Game Theory

1-Pure strategy is the only course of action that is always chosen by a player
regardless of other player’s strategy .

2- Mixed strategy are courses of action that are to be selected on a particular

occasion with some fixed probability.

3- TWO-PERSON ZERO-SUM GAMES A game with only two players, say A and B, is
called a two-person zero-sum game, only if one player’s gain is equal to the loss
of other player, so that total sum is zero.

4- Payoff matrix The payoffs in terms of gains or losses, when players select
their particular strategies (courses of action), can be represented in the form of a
matrix, called the payoff matrix.

Assumptions of the game

1. Each player has available to him a finite number of possible strategies (courses
of action). The list may not be the same for each player.

2. Players act rationally and intelligently.

3. List of strategies of each player and the amount of gain or loss on an

individual’s choice of strategy is known to each player in advance.

4. One player attempts to maximize gains and the other attempts to minimize
losses.

5. Both players make their decisions individually, prior to the play, without direct
communication between them.

6. Both players select and announce their strategies simultaneously so that

neither player has an advantage resulting from direct knowledge of the other
player’s decision.

7. The payoff is fixed and determined in advance

5-Maximin principle maximize the player's minimum gains.

For player A the minimum value in each row represents the least gain (payoff) to
him, if he chooses his particular strategy. These are written in the matrix by row
minima. He will then select the strategy that gives the largest gain among the row
minimum values.

6-Minimax principle minimize the player's maximum loss.

For player B, who is assumed to be the looser, the maximum value in each column
represents the maximum loss to him, if he chooses his particular strategy. These
are written in the payoff matrix by column maxima. He will then select the
strategy that gives the minimum loss among the column maximum values.

Optimal strategy A course of action that puts any player in the most preferred
position, irrespective of the course of action his competitor(s) adopted .

Saddle point is the payoff value that represents both minimax and maximin value
of the game.

if the maximin value equals the minimax value, then the game is said to have a
saddle (equilibrium) point and the corresponding strategies are called optimal
strategies.

Value of the game is the expected gain or loss in a game when a game is played a
large number of times or expected payoff at end of game when each player uses
optimal strategy.

Remarks
1. The value of the game, in general, satisfies the equation: maximin value ≤ V ≤
minimax value.

2. A game is said to be a fair game if the lower (maximin) and upper (minimax)
values of the game are equal and both equals zero.

3. A game is said to be strictly determinable if the lower (maximin) and upper

(minimax) values of the game are equal and both equal the value of the game.
Rules to Determine Saddle Point
1. Select the minimum (lowest) element in each row of the payoff matrix and
write them under ‘row minima’ heading. Then, select the largest element among
these elements and enclose it in a rectangle.
2. Select the maximum (largest) element in each column of the payoff matrix and
write them under ‘column maxima’ heading. Then select the lowest element
among these elements and enclose it in a circle.
3. Find out the element(s) that is same in the circle as the well as rectangle and
mark the position of such element(s) in the matrix. This element represents the
value of the game and is called the saddle (or equilibrium) point.

Q 2 SOLUTION=First ignore the values of p and q in the payoff matrix, and then
determine the maximin and minimax values in the usual manner.

since there exists no unique saddle point, therefore, the saddle point will exist at
the position (2, 2) only when p ≤ 7 and q > 7.
THE RULES (PRINCIPLES) OF DOMINANCE

These rules help in deleting certain rows and/or columns of the payoff matrix that
are inferior (less attractive) to at least one of the remaining rows and/or columns
(strategies), in terms of payoffs to both the players.

The rules of dominance are especially used for the evaluation of two-person zero-
sum games without a saddle (equilibrium) point. Certain dominance principles are
stated as follows:

1. For player B, who is assumed to be the loser, if each element in a column, say
Cr is greater than or equal to the corresponding element in another column, say
Cs in the payoff matrix, then the column Cr is said to be dominated by column Cs
and therefore, column Cr can be deleted from the payoff matrix. In other words,
player B will never use the strategy that corresponds to column Cr because he will
loose more by choosing such strategy.

2. For player A, who is assumed to be the gainer, if each element in a row, say Rr ,
is less than or equal to the corresponding element in another row, say Rs , in the
payoff matrix, then the row Rr is said to be dominated by row Rs and therefore,
row Rr can be deleted from the payoff matrix. In other words, player A will never
use the strategy corresponding to row Rr , because he will gain less by choosing
such a strategy.

3. A strategy say, k can also be dominated if it is inferior (less attractive) to an

average of two or more other pure strategies. In this case, if the domination is
strict, then strategy k can be deleted. If strategy k dominates the convex linear
combination of some other pure strategies, then one of the pure strategies
involved in the combination may be deleted. The domination would be decided as
per rules 1 and 2 above.

Remark :Rules (principles) of dominance discussed are used when the payoff
matrix is a profit matrix for the player A and a loss matrix for player B. Otherwise
the principle gets reversed.
 Introduction Of OR

Definition of OR- Operations research is a Scientific method to manage large

systems of men, machines, materials and money in industry, business,
government and defence. It provides a quantitative basis in decision making to
increase the effectiveness of such organizations .

Scope of OR-

1- Manufacturing - used for various activities which include scheduling,

routing, inventory control, operational planning.
2- Revenue Management
3- Supply Chain Management
4- Marketing Management
5- Human Resource Management
6- Production systems
7- Retailing: OR groups to advice on merchandising policies

Application of OR-

1- Forecasting- Demand, sale, profit

2- Manpower Planning & Assignment
3- Sequencing & Scheduling
4- Location, Allocation, Distribution & Transportation
5- Marketing
6- Purchasing, Procurement and Exploration
7- Finance and Accounting

ADVANTAGES OF OPERATIONS RESEARCH STUDY-

1- Structured approach to problem solving: A substantial amount of time and

effort can be saved in developing and solving OR models.
2- Critical approach to problem solving: The decision-maker will select a
mathematical model for solving the given problem.

Shortcomings
• The solution to a problem is often derived by simplifying assumptions.
Consequently, such solutions are not optimal.

• Models may not represent the realistic situations in which decisions are made.

• Often the decision-maker is not fully aware of the limitations of the models.

General method for solution-

In general, operations research models are solved using either

(i) analytical
(ii) numerical
(iii) Monte Carlo method

Analytical Method- It is a noniterative optimization techniques such as calculus,

finite difference and graphs are used for solving an OR model to obtain an
optimal solution of a problem. Ex- EOQ Model.

Numerical method- When analytical methods fail to obtain the solution due to
complexity in terms of constraints or number of variables, a numerical (or
iterative) method is used to find the solution. In this method, instead of solving
the problem directly, a general algorithm is applied for obtaining a specific
numerical solution.

Monte Carlo method -This method is based upon the idea of experimenting on a
mathematical model by inserting into the model specific values of decision
variables for a selected period of time under different conditions and then
observing the effect on the criterion chose.

model Formulation-

1– Collection of data 2– Problem definition and formulation 3 – Model

development 4– Model