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Introduction
Game Theory ▪ In previous topics, we have encountered many situations in which a
single decision maker chooses an optimal decision without reference
Industrial Engineering Department to the effect that the decision has on other decision makers (and
Institut Teknologi Sepuluh Nopember without reference to the effect that the decisions of others have on
Surabaya him or her).
▪ In many business situations, however, two or more decision makers
simultaneously choose an action, and the action chosen by each
player affects the rewards earned by the other players. For
example, each fast-food company must determine an advertising
and pricing policy for its product, and each company’s decision will
affect the revenues and profits of other fast-food companies.
Game theory is useful for making decisions in cases where two or
more decision makers have conflicting interests. Most of our study
of game theory deals with situations where there are only two decision
makers (or players), but we briefly study n-person (where n2) game
theory also.
2
Quantitative Modeling & Industrial Policy Analysis (Q-Lab)

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Outline Definition

➢ Game Theory vs Decision Tree • Part of a rational behavior study of interdependency between
players.
➢ Pay-off Tree
• Mathematical approach to formulate situation of competition/conflict
➢ Zero-sum Game and cooperation between various interests.
➢ Decision making using Minimax and Maximin criteria. • Optimization method to optimize the problems of at least 2
➢ Dominant vs dominated Strategy individuals or group that have an equal interest in maximizing their
benefits as much as possible
➢ Prisoner’s Dilemma
• Optimal solution of the game → maximum benefit for players who
➢ Stable and unstable solution in a game win the game and minimum losses for players who lose the game
➢ Graphical solution in game theory – Zero sum game is said as a fair game, and vice versa

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Aplication Aplication (2)

• Every business player must always think of a new strategic

• In business application, Game Theory is almost the
plan to achieve his payoff goal. The only problem is that
same as Decision Tree, in which the goal is to
when other players also take the same plan, the plan
determine the best decision which is initial strategic, can not work at all or even harm.
• The advantage of Game Theory → to take into In fact, this consequence applies to all players within the
account the steps taken by other players (non- game
parametric), while Decision Tree is the opposite. • For example:
Each fast-food company must determine an advertising
and pricing policy for its product, and each company’s decision
will affect the revenues and profits of other fast-food
companies

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Basic Theory History

• At November 13, 1713, James Waldegrave introduced Minimax Concept as

❑ In making rational decision, a player needs anticipation of the a method to solve the two-person game with a mixed strategy.
competitor’s response. • Study of game theory, esp. about duopoly, was proposed by Antoine
Cournot in 1838.
❑ Competitor’s behavior is not always as expected.
• A mathematician, Emile Borel, made a modern formulation of mixed
❑ Thus, uncertainty is an important consideration in game strategies in game theory between 1921-1927, then studied further by
theory John von Neumann in 1928 in the “Theory of Parlor Games."
• Game theory became a separate field of research after the publication of
the Theory of Games and Economic Behavior by von Neumann and
economist Oskar Morgenstern in 1944.
• George B. Dantzig developed the simplex solution for game theory in
1947

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History (2) Terms and Conditions

• In 1950, John Nash showed that finite games always have an equilibrium ❑ Each player plays rationally, assuming they have the same
point where all players choose the best action if they want the opponent’s intelligences and objectives, which is to maximize payoff
choice
with maximin and minimax criteria.
• In 1950s and 1960s, game theory is theoretically expanded and applied for
wars and politics. ❑ Each player chooses the strategy only for their own sake
• Since 1970s, game theory has triggered a revolution in economic theory ❑ Each player knows each other’s strategy
and applied for sociology and psychology case.
❑ Each player knows payoff value of each decision made
• Game theory received special attention in 1994 with the awarding of
Nobel Prizes for Nash, John Harsanyi, and Reinhard Selten in the field of
Economics.

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Terms and Conditions (2) Classification of Game Theory

Value of Strategy Number

❑ The game is done by choosing strategies repeatedly until
Game of Game of Player
optimum problem solving is obtained.
❑ If it consists of 2 players, then benefit for one player is a loss Zero-sum Pure
2 Players
for another player Game Strategy

❑ The aim of this game theory is to identify the optimal

Non-Zero- Mixed Three
strategies sum Game Strategy Players
❑ The arranged table shows benefits for row player and losses
for column player Constant- n Players
sum Game (n >3)
❑ The game is said to be fair if the final result produces zero
(0) → no win/lose Non-
Constant-
sum Game

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Payoff Matrix Payoff Matrix

• aij → The amount of benefit for player 1 (row player) if player 1 takes • According to Hiller & Lieberman (1990), based on the value of
strategy i and player 2 (column player/competitor) takes strategy j
game, payoff matrix can be divided by two types:
• a22 : The amount of benefit for player 1 if player 1 takes strategy 2 and
player 2 takes strategy 2
1. Zero-Sum → Fair

