlosstoBwhen Bj is b j =
max (aij i

).Thisisthemaximumpayoffinthe j column.Theminimumofthecolumn

th

maximumsinthepayoffmatrixiscalledminimax.Theminimaxis

b=

min max (aij j i

Forsomegames,themaximinandtheminimaxareequal.Thatis,

a = b = v (say).Suchgamesaresaidtohavesaddlepoint.
On the other hand, if a < b , the game does not have saddle point.

(Notethat a cannotbegreaterthan b ). 12.4.1.SaddlePoint Inatwopersonzerosumgame,ifthemaximinandtheminimaxareequal,wesaythatthegame hassaddlepoint. Saddlepointisthepositionwherethemaximin(maximumoftherow minimums)andminimax(minimumofthecolumnmaximums)coincide. Ifthemaxminoccursinthe rthrowandiftheminimaxoccursinthe sthcolumn,theposition(r,s) isthesaddlepoint.Here, v = ars isthecommonvalueofthemaximinandtheminimax.Itiscalled thevalueofthegame. ThevalueofagameistheexpectedgainofplayerAwhenboththeplayersadoptoptimal strategy. Note1: Ifagamehassaddlepoint,andif(r,s)isthesaddlepoint,suggestedsolutiontoboth theplayersispurestrategy.ForplayerA,thesuggestedsolutionisA .ForplayerB,the r suggestedsolutionisBs. Note2: Ifagamedoesnothavesaddlepoint,thesuggestedsolutionismixedstrategy. Note3:Agameissaidtobefairifitsvalueiszero.

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12.4.2.SolutiontoaGamewithSaddlePoint ConsideratwopersonzerosumgamewithplayersAandB.Let A , 2 ,...A bethecoursesof 1 A m actionforplayerA.Let B , 2 ,..... nbethecoursesofactionforplayerB. B 1 B Thesaddlepointofthegameisfoundasfollows. 1. Theminimumpayoffineachrow ofthepayoffmatrixiscircled(markedwith) 2. Themaximumpayoffineachcolumnisboxed(markedwith) 3. Intheaboveprocess,ifanypayoffiscircledaswellasboxed,thatpayoffisthevalueofthe game.Thecorrespondingpositionisthesaddlepoint. Let (r, s) be the saddle point. Then, the suggested pure strategy for player A isA . The r suggestedpurestrategyforplayerBisBs.Thevalueofthegameisars. Note: However, in theabove procedure,if none ofthe payoffis circled as well asboxed, the gamedoesnothavesaddlepoint.Andso,thesuggestedsolutionfortheplayersismixed strategy. Example2: Verify whetherthe2fingermorragameexplainedearlierhassaddlepoint.Ifso,writedownthe solutionforthegame. Solution: ThepayoffmatrixofplayerAis

PlayerB B1 (onefinger)B2 (twofingers) A1(onefinger) PlayerA A2 (twofingers)

10

10

1. Theminimumpayoffineachrowiscircled. 2. Themaximumpayoffineachcolumnisboxed.

3. Sincenoneofthepayoffiscircledas wellasboxed,thegamedoesnothavesaddlepoint. Andso,thesolutionforthegameismixedstrategyforboththeplayers.

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Example3: TwopersonsAandB,withoutshowingeachother,placeacoineachonthe table.Ifthecoinshappentobeofthesamedenomination,playerAwilltakebothofthem.Ifthey happentobeofdifferentdenominations,playerBwilltakebothofthem.SupposeplayerAhasa few onerupee coins and tworupee coins. And suppose player B has a few onerupee, two rupeeandfiverupeecoins. i) WritedownthepayoffmatrixofA.Doesthegamehavesaddlepoint?Ifso,writedownthe solution. ii) What happens to the game if both the players play only with onerupee and tworupee coins? Solution: i) ThepayoffmatrixofAis PlayerB B1 (oneRs.)B 2 (twoRs)B 3 (fiveRs.) A1(onerupee) PlayerA A2 (tworupees)

1 2

1. Theminimumpayoffineachrowiscircled.(Here,theminimumsrepeat.) 2. Themaximumpayoffineachcolumnisboxed. 3. Thepayoff1iscircledaswellasboxed.Therefore,thegamehasasaddlepoint.Itis theposition(1,3). Thesolutiontothegameis a) StrategyforAisA . 1 b) StrategyforBisB . 3 c) Valueofthegameisv=1rupees. ii) Ifboththeplayersplayonlywithonerupeeandtworupeecoins,thepayoffmatrixofAis

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PlayerB B1 A1 PlayerA A2 B2

1 2

Here,thegamedoesnothavesaddlepoint.Therefore,thesuggestedsolutionismixedstrategy fortheplayers. Example4: A labour union of a firm is negotiating a new 5year settlement regarding payments with the management. Theoptionsthe union hasareA : Aggressivebargaining, A : Bargaining with 1 2 reasoningandA :Conciliatoryapproach.Thelikelymodeofresponsefromthemanagement 3 areB :Aggressivebargaining,B2:Bargainingwithreasoning,B3:Legalisticapproachand 1 B4:Conciliatoryapproach.Thegainstotheunionineachcaseareasfollows.

