Game theory – Zero-sum Two-player game

Sunday, February 21, 2021 3:36 PM

Player B
B1: B2:
Player A A1: Payoff A1B1 Payoff A1B2
A2: Payoff A2B1 Payoff A2B2
Payoff matrix

EXAMPLE 1 - APPLY DOMINANCE STRATEGY

The best strategy for player A is A4, the best strategy for player B is B3.
The value of the game for both players is 0.

EXAMPLE 2 - APPLY PURE STRATEGY saddle point

Y Minimum in rows
Y1 Y2
X X1 3 5 3
X2 1 -2 -2
Maximum in columns 3 5
Upper value = lower value of the game =3
The best strategy for X is X1.
The best strategy for Y is. Y1
The value of the game for both players in the game is 3.
--> Player X benefits from the game.
Saddle point
Y Minimum in rows
Y1 Y2
X X1 10 6 6
X2 -12 2 -12
Maximum in columns 10 6
The best strategy for X is X1
The best strategy for Y is Y2.
The value of the game for both players in the game is 6.
--> Player X benefits from the game.

– EXAMPLE 3 - APPLY PURE AND MIXED STRATEGY

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 • Pure strategy
Y Minimum in rows
Y1 Y2

X X1 4 2 2
X2 1 10 1
Maximum in 4 10
columns
There is no saddle point in this game. So, you have to apply a mixed strategy.
• Mixed strategy
Let P be the probability that X will play X1, 1-P be the probability X will play X2.
Let Q be the probability that Y will play Y1, 1-Q be the probability Y will play Y2.

Y Expected gain
Y1 Y2
Q 1-Q
X X1 P 4 2 4Q + 2(1-Q)
X2 1-P 1 10 1Q + 10(1-Q)
Expected gain 4P + 1(1-P) 2P + 10(1-P)
For player X, we have:
4P + 1(1-P) = 2P + 10 (1-P)
--> P = 9/11 , 1-P = 2/11
For player Y:
4Q + 2(1-Q) = 1Q + 10 (1-Q)
--> Q = 8/11, 1-Q = 3/11
The value of the game for player X:
4(9/11) + 1(2/11) = 2(9/11) + 10 (2/11) = 38/11
The value of the game for player Y:
4(8/11) + 2(3/11) = 1(8/11) + 10 (3/11) = 38/11
Conclusion
9/11 and 2/11 are the probability that X will play X1 and X2, respectively.
8/11 and 3/11 are the probability that Y will play Y1 and Y2, respectively.
The value of the game is 38/11 for both players and X has more advantages.

PRACTICE 1:
Dominos pizza and Pizza Hut are sharing the pizza market in HCM city. If Dominos pizza does no advertising, it will
not lose any share of the market if Pizza Hut does nothing. It will lose 2% of the market if Pizza Hut invests $10,000 in
advertising, and it will lose 5% of the market if Pizza Hut invests $20,000 in advertising.
On the other hand, if Dominos pizza invests $15,000 in advertising, it will gain 3% of the market if Pizza Hut does
nothing; it will gain 1% of the market if Pizza Hut invests $10,000 in advertising; and it will lose 1% if Pizza Hut
invests $20,000 in advertising.
a. Develop a payoff table/matrix for this game.
b. What are the best strategies for each player?
c. What is the value of the game? Which company has more advantages?

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SOLUTION: pure and dominance strategy
a. Payoff matrix:
Pizza Hut
$0 (no ads) $10,000 $20,000 Min
Dominos Pizza 0$ (no ads) 0 -2 -5 -5
$15,000 3 1 -1 -1
Max 3 1 -1

Max of the min = -1 = min of the max

=> Value of this game : -1
Best strategy for Domino : $15,000 investment
Best strategy for Pizza Hut : $20,000 investment

PRACTICE 2:
Mr Hanh has a $1 bill and a $20 bill, and Miss Phuc has a $5 bill and a $10 bill. Each of them will select a bill from the
other one without knowing what bill the other player selected. If the total of the bills selected is odd, Mr Hanh gets both
of the two bills that were selected, but if the total is even, Miss Phuc gets both bills.
a. Develop a payoff table for this game. (Hint: Place the sum of both bills in each cell)
b. What are the best strategies for each player?
c. What is the value of the game? Which player would you like to be?

SOLUTION:
a. Payoff matrix:
Miss Phuc
Select $1 Select $20
Mr Hanh Select $5 -6 25
Select $10 11 -30

b. Pure strategy: (Is there any saddle point)

Miss Phuc Minimum in rows
Select $1 Select $20
Mr Hanh Select $5 -6 25 -6
Select $10 11 -30 -30
Maximums in columns 11 25
Since Maximum of Minimums # Minimum of Maximums, there is no saddle point
c. Mixed strategy:
Let
• P is the probability that Mr Hanh will select strategy A1
• 1-P is the probability that Mr Hanh will select strategy A2
• Q is the probability that Miss Phuc will select strategy B1
• 1-Q is the probability that Miss Phuc will select strategy B2

Miss Phuc Expected gain

B1: Select $1 B2: Select $20

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 B1: Select $1 B2: Select $20
Q 1-Q
Mr Hanh A1: Select $5 P -6 25 -6Q + 25(1 – Q)
A2: Select $10 1-P 11 -30 11Q –30(1-Q)
Expected gain -6P + 11( 1 - P ) 25P-30(1-P)

• For Mr Hanh
-6P+ 11( 1 - P )= 25P-30(1-P)
--> P =41/72 ,1-P = 31/72
• For Miss Phuc, we have:
-6Q + 25(1 – Q) = 11Q –30(1-Q)
--> Q =55/72 ,1-Q =17/72

• The value of the game:

-6*(41/72)+ 11( 1 - 41/72 )= 25* 41/72 -30 (1 - 41/72)= 95/72

-6*55/72 + 25(1 – 55/72) = 11*55/72 –30 (1 - 55/72)= 95/72

Since the value of the game is positive, Mr Hanh is benefit

PRACTICE 3:
CocaCola and Pepsi Co. are competitors in soft drink products market. They consider investing some money in advertising
campaigns.
• If Cocacola invests $30000 in advertising campaign, it will gain 5% market share if Pepsi does nothing, it will gain 3%
market share if Pepsi invests $15000 in advertisement, and gain 2% market share if Pepsi invests $22000 in advertisement.
• If CoCaCola invests $25000 in advertising campaign, it will gain 4% market share if Pepsi does nothing, it will gain 1%
market share if Pepsi invests $15000 in advertisement, and loss 1% market share if Pepsi invests $22000 in advertisement.
• If Cococala does nothing, it will not loss its market share if Pepsi does nothing, it will loss 3% market share if Pepsi invests
$15000 in advertisement, and loss 4% market share if Pepsi. invests $22000 in advertisement.
(a)Develop a payoff table for this problem.
(b) What are the best strategies for each company using?
(c) What is the value of the game? Which company has more advantages?

a. Payoff matrix:
Pepsi
Do nothing Invest $15,000 Invest $22,000
Cococola Do nothing 0 -3 -4
Invest $25000 4 1 -1
Invest $30,000 5 3 2

Based the dominance strategy

The best strategy for Cocacola is invest $30,000.
The best strategy for Pepsi is invest $22,000.
The value of the game is 2, Cocacola has more advantages.

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