• a23 : The amount of loss of player 2 if player 1 takes strategy 2 and player Player B
Player A
2 takes strategy 3 Strategy B1 Strategy B2
Strategy A1 2 4
Strategy A2 -1 5

2. Non-Zero Sum → Not Fair

Player B
Player A
Strategy B1 Strategy B2 Payoff value : (a, b)
Strategy A1 4, 3 3, 2 a : payoff value of player 1
❑ A strategy is said to be dominant to other strategies if each element of b : payoff value of player 2
payoff in a row is greater than its equivalent element in another strategy Strategy A2 2, -2 1, 1

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1) Zero-Sum Game Matrix 2) Non-Zero Sum Game Matrix

Player B Player B
Player A Player A
Strategy B1 Strategy B2 Strategy B1 Strategy B2
Strategy A1 2 4 Strategy A1 4, 3 3, 2
Strategy A2 -1 5 Strategy A2 2, -2 1, 1

• Player A (Row player) is positioned as the winner • If one player wins the game, then another player does not
• Player B (Column player) is positioned as the loser necessarily lose

• Value within matrix shows the quantity of win/loss • Consists of two numbers:

– Positive value → the quantity of wins for player A and loss for – Front number → belongs to Player A
player B as well – Rear number → belongs to Player B
• Number of wins for one player = number of loss for another player • Positive number indicates the win, yet negative shows the loss for
both Player A and Player B.

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Solving Strategy Solving Strategy

• Uses dominant strategy and/

Pure Strategy Mixed Strategy maximin concept for row player and
Pure minimax for column player
Strategy • Uses a single strategy to get the
optimal results → the same saddle
• Dominated strategy • Analytical Method point
• Maximin/Minimax • Matrix Algebra
strategy • Graphical Method
• Linier Programming • Conducted if a pure strategy has not
(simplex) Mixed provided the optimal solution yet
• So, it needs to be followed up to get
Strategy the optimal point, by trying to get
the same saddle point

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Solving Strategy (A)Two-Person Zero-Sum Game

• Two-person game → involves two players within game

• Each player has some strategies
• Payoff from the game→ Function of different strategies for
each player
• Zero-sum game→ Gain/benefit of one player is the loss of
another player
• Each player knows the strategy taken by the competitor
• Zero-Sum Game = a Fair game

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Two-Person Zero-Sum Game Two-Person Zero-Sum Game

• Assumptions: • Solving strategy:
– Both players are rational
– Pure Strategy
– Both players choose strategy which is able to support their own
1. Dominated Strategy
prosperity
Payoff Table 2. Maximin – Minimax Strategy
– Mixed Strategy
1. Matrix Algebra
Player 2 2. Analytical Method
3. Graphical Method
If Player 1 uses strategy i and
Player 2 uses strategy j, then
4. Linear Programming
Player 1 benefit for Player 1 is 𝑎𝑖𝑗
(benefit for Player 2 is −𝑎𝑖𝑗 )

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1) Dominated Strategy 1) Dominated Strategy

• Frequently, there are strategies which are always better than • Concept of dominated strategy is useful for:
other strategies regardless of the strategies taken by the
– Reducing the size of payoff matrix
opponent
– Identifying the optimal solution of game
• Strategies which are always better are maintained.
Otherwise, the strategies which are always worse are eliminated.
– For Player 1,
Strategy p is dominated by Strategy i → if apj ≤ aij for each j
– For Player 2,
Strategy q is dominated by Strategy j → if aiq ≥ aij for each i
• Dominated strategy is eliminated from further evaluation.

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Payoff Matrix – Dominated Strategy Payoff Matrix – Dominated Strategy (2)

• Eliminate the strategy

Player 2
Player 2

Player 1
Player 1

Strategy 3 of Player 1 is dominated by Strategy 1

(0 ≤ 1, 1 ≤ 2, ‐1 ≤ 4) • Strategy 3 of Player 2 is dominated by Strategy 1 (4 ≥ 1, 5 ≥ 1)
and Strategy 2 (4 ≥ 2, 5 ≥ 0)

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Payoff Matrix – Dominated Strategy (3) Payoff Matrix – Dominated Strategy (4)

• Eliminate the strategy • Eliminate the strategy

Player 2 Player 2

Player 1 Player 1

• Strategy 2 of Player 1 is dominated by Strategy 1 (1 ≤ 1, 0 ≤ 2) • Strategy 2 of Player 2 is dominated by Strategy 1 (2 ≥ 1)

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Payoff Matrix – Dominated Strategy (5) 2) Maximin – Minimax Strategy

• Solution Player 2 • Player 1 → MAXIMIN strategy

▪ Each strategy is searched for the worst possibility
▪ So, choose the strategy which is most likely to have the biggest payoff
rather than other strategies
Player 1
• Player 2 → MINIMAX strategy
• Player 1 → Strategy 1 ▪ Basic thinking is the same as Maximin in Player 1