Union B1 A1 A2 A3 20 25 5

Management B2 15 14 4 B3 12 8 11 B4 35 10 0

Whatstrategywouldyousuggestforthetwosides?Whatisthevalueofthe game?

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Solution: Union B1 A1 20 A2 25 A3 5 15 Management B2 12 B3 35 B4

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1. Theminimumpayoffineachrowiscircled. 2. Themaximumpayoffineachcolumnisboxed. 3. The value 12 is circled as well as boxed. And so, the game has a saddle point. It is the position(1,3). Therefore,thesolutiontothegameis a) StrategyfortheunionisA :Aggressivebargaining. 1 b) StrategyforthemanagementisB3 :Legalisticapproach. c) Valueofthegameisv=12. Example5: Solvethegame

B1 A1 A2 6 7

B2 12 9

B3 7 8

Isthegamefair? Solution: B1 A1 A2 6 B2 12 B3 7

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1. Theminimumpayoffineachrowiscircled. 2. Themaximumpayoffineachcolumnisboxed. 3. Thevalue7iscircledaswellasboxed.Andso,thegamehasasaddlepoint.Itistheposition (2,1). Therefore,thesolutiontothegameis a) StrategyforAisA . 2 b) StrategyforBisB . 1 c) Valueofthegameisv=7. d) Thegameisnotfairbecausevisnotequaltozero. Example6: Atwopersonzerosumgame,hasthefollowingpayoffmatrix.Solvethegame. 8 -1 3 0 0 - 2 -7 - 4 Isthegamefair? Solution: B1 8 B2 1

A1 A2 A3 A4

1. Theminimumpayoffineachrowiscircled. 2. Themaximumpayoffineachcolumnisboxed. 3. Thevalue0iscircledaswellasboxed.Andso,thegamehasasaddlepoint.Itistheposition (2,2). Therefore,thesolutiontothegameis a) StrategyfortheplayerisA (secondcourseofaction). 2

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b) StrategyfortheopponentisB (secondcourseofaction). 2 c) Valueofthegameisv=0. d) Sincethevalueofthegameis0,thegameisfair. SelfAssessmentQuestions3 ArethefollowingstatementsTrueorFalse

1. Saddlepointoccursatrowminimumandcolumnmaximum. 2. Ifthevalueofthegameiszerothenitiscalled0sumgame. 3. Thepayofmatrixrepresentsthegainfortopplayer.

12.5 Dominance Inarectangulargame,supposeinthepayoffmatrixofplayerA,eachpayoffinonespecificrow (r th row ) exceeds the corresponding payoff in another specific row (sth row ). This means, whateverbethecourseofactionadoptedbyplayerB,forA,thecourseofaction A yieldsgreater r gains than the courseofactionA .Therefore,A isa betterstrategy thanA irrespectiveofthe s r s strategyofB.Andso,wesaythatA dominates A . r s On the other hand, suppose each payoff in a specific column (pth column)is less than the corresponding payoff in another specific column (qth column). This means, for player B, strategy Bp haslesserloss than strategy Bq irrespective of strategy of A. Andso, we say that Bp dominates Bq.Thus, a) In the payoff matrix, if each payoff in the rth row is greater than (or equal to ) the correspondingpayoffinthe sth row, A dominates A . r s b) In the payoff matrix, if each payoff in thepth columnis less than

(orequalto)thecorrespondingpayoffinthe qth column, Bp dominates Bq. Sometimes, a convex combination of two or more courses of action may dominate another courseofaction. Whenever a course of action (say A or Bq ) isdominatedby others, that course of action s (A or Bq )canbedeletedfromthepayoffmatrix.Suchdeletionwillnotaffectthechoiceof s thesolution.
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Suchdeletionofcoursesofactionreducestheorderofthepayoffmatrix. Successivereductionoftheorderusingdominancepropertyhelpsusinsolvinggames. 12.5.1 SolvingGamesUsingDominance (Solvingtwopersonzerosumgamewithsaddlepoint) ConsideratwopersonzerosumgamewithplayersAandB.LetA , 2 ,......Ambethecourses 1 A ofactionforplayerA.Let B ,B2,... n bethecoursesofactionforplayerB. B 1 Suppose the game has saddle point. Then, using dominance property, it is possible to successively delete the courses ofaction of A aswellas B such that ultimately the pair comprisingthesaddlepointaloneremains.Theprocedureinthisregardisasfollows. a) In the payoff matrix, if each payoff in the rth row is greater than (or equal to ) the correspondingpayoffinthe sth row, A dominates A .Andso, A isdeleted. r s s b) In the payoff matrix, if each payoff in thepth columnis less than (or equal to) the correspondingpayoffinthe qth column, Bp dominates Bq.Andso, Bq isdeleted. c) The above steps are repeated in succession until the saddle point is reached. And hence,thesolutionsiswrittendown. Note: Sometimes,aconvexcombinationoftwoormorecoursesofactionmaydominateanother courseofaction. Example8: Solvethefollowinggameusingdominanceproperty. B1 A1 A2 A3 Solution: Inthepayoffmatrix,eachpayoffinthefirstrowexceedsthecorrespondingpayoffinthethird row.Therefore, A dominatesA .Andso, A isdeleted.Thereducedmatrixis 1 3 3
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B3 12

