This document defines basic game theory terminology and concepts. It discusses pure and mixed strategies, optimal strategies, the value of a game, zero-sum games, payoff matrices, and the maximin-minimax principle. It also covers determining the saddle point and value of a game. The document notes advantages of game theory in decision making but also limitations, such as assumptions of perfect information.
This document defines basic game theory terminology and concepts. It discusses pure and mixed strategies, optimal strategies, the value of a game, zero-sum games, payoff matrices, and the maximin-minimax principle. It also covers determining the saddle point and value of a game. The document notes advantages of game theory in decision making but also limitations, such as assumptions of perfect information.
This document defines basic game theory terminology and concepts. It discusses pure and mixed strategies, optimal strategies, the value of a game, zero-sum games, payoff matrices, and the maximin-minimax principle. It also covers determining the saddle point and value of a game. The document notes advantages of game theory in decision making but also limitations, such as assumptions of perfect information.
This document defines basic game theory terminology and concepts. It discusses pure and mixed strategies, optimal strategies, the value of a game, zero-sum games, payoff matrices, and the maximin-minimax principle. It also covers determining the saddle point and value of a game. The document notes advantages of game theory in decision making but also limitations, such as assumptions of perfect information.
A strategy for a player has been defined as a set of rules or
alternative courses of action available to him in advance, by
which player decides the courses of action that he should
adopt. There are two types:
a. Pure Strategy
If the player selects the same strategy each time, then it is
a pure strategy. In this case each player knows exactly
what the other is going to do, i.e. there is a deterministic situation and the objective of the players is to maximize
gains or to minimize losses.
b. Mixed Strategy
When the players use a combination of strategies and
each player is always kept guessing as to which course of action is to be selected by the other, then it is known as a
mixed strategy. Thus, there is a probabilistic situation and
the objective of the player is to maximize expected gains or to minimize losses. Thus, mixed strategy is a selection among pure strategies with fixed possibilities.
2. Optimal Strategy
A course of action which puts the player in the most
preferred position irrespective of the strategy of his competitors. Any deviation from this strategy results in a
decreased pay-off for the player.
3. Value of the Game
The expected pay-off of the game when all the players of
the game follow their optimum strategies. The game is
called fair if the value of the game is zero and unfair if it is
non-zero. 4. Two-person zero-sum game There are two types of Two-person zero-sum games. In one, the most preferred position is achieved by adopting a
single strategy and therefore the game is known as the
pure strategy game. The second type requires the adoption by both players of a combination of different strategies in order to achieve the most preferred position and is,
therefore, referred to as the mixed strategy game.
5. Pay-off matrix
A two-person zero-sum game is conveniently represented
by a matrix. The matrix which shows the outcome of the game as the players select their particular strategies, is known as the pay-off matrix. It is important to assume that
each player knows not only his own list of possible courses of action but also that of his opponent. The MAXIMIN-MINIMAX principle
• Maximin Criteria- The maximising player lists his
minimum gains from each strategy and selects the strategy which gives the maximum out of these minimum gains • Minimax Criteria- The minimising player lists his maximum loss from each strategy and selects the strategy which gives him the minimum loss out of these maximum losses
Some definitions-
Saddle point (equilibrium point)- it is position in the pay off
matrix where maximum of row minima coincides with the minimum of the column maxima. The saddle point need not
be unique. Let v1= maximin value of the game and v2=
minimax value of the game. At saddle point v1=v2=v
The following steps are required to find out Saddle point
• Select the minimum value of each row & put a circle around it. • Select the maximum value of each column and put square around it • The value with both circle and square is the saddle point.
Value of game- the value of the game is the maximum
guaranteed gain to the maximising player if both the players use their best strategy. The pay off the saddle point is called
the value of the game denoted by v.
Fair game- game is called fair game if neither player has an
advantage over the other. So v1=0=v2
Strictly determinable game- A game is said to be strictly
determinable if v1=v=v2 Points to remember
• Saddle point may or may not exist in a given game
• There may be more than on saddle point then there will be more than one solution • The value of game may be positive or negative • The value of game may be zero which means fair game
PRINCIPLE OF DOMINANCE
Sometimes, it is observed that one of the pure strategies of
either player is always inferior to at least one of the remaining ones. The superior strategies are said to dominate the inferior
ones. Clearly, a player would have no incentive to use inferior
strategies which are dominated by the superior ones. In such case of dominance, we can reduce the size of the payoff matrix by deleting those strategies which are dominated by
the others.
General rules for dominance are
• If all the elements of a row, First row, are less than or
equal to the corresponding elements of any other row, say Second row, then first row is dominated by second row • If all the elements of a column, say first column are greater than or equal to the corresponding elements of any other column, second column, then first column is dominated by the second column • Column max and Row min are deleted .
• Average of two rows may dominate any other row.
Average of two columns may dominate any other column.
Advantages of Game Theory
1. Game theory gives insight into several less known aspects, which arise in situation of conflicting interest. 2. Game theory develops a framework for analysing decisions making in such situation where inter-dependence of firm is considered 3. At least in two person zero games, game theory outlines a scientific quantitative techniques that can be used by players to arrive at an
optimal strategy
Limitation of Game Theory
1. The assumption that players have the knowledge about their own pay off and pay offs of there is not practical. 2. The Techniques of solving gains involving mixed strategies particularly in case of large pay off matrix is very complicated.
3. All the competitive problems cannot be analyzed with the help of game theory
Points to remember
1. If any game has saddle point, it will be pure strategy game and if there is no saddle point , it will be mixed strategy game.
2. Mixed strategy can be solved through ODDS method but odds method will be used only on 2 x 2 matrix. Therefore , dominance method will be used to reduce the size of matrix first and then odds method will be used to calculate value of game and probability of strategies used by both the players. 3. Graphical method and dominance method both are used to reduce the size of matrix but there is one difference that it is not necessary that matrix can be reduced to the size of 2x2 through dominance method but graphical method can undoubtedly reduce the size of matrix upto 2x 2.