• Player 2 → Strategy 1 ▪ In the payoff table/matrix, the large positive value actually shows the
large loss for Player 2, so that Maximin becomes MINIMAX
• Payoff value of game = 1 → Saddle Point
• Choosing other strategies will not guarantee in increasing the
win of Player 1 and decreasing the loss of Player 2
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Payoff Matrix: Maximin-Minimax Strategy Payoff Matrix: Maximin-Minimax Strategy (2)

Player 2
• If there is no strategy dominating other strategies (dominated strategy can
not be done), then the game is solved by Maximin-Minimax strategy
Maximin value = Minimax → Saddle Point • See the following Payoff Matrix:
Player 1
Player B
Player A
Strategy B1 Strategy B2 Strategy B3
Player 2
Strategy A1 -3 -2 6
minimum
Strategy A2 2 0 2
Strategy A3 5 -2 -4
Player 1

maximum

Player 1 → Strategy 1
Player 2 → Strategy 1
31 Point
Payoff Value of Game) = 1 → Saddle 32

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Payoff Matrix: Maximin-Minimax Strategy (3) Example: Saddle Point

Player B
Player A Minimum
Strategy B1 Strategy B2 Strategy B3

Strategy A1 -3 -2 6 -3

Strategy A2 2 0 2 0 Maximin value

Strategy A3 5 -2 -4 -4

Maximum 5 0 6

Minimax value
Zero Sum Game → Fair
• Optimal Solution : Player A → Strategy A2
Player B → Strategy B2

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(A) 2-Person Zero-sum Game without Saddle Point

(B) Two-Person Constant Sum Game
(Unstable Game)
• A player has a choice to point his one or two fingers. • Even if a two-person game is not zero-sum, two players can still be in total
• If the number of fingers pointed by both players is even, then column conflict.
player wins. Unless, row player wins. • A 2-person constant-sum game:
• The winner will get $1, yet the loser pays $1 A 2-player game in which, for any choice of both player’s strategies,
the row player’s reward and the column player’s reward add up to a
• This games has no saddle point constant value c
Max (row min) =−1  Min (column
max)=+1
• It is unclear how to determine the value of 2-Person ZERO-Sum Game = 2-Person Constant Game with c = 0
the game and the optimal strategies
• Observe that for any choice by strategies,
there is a player who can benefit by
unilaterally changing her strategy.
• Thus, no choice of strategies by the player is
stable

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(B) Two-Person Constant Sum Game (2) (C) Two-Person Non-Constant-sum Game
• Two local TV stations are considering to determine which program will be
aired on prime time. • Most game-theory models of business situations are not
• Total audience is 100 million people → so, this is 2-person constant sum constant-sum games, because it is unusual for business
game with c = 100 (million) competitors to be in total conflict
• If a TV station shows comedy and another one shows soap opera, then there • Prisoner’s Dilemma → a well-known concept to discuss the
will be 14 million people watching comedy and the rest is 100-14 = 86 analysis of two-person non-constant-sum game in which
million people watching soap opera
cooperation between the players is not allowed.

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(C) Two-Person Non-Constant-sum Game: (C) Two-Person Non-Constant-sum Game:

Prisoner’s Dilemma Prisoner’s Dilemma

❑ Two people are caught by police and charged with being ❑ Then, both of them will be interrogated, and before being
unlawful interrogated, they are informed that:
– If one confesses and another does not confess, then the one admitting
❑ Both of them are arrested in the separated rooms, so that will be free and another who does not admit will be sentenced for 20
they can not communicate with each other years.
– If both of them do not confess, then they will be sentenced for 1 year..
– If those Prisoners confess, then they will be sentenced for 5 years.

❑ What should they do?

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Prisoner’s Dilemma Strategies for Prisoner 1

• Strategies which can be chosen by those Prisoners and their consequences

can be described as follows: • Prisoner 1
Prisoner B – If Prisoner 1 confesses, then he will be sentenced for 5 years with
provision of Prisoner 2 also confesses. Unless, Prisoner 1 will be free if
Confess Remain Silent Prisoner 2 does not confess.
– If Prisoner 1 does not confess, then he will be sentenced for 20 years
with provision of Prisoner 2 confesses. Unless, Prisoner 1 will be
Confess
sentenced for 1 year if Prisoner 2 also does not confess.
Prisoner A

5 years 5 years 0 year 20 years → Whatever strategies Prisoner 2 takes, the best
Remain option for Prisoner 1 is to confess!
Silent

20 years 0 year 1 year 1 year

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Strategies for Prisoner 2 Strategy taken by Prisoner 1 and 2

• Prisoner 2 • Based on previous analysis, it obviously confirms that both

– If Prisoner 2 confesses, then he will be sentenced for 5 years with prisoners will confess!!
provision of Prisoner 1 also confesses. Unless, Prisoner 2 will be free if • Both prisoners will be sentenced for 5 years!
Prisoner 1 does not confess.
– If Prisoner 2 does not confess, then he will be sentenced for 20 years
with provision of Prisoner 1 confess. Unless, Prisoner 2 will be
sentenced for 1 year if Prisoner 1 also does not confess.