B4 35

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25

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B1 A1 A2 20 25

B2 15 14

B3 12 8

B4 35 10

Here, each payoff in the third column is less than corresponding payoff in the first column. Therefore, B3dominatesB . Similarly, B3 dominatesB2 . Also, B3dominatesB4. Thus, the 1 matrixreducesto B3 A1 A2 12 8

Here,since12>8, A dominatesA .Andso,finallythematrixreducesto 1 2 B3 A1 (12)

Thus,(1,3)isthesaddlepoint.Andso,thesolutiontothegameis a) StrategyforAisA . 1 b) StrategyforBisB3 . c) Valueofthegameisv=12 Example9: Solvethefollowingzerosumgameandfinditsvalue. CompanyY P Q R S

B6 CompanyX C D 3 2

1 2 3

12 2 7

3 6 7

Solution: In the payoff matrix, each payoff in the second column is less than (or equal to) the correspondingpayoffinthethirdcolumn.Andso,thecourseofactionQdominatesR.
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Similarly,QdominatesS. AfterdeletingRandS,thereducedmatrixis P A B C D 6 6 3 2 Q 2 1 2 3

Here,payoffinthesecondrowisgreaterthan(orequalto)thecorrespondingpayoffsinthefirst, thirdaswellasfourthrows.Therefore,BdominatesA,CandD. AfterdeletingA,CandD,thereducedmatrixis P B[6 Q 1]

Here,1<6.Therefore,QdominatesP. AfterdeletingP,thereducedmatrixis Q B [1]

Thus,thesolutiontothegameis a) StrategyforCompanyXisB. b) StrategyforCompanyYisQ. c) Valueofthegameisv=1. Example10. Inatwopersonzerosumgame,thepayoffmatrixofAis

PlayerB B1 A1 PlayerA A2 1 3 6 4 B2 7 B3 0

WritedownthepayoffmatrixofplayerB.

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Solution: ThepayoffmatrixofBis PlayerA A1 B1 PlayerB B2 B3 7 3 4 A2 1

SelfAssessmentQuestions4 Fillintheblanks a. The row whose elements are less than the corresponding elements of another row is __________. b. If the average of any 2 columns is less than or equal to the corresponding elements of anothercolumnis_________.

12.6. Summary In this unit of game theory we studied the concept of competitive situations where the characteristicsofcompetitivegameanditsstrategyweconsidered.Themaximum minimum principleisdiscussedbrieflysaddlepointandDominanceisexplainedwithclearcutexamples. TerminalQuestions 1.Solvethefollowingrectangulargame.

-2 2 0 5 - 8 3 2 1 2 2 - 1 3 0 - 4 2 0- 5- 4 3 - 2

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2.Inarectangulargame,payoffmatrixofplayerAis PlayerB B1 A1 PlayerA A2 5 4 B2 7 0

i) Solvethegame. ii) WritedownthepayoffmatrixofBandthen,solvethegame. 3. Brieflydescribecharacteristicsofcompetitivegame. 4. ExplainMAXIMINMINIMAXprinciple AnswersToSelfAssessmentQuestions SelfAssessmentQuestions1 1.Two,more,withconflicting,interest 2.Finite SelfAssessmentQuestions2 1.Playersdonotcommunicatetoeachother 2.Whenthevalueofthegameis0. 3.Twopersonzerosumgame. 4.WhenaplayeralwaysplayonlyonestrategyirrespectiveofOpponentsmove SelfAssessmentQuestions3 1.True 2.True c)False

SelfAssessmentQuestions4 1.Deleted 2.Deleted

AnswerforTerminalQuestions 1.Valueofthegameis1.AsStrategy(0,1,0,0) BsStrategy(0,0,1,0,0) 2.Valueis5.AsStrategy(1,0) 3.ReferSection12.3 4.ReferSection12.4 BsStrategy(1,0)

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