Two-person zero-sum game

It is a game which involves two persons (players) and where the gain made by one equals
the loss incurred by the other.

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Suppose that there are two firms A and B in an area which, for a long period in the past,
have been selling a competing product and are now engaged in struggle for a larger share of
the market. Now with the total market of a given size, any share of the market gained by
one firm must be lost by the other, and, therefore, the sum of the gains and losses equals
zero.
Both these firms are considering the same three strategies in a bid to gain the share in the
market; low advertising, high advertising, and quality improvement. Currently they are
sharing the market equally and further that each of the firms can employ only one of the
strategies at a time.

Under the conditions postulated, there are a total of 3 x 3 = 9 combinations of the moves
possible—thus, low advertising by firm A may be accompanied by low advertising, high
advertising or quality improvement by firm B and so on for other strategies. Each pair of the
moves shall affect the sharing of the market in a particular way.
For example, low advertising both by firm A and by firm B shall lead to 12 points (implying
12 per cent of the total market) in favour of firm A, while low advertising by A and high
advertising by B would lead to a shift of 8 points in favour of B. Similarly, there are pay-offs
corresponding to other pairs of moves. These are shown in the pay-off matrix that follows.
The strategies of low advertising, high advertising and quality improvement have been
marked as a1, a2, and a3, respectively for the firm A, and b1, b2 and b3, respectively for the
firm B .

B's Strategy

b1 b2 b3

a1 12 −8 −2
A's Strategy
a2 6 7 3

a3 −10 −6 2

This pay-off matrix is drawn from A's point of view—a positive pay-off indicates that the firm

A has gained the market share at the expense of firm B while negative pay-offs imply B's gain

at A's expense.

Ans
Choice of optimal strategy

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row minima and col maxima

b1 b2 b3 Row Minima

a1 12 -8 -2 -8
A's Strategy a2 6 7 3 3*

a3 -10 -6 2 -10

Column Maxima 12 7 3*

rows: maximin 3
cols: minimax 3

Optimal strategy:
For A: A2
For B: B3
Value: 3

Unfair: coz saddle point is not zero

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Can we have multiple Saddle Points?

b1 b2 b3 b4
A's Strategy a1 4 -16 14 -15
a2 -6 7 -4 -6
a3 6 -2 0 -6

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 b1 b2 b3 b4 Row Minima
A's Strategy a1 4 -16 14 -15 -16
a2 -6 7 -4 -6 -6*
a3 6 -2 0 -6 -6*
Column Maxima 6 7 14 -6 *

Next
b1 b2 b3 b4
A's Strategy a1 4 -1 14 1
a2 -6 7 -4 -6
a3 6 -2 0 -6

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Since the pay-off corresponding to B's minimax strategy and A's either maximin strategies, is
identical, there are two saddle points, represented by a2b4 and a3b4.

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Two leading firms, Nirmala Textiles Ltd. and Swati Rayons Ltd., for years have been selling

shirting, which is but a small part of both firms' total sales. The Marketing Director of Nirmala

Textiles raised the question, 'What should the firm's strategies be in terms of advertising for

the product in question?" The system group of Nirmala Textiles developed the following data

for varying degrees of advertising:

(a) No advertising, medium advertising and heavy advertising for both firms will result in

equal market share.

(b) Nirmala Textiles with no advertising: 40 per cent of the market with medium advertising

by Swati Rayons and 28 percent of the market with heavy advertising by Swati Rayons.

(c) Nirmala Textiles using medium advertising: 70 per cent of the market with no advertising

by Swati Rayons and 45 per cent of the market with heavy advertising by Swati Rayons.

(d) Nirmala Textiles using heavy advertising: 75 per cent of the market with no advertising by

Swati Rayons and 52.5 per cent of the market with medium advertising by Swati Rayons.

Based upon the above information, answer the marketing director's question.

Ans.

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 Swati Rayons Ltd.'s Strategy
No. Med. Hvy. Row
Advt. Advt. Advt. minima
B1 B2 B3
Nirmala'Textiles Ltd.'s No Advt. A1 50 40 28
Strategy Med. Advt. A2 70 50 45
Hvy. Advt. A3 75 52.5 50
Column
Maxima

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 Swati Rayons Ltd.'s Strategy
No. Med. Hvy. Row
Advt. Advt. Advt. minima
B1 B2 B3
Nirmala'Textiles Ltd.'s No Advt. A1 50 40 28 28
Strategy Med. Advt. A2 70 50 45 45
Hvy. Advt. A3 75 52.5 50 50*
Column 75 52.5 50*
Maxima

We observe that saddle point exists at the intersection of a3 and b3. Thus, the optimal
strategy for each one is to engage in heavy advertising and it will result in an even
distribution of the market between the firms. Nirmala Textiles Ltd's marketing director
should, therefore, resort to heavy advertising.