→ Whatever strategies Prisoner 1 takes, the best

option for Prisoner 2 is to confess!
What will happen if they are allowed to communicate with
each other before being held in separated jails??

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What will happen if they are allowed to communicate What will happen if they are allowed to communicate
with each other? with each other?

• They will cooperate and both will remain silent, so that each
of them will be sentenced only for 1 year.
Prisoner B

Confess Remain Silent

Confess
Prisoner A

5 years 5 years 0 year 20 years

Remain
Silent

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Summary of Prisoner’s Dilemma Nash Equilibrium

As in a 2-person zero-sum game, a choice of strategy by each player (prisoner) is an
❑ Both players will get better condition if they can cooperate equilibrium point if neither player can benefit from a unilateral change in strategy.
with each other to solve the problem
❑ No one player has the incentive to change strategy against another
→ Thus, the police will separate both prisoners into distinct
interrogation rooms. player’s strategy
❑ If both players confess, then equilibrium point is reached, namely Nash
Equilibrium
❑ Equilibrium point does not have to be efficient.
❑ Non-cooperative equilibrium point in Prisoner’s Dilemma ❑ If both players do not confess, then it can not be categorized as Nash
yields a problem solving which is not the best result as both Equilibrium, because competitor will always want to fight and rebel
prisoners expect.
❑ Nash Equilibrium → a situation while each player chooses the optimal
strategy to face the strategy that has been done by another player.
❑ All players choose the best strategy if the opponent’s strategy is
already known
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2) Mixed Strategy 2) Mixed Strategy

Characteristics:
• Methods used in mixed strategy are:
• Used when value of Maximin ≠ Minimax → no Saddle Point
a) Matrix Algebra
max (row minimum) = min (column maximum) b) Analytical Method
all rows all columns
c) Graphical Method
• Unstable game
d) Linear Programming

Note:
Value of game follows this equation:

Maximin value (LL) ≤ Value of Game ≤ Minimax value (UL)

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2) Mixed Strategy 2) Mixed Strategy

Xi = Probability of Player 1 using pure strategy i (i = 1, 2, ..., m)

Player 2
Yj = Probability of Player 2 using pure strategy j (j = 1, 2, ..., n)

Player 1

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2) Mixed Strategy 2) Mixed Strategy

Player 1’s Viewpoint (Maximin Problem) Player 2’s Viewpoint (Minimax Problem)
• Player 1 chooses Xi which maximizes minimum expected payoff • Player 2 chooses Yj which minimizes maximum expected payoff

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a) Matrix Algebra 2) Analytical Method

• If there is dominated strategy → payoff matrix is reduced first

Player B
Player A Minimum
Strategy B1 Strategy B2 Strategy B3
Strategy A1 2 5 7 2 Maximin
Strategy A2 -1 2 4 -1
Strategy A3 6 1 9 1
Maximum 6 5 9
Minimax

• Strategy A2 is eliminated → dominated by Strategy A1

• Strategy B3 is eliminated → dominated by Strategy B1 or B2

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2) Analytical Method (2) 2) Analytical Method (3)

Player A’s Viewpoint
Prob. q (1-q)
Player A’s Viewpoint
Player B
Prob. Player A Minimum • Optimal strategy for Player A is obtained if Eq. (1.1) = Eq. (1.2) :
Strategy B1 Strategy B2
-4p + 6 = 4p + 1
p Strategy A1 2 5 2 Maximin
p = 0.625
(1-p) Strategy A3 6 1 1
Maximum 6 5 • So, prob. of Player A using strategy A1 = 0.625 or 62,5% and
using strategy A3 = 0.375 or 37,5%
Minimax
• Expected profit (gain) of Player A is:
• If probability of Player A using strategy A1 is p, then prob. of using
strategy A3 is (1-p) = -4p + 6

• If Player B uses strategy B1, then prob. of Player A’s profit: = -4(0.625) + 6

2p + 6 (1-p) = -4p + 6 (1.1) = 3.5

• If Player B uses strategy B2, then prob. of Player A’s profit :

5p + 1 (1-p) = 4p + 1 (1.2)
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2) Analytical Method (4) 2) Analytical Method (5)

Player B’s Viewpoint
Prob. q (1-q) Player B’s Viewpoint
Player B
Prob. Player A Minimum • Optimal strategy for Player B is obtained, if Eq. (1.3) = Eq. (1.4) :
Strategy B1 Strategy B2
-3q + 5 = 5q + 1
p Strategy A1 2 5 2 Maximin
q = 0.5
(1-p) Strategy A3 6 1 1
Maximum 6 5 • So, prob. of Player B using strategy B1 = 0,5 or 50% and
using strategy B2 = 0.5 or 50%
Minimax
• Expected loss of Player B is:
• If probability of Player A using strategy B1 is q, then prob. of using strategy B2
is (1-q) = -3q + 5

• If Player A uses strategy A1, then prob. of Player B’s loss: = -3(0.5) + 5 Thus,
= 3.5 Profit of Player A = Loss of Player B
2q + 5 (1-q) = -3q + 5 (1.3)
Player A → profit of 2 to 3.5
• If Player A uses strategy A3, then prob. of Player B’s loss : Player B → loss of 5 to 3.5
6q + 1 (1-q) = 5q + 1 (1.4) Saddle Point = 3.5

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3) Graphical Method 3) Graphical Method (2)

• Game also can be solved by graphical method, only for: • This method can be done with similar way by observing graphical method
in linear programming
– All games of 2 x n → Row Player has two strategies and Column
Player has n strategies • If a player can choose one of two possible strategies, then situation of
player’s decision can be described in the following graphic:
– All games of m x 2 → Row Player has m strategies and Column Player
has 2 strategies Strategy 1
Strategi 1 Strategy 3
Strategi 3

• To be able to solve a game with mixed strategy graphically, the

1st dimension of matrix should be 2 Pilih C
10
9.5 Pemain
Maximin Line Minimax Line
Pemain
Pilih A
Upper Envelope 7 6

Lower Envelope
1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 00.0
Probabiliti (Selection
Probability (Pemilihan Strategi 1)
of Strategy 1)

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3) Graphical Method (3) 3) Graphical Method – Payoff Matrix 2xn

• Payoff Matrix 2 x n • Expected Payoff of Player 1 related to each pure strategy of j from Player 2:
Player 2

Player 1

෍ 𝑥𝑖 = 1 Player 2
Player 2
𝑖=1
𝑥2 = 1 − 𝑥1
Player 1
Player 1

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3) Graphical Method – Payoff Matrix 2xn 3) Graphical Method – Example 1

Two companies, A and B, is under process to determine a promotion for
increasing their market shares. Company A has 3 promotion strategies,
meanwhile Company B has 5 strategies.
The following matrices show strategies and pay off of both companies.
Company B

Company A

Company B
Solution: Minimum

Company A Maximin

Maximum

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Minimax

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3) Graphical Method – Example 1 3) Graphical Method – Example 1

Company B Player 2
• Solution of Player 1’s Viewpoint

Company A Player 1
Company B
Expected Payoff
Pure Strategy of Player 2
of Player 1

Company A

Player 2

Player 1
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3) Graphical Method – Example 1 3) Graphical Method – Example 1

Optimal Solution of Player 1’s Viewpoint Solution of Player 2’s Viewpoint

• Optimal mixed strategy for Player 2 is determined by two strategies which
define lower envelope
– Two lines that have slopes with opposite signs
• Because there are more than 2 lines that define lower envelope (through
Expected Payoff Value

maximin point), then there are more than 1 solution for Player 2:
– Combination 2 and 3
– Combination 3 and 4
Maximin Area – Combination 2 and 4 → is excluded because it gives non-optimal solution
(slope with the same sign)

𝒙𝟏
Strategy 1 Strategy 2 Strategy 3 Strategy 4

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3) Graphical Method – Example 1 3) Graphical Method – Example 1

Solution of Player 2’s Viewpoint Solution of Player 2’s Viewpoint
• Intersection of Maximin point between Pure Strategy 2 and 3. • Intersection of Maximin point between Pure Strategy 3 and 4.
• Consequence: • Consequence:

Pure Strategy of Player 1 Expected Payoff of Player 2

Pure Strategy of Player 1 Expected Payoff of Player 2

Player 2 Player 2

Player 1 71 Player 1 72

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3) Graphical Method – Example 1 3) Graphical Method – Example 1

Solution of Player 1’s Viewpoint using Player 2 Solution of Player 1’s Viewpoint (Payoff Matrix)
Payoff Matrix – Dominated Strategy Player 2

Player 1

Player 1
→ Strategy 1 of Player 2 is
dominated by Strategy 2, Player 2
then Strategy 1 is Player 2
eliminated

Player 1

Player 1

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3) Graphical Method – Example 1 3) Graphical Method – Example 1

• Solution of Player 1’s Viewpoint • Optimal Solution of Player 1’s Viewpoint

Pure Strategy of Player 2 Expected Payoff of Player 1

Expected Payoff Value

Maximin Area

Strategy 2 Strategy 3 Strategy 4

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3) Graphical Method – Example 2 3) Graphical Method – Example 2