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No Saddle Point

b1 b2
a1 8 -7
a2 -6 4

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Problem does not have a saddle point. Therefore, the method discussed before does not
suffice to enable us to determine optimal ways for A and B to play. IfA plays a1, then B
would play b2 while for a2 played by A, B would choose to play b1. So if B knows what
choice A will make then B can ensure that he gains by choosing a strategy opposite to the one
desired by A. Thus, it is of utmost importance for A to make it difficult for B to guess as to
what choice he is going to make. Similarly, B would like to make it very difficult for A to
assess the strategy he is likely to adopt. It would pay each one of them to play either of the
respective strategies open to each with certain probability.
Now suppose that A plays strategy a1 with probability x and plays strategy a2 with
probability 1 − x . If B plays strategy b1, then A's expected pay-off can be determined in
reference to the figures given in the first column of the payoff matrix as follows:
Expected pay-off (given that B plays b1) = 8x − 6(1 − x)
Similarly, if B plays strategy b2, the expected payoff of A can be determined as follows:
Expected pay-off (given that B plays b2) = −7x + 4(1 − x)
Now we shall determine a value x so that the expected pay-off for A is the same irrespective
of the strategy adopted by B . This value can be obtained by equating these two equations.
8x − 6(1−x) = − 7x + 4(1−x)
x = 10/25 = 2/5

A would do best to adopt the strategies a1 and a2, choosing in a random manner, in the
proportion 2 : 3 (i.e. 2/5 and 3/5). The expected pay-off for A using this mixed strategy
equals

8×(2/5) − 6(3/5) = − 2/5

Thus, he shall net a loss of 2/5 per play in the long run.

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We can determine mixed strategy for B in a similar manner as for A. Thus, if he plays
strategy b1 with probability
y and strategy b2 with probability 1−y, we have
Expected pay-off (given that A plays a1) = 8y − 7(1 − y),
and Expected pay-off (given that A plays a2) = −6y + 4(1 − y)
We can determine the value of y as will ensure equal pay-off irrespective of the strategy ofA,
as follows:
8y − 7(1 − y) = −6y + 4(1 − y)
or 8y − 7 + 7y = − 6y + 4 − 4y
or y= 11/25
Thus, B should play strategies b1 and b2 in the ratio of 11 : 14 in a random manner. B's
expected pay-off (loss) per play shall be:
8(11/25) − 7(14/25) = −10/25 = −2/5
or −6(11/25) + 4(14/25) = −10/25 = −2/5
It implies that B shall gain 2/5 per play in the long run.
Thus, we conclude that A and B should both use mixed strategies as given here and the value
of game equals -2/5.
Strategy Probability
𝑎1 2/5
𝑎2 3/5
𝑏1 11/25
𝑏2 14/25
V = -2/5

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In general, for a zero-sum two-persons game in which each of the players, say A and B, have
strategies a1 & a2 and b1 & b2 respectively, and the pay-offs as given below then, if x is the
probability with which A chooses strategy a1 and if y is the probability that B plays strategy
b1, we have,

𝑏1 𝑏2
𝑎1 𝑎11 𝑎12
𝑎2 𝑎21 𝑎22

𝑏1 𝑏2
𝑎1 8 −7
𝑎2 −6 4

Formulas
𝑎22 − 𝑎21
𝑥=
(𝑎11 + 𝑎22 ) − (𝑎12 + 𝑎21 )
𝑎22 − 𝑎12
𝑦=
(𝑎11 + 𝑎22 ) − (𝑎12 + 𝑎21 )
𝑎11 𝑎22 − 𝑎12 𝑎21
𝑉=
(𝑎11 + 𝑎22 ) − (𝑎12 + 𝑎21 )

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For the present problem,
a11 = 8, a12 = −7, a21 = −6, and a22 = 4. Substituting these values in the formulae, we get
4 − (−6) 10 2
𝑥= = =
(8 + 4) − ((−7) + (−6)) 25 5

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