• Each player has 2 strategies • To determine X1, X2, Y1, and Y2, the following formula is used:
Y1 Y2 = 1–Y1
• Player 1 tends to choose Strategy 2 that will give Maximin Value
Player II
• Player II tends to choose Strategy 2 that will give Minimax Value Player I
Strategy 1 Strategy 2 Maximin
Player II X1 Strategy 1 12 -8 -8
Player I
Strategy 1 Strategy 2 Maximin X2 = 1–X1 Strategy 2 -3 6 -3
Strategy 1 12 -8 -8 Minimax 12 6
Strategy 2 -3 6 -3
Player 1’s Viewpoint Player 2’s Viewpoint
Minimax 12 6
12X1 – 3(1–X1) = –8X1 + 6(1–X1) 12Y1 – 8(1–Y1) = – 3Y1 + 6(1–Y1)
12X1 – 3 + 3X1 = –8X1 + 6 – 6X1 12Y1 – 8 + 8Y1 = –3Y1 + 6 – 6Y1
Solution → using Mixed strategy (Maximin ≠ Minimax)
15X1 –3 = –14X1 + 6 20Y1 – 8 = –9Y1 + 6
So, it has to be found the probability of strategy chosen by both players
29X1 = 9 29Y1 = 14
➢ Probabilities of strategy chosen by Player 1 = X1 and X2
X1 = 9/29 Y1 = 14/29
➢ Probabilities of strategy chosen by Player 2 = Y1 and Y2
X2 = 20/29 Y2 = 15/29
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3) Graphical Method – Example 2 3) Graphical Method – Example 3

Player 1’s Viewpoint Player 2’s Viewpoint Game of 2x4

X1 = 9/29 Y1 = 14/29 Calculate the expected value of game for Player 1, if Player II uses all
X2 = 20/29 Y2 = 15/29 4 strategies.
➢ Probabilities of Player 1 to choose Strategy 1 and 2 = X1 (9/29) and X2 (20/29) Player II
➢ Probabilities of Player 2 to choose Strategy 1 and 2 = Y1 (14/29) and Y2 (15/29) Player I
Strategy 1 Strategy 2 Strategy 3 Strategy 4 Maximin
Strategy 1 12 -9 10 -6 -9
Value of Game Strategy 2 -5 6 -8 3 -8
Player 1’s Viewpoint Player 2’s Viewpoint Minimax 12 6 10 3

V* = 15X1 – 3 V* = 20Y1 – 8
Solution → using Mixed strategy (Maximin ≠ Minimax)
V* =15(9/29) – 3 V* = 20(14/29) – 8 So, it has to be found the probability of strategy chosen by both players
V* = 48/29 V* = 48/29 ➢ Probabilities of strategy chosen by Player 1 = X1 and X2
➢ Probabilities of strategy chosen by Player 2 = Y1, Y2, Y3, and Y4

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3) Graphical Method – Example 3 3) Graphical Method – Example 3

Player 1’s Viewpoint • Draw all 4 expected values of Player 1 in 2D graph Player 1’s Viewpoint
Y1 Y2 Y3 Y4
• Then, determine the probability of strategy chosen by Player 1 (Maximin)
Player II
Player I
Strategy 1 Strategy 2 Strategy 3 Strategy 4 Maximin Player 2’s
Expected Value of Player 1
Strategies
X1 Strategy 1 12 -9 10 -6 -9
1 12X1 – 5X2 = 17X1 – 5 (1)
X2 Strategy 2 -5 6 -8 3 -8
2 –9X1 + 6X2 = –15X1 + 6 (2)
Minimax 12 6 10 3
3 10X1 – 8X2 = 18X1 – 8 (3)
4 –6X1 + 3X2 = –9X1 + 3 (4)
Player 2’s
Expected Value of Player 1
Strategies (1) 17X1 – 5 (3) 18X1 – 8
1 12X1 – 5X2 = 17X1 – 5 (1) X1 = 0 → –5 X1 = 0 → –8
2 –9X1 + 6X2 = –15X1 + 6 (2) X1 = 1 → 12 X1 = 1 → 10 Maximin
(2) –15X1+6 (4) –9X1 + 3
3 10X1 – 8X2 = 18X1 – 8 (3)
X1 = 0 → 6 X1 = 0 → 3
4 –6X1 + 3X2 = –9X1 + 3 (4) X1 = 1 → –9 X1 = 1 → –6

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3) Graphical Method – Example 3 3) Graphical Method – Example 3

Player 1’s Viewpoint Player 2’s Viewpoint
Y1 Y2 Y3 Y4 = 1-Y3
➢ Maximin intersects Eq. (3) and (4) Player II
Player I
➢ Eq.(1) is always above (3) → Strategy 3 dominates Strategy 1 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Maximin
➢ The best strategy for Player 2 against Player 1 is by using Strategy X1 Strategy 1 12 -9 10 -6 -9
3 or 4 X2 Strategy 2 -5 6 -8 3 -8
Minimax 12 6 10 3
➢ Probability of strategy for Player 1 (based on Strategy 3 and 4)
Player 1’s
18X1 – 8 = –9X1 + 3 Strategies
Expected Value of Player 2
27X1 = 11 1 10Y3 – 6Y4 = 16Y3 – 6 (1)
X1 = 11/27 2 –8Y3 + 3Y4 = –11Y3 + 3 (2)
X2 = 16/27
➢ Probability of strategy for Player 2 → Substitute Eq. (1) & (2)
Thus, we get Y3 = 9/27 and Y4 = 18/27, Y1 = Y2 = 0

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3) Graphical Method – Example 3 3) Graphical Method – Example 4

Game of 4x2
CONCLUSION Calculate the expected value of game for Player 2, if Player 1 uses all
4 strategies. Y1 Y2
➢ Value of Game Player II
Player I
V* = 18X1 – 8 Strategy 1 Strategy 2 Maximin
= 18(11/27) – 8 X1 Strategy 1 -8 6 -9
= –18/27 → Profit for Player 2, yet Loss for Player 1 X2 Strategy 2 8 -3 -3
X3 Strategy 3 5 -5 -5
X4 Strategy 4 4 -2 -2
Minimax 8 6

Solution → using Mixed strategy (Maximin ≠ Minimax)

So, it has to be found the probability of strategy chosen by both players
➢ Probabilities of strategy chosen by Player 1 = X1, X2, X3, and X4
➢ Probabilities of strategy chosen by Player 2 = Y1 and Y2
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3) Graphical Method – Example 4 3) Graphical Method – Example 4

➢ Draw all 4 expected values of Player 2 in 2D graph Player 2’s Viewpoint
➢ Then, determine the probability of strategy chosen by Player 2 (Minimax)
➢ Maximin intersects Eq. (1) and (2)
Player 2’s Viewpoint ➢ Eq.(2) is always above (3) → Strategy 2 dominates Strategy 3
Player 1’s ➢ The best strategy for Player 1 against Player 2 is by using Strategy
Expected Value of Player 2
Strategies 1 or 2
1 –8Y1 + 6Y2 = –14Y1 + 6 (1)
2 8Y1 – 3Y2 = 11Y1 – 3 (2) ➢ Probability of strategy for Minimax
3 5Y1 – 5Y2 = 10Y1 – 5 (3) Player 2 (based on Strategy 1
4 4Y1 – 2Y2 = 6Y1 – 2 (4) and 2)
(1) – 14Y1 + 6 (3) 10Y1 – 5 –14Y1 + 6 = 11Y1 – 3
Y1 = 0 → 6 Y1 = 0 → –5 25Y1 = 9
Y1 = 1 → –8 Y1 = 1 → 5 Y1 = 9/25
(2) 11Y1 – 3 (4) 6Y1 – 2
Y2 = 16/25
Y1 = 0 → –3 Y1 = 0 → –2
Y1 = 1 → 8 Y1 = 1 → 4
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3) Graphical Method – Example 4 3) Graphical Method – Example 4

Player 1’s Viewpoint
Y1 Y2
➢ Probability of strategy for Player 1 → Substitute Eq. (1) & (2)
Player II Thus, we get X1 = 11/25, X2 = 14/25, X3 = X4 = 0
Player I
Strategy 1 Strategy 2 Maximin
X1 Strategy 1 -8 6 -9 CONCLUSION
X2 Strategy 2 8 -3 -3
X3 Strategy 3 5 -5 -5 ➢ Value of Game
X4 Strategy 4 4 -2 -2 V* = 9X1 – 3
Minimax 8 6 = 9(11/25) – 3
= 24/25 → Profit for Player 1, yet Loss for Player 2
Player 2’s
Expected Value of Player 1
Strategies
1 – 8X1 + 8X2 = –16X1 + 8 (1)
2 6X1 – 3X2 = 9X1 – 3 (2)

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Linear Programming and Zero-Sum Games 4) Linear Programming

• Linear programming can be used to find the value and optimal • Player 1’s Viewpoint (Maximin Problem)
strategies for any two-person zero-sum game.
• Example:
▪ Two players must simultaneously utter one of the three words
stone, paper, or scissors and show corresponding hand signs.
▪ If both players utter the same word, then the game is a draw.
▪ Otherwise one player wins $1 from the other player according to
the these rules
− Scissors defeats (cuts) paper
− Paper defeats (covers) stone
− Stone defeats (breaks) scissors
▪ Find the optimal strategies for this two-person zero-sum game.

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4) Linear Programming 4) Linear Programming

• Player 1’s Viewpoint (Maximin Problem) • Player 2’s Viewpoint (Minimax Problem)

Subject to:

unrestricted

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4) Linear Programming 4) Linear Programming

• Player 2’s Viewpoint (Minimax Problem) Relationship of Maximin and Minimax Problem
• Both problems (Maximin & Minimax) optimize variable V,
which is the expected value of game
Subject to: • Problem of Player 2 (Minimax problem) is the DUAL Problem
of Player 1 (Maximin problem)
• Optimal solution for one problem yields optimal solution for
another.

unrestricted

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4) Linear Programming – Example 1 4) Linear Programming – Solution 1

• Optimal Solution of Player 1 (Software Result)

Player 2

Player 1

unrestricted

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4) Linear Programming – Example 2 4) Linear Programming – Solution 2

• The reward matrix is • The row player has chosen a mixed strategy (x1, x2, x3) then the optimal
strategy can be found by solving the LP
Column Player
Row Player Stone Paper Scissors Row
minimum
max z = v
Stone 0 -1 +1 -1
s.t. v ≤ x2 – x3 (Stone constraint)
Paper +1 0 -1 -1
v ≤ -x1 + x3 (Paper constraint)
Scissors -1 +1 0 -1
v ≤ x1 – x2 (Scissor constraint)
Column
x1 + x2 +x3 = 1
minimum +1 +1 +1 x1, x2, x3 ≥ 0; v urs

• Define: Row Player’s Expected Reward if Row

Column Player Chooses
Player chooses (x1 , x2 , x3 )
x1 = probability that row player chooses stone
Stone x2 – x3
x2 = probability that row player chooses paper
Paper -x1 + x3
x3 = probability that row player chooses scissors
Scissors x1 – x2
y1 = probability that column player chooses stone
y2 = probability that column player chooses paper
y3 = probability that column player chooses scissors 104 105

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4) Linear Programming – Solution 2

• The column player has chosen a mixed strategy (y1, y2, y3) then the
optimal strategy can be found by solving the LP

min z = w
s.t. w ≥ –y2 – y3 (Stone constraint)
w ≥ y1 – y3 (Paper constraint)
w ≥ –y1 + y2 (Scissor constraint)
y1 + y2 +y3 = 1
y1, y2, y3 ≥ 0; w urs

Column’s player Expected Reward if column

Row Player Chooses
player chooses (x1 , x2 , x3 )
Stone - y2 + y3
Paper y1 - y3
Scissors - y1 + y2

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4) Linear Programming – Solution 2

• The column player’s LP is the DUAL of the row player’s LP.

• Thus, the row player’s floor equals the column players ceiling. This result
is often known as the Minimax Theorem.
• The common value of V and W are the values of the game to the row
player.

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4) Linear Programming – Solution 2 4) Linear Programming – Conclusion

– The value of Stone, Paper, Scissors is v’ -1 = 0. • LINDO or LINGO can be used to solve for the value and the
– The optimal strategy for the row player is ( 1/3, 1/3, 1/3). optimal strategies in a two-person zero-sum game.
– The optimal strategy for the column player is ( 1/3, 1/3, 1/3). • Simply type in either the row or column player’s problem.

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(D) Non-Zero Sum Game (D) Non-Zero Sum Game – Example

CASE 1
• One of types of Game Theory classification
• Table of Payoff Matrix of 2-person non-zero sum gam
• Shows the quantity of win for Player 1 is different with
quantity of loss for other Players Company A
Company B
Strategy B1 Strategy B2
Strategy A1 4%, 3% 3%, 2%
Strategy A2 2%, -2% 1%, 1%

• In the cell of Strategy A1 and B1, Player A wins of 4% and Player B also
wins of 3%
• In the cell of Strategy A2 and B1, Player A wins of 2% and Player B loses of
2%

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(D) Non-Zero Sum Game –Example (2) (D) Non-Zero Sum Game – Example (3)

CASE 2 CASE 3
• Table of Payoff Matrix of 2-person non-zero sum game in competing • Table of Payoff Matrix of 2-person non zero sum game in competing the
market share, in which A1 dominates A2, and B1 dominates B2 market share, in which there is domination, but not optimal (maximum).

Company B Company B
Company A Company A
Strategy B1 Strategy B2 Strategy B1 Strategy B2
Strategy A1 4%, 3% 3%, 2% Strategy A1 3%, 3% 1%, 4%
Strategy A2 2%, 2% 1%, 1% Strategy A2 4%, 1% 2%, 2%

• In competing market share: • Dominant strategy will take Company A and B to choose Strategy A2 and
B2 respectively, but the most optimal strategies for both are Strategy A1
Company A → Strategy A1 : proft of 4%
and B1
Company B → Strategy B1 : profit of 3%
• Thus, in this situation every company will accept that strategy.

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Conclusion Reference

• Game Theory had been developed for decision making in conflict situation • Winston, Wayne L., (2003), Operations Research; Applications and
between 2 parties/interests, so that it will be obtained the optimal solution Algorithms, 4thedition, Duxbury Press
• Intended optimal solution is to choose the alternative solution that will give
maximum profits for the winner, but minimum loss for the loser
• In daily practices, game theory is not always able to be applied properly
(because the assumptions used to underlie this theory can not always be
fulfilled)
• Moreover, problem complexity, often gives its own difficulties for the
application of this theory.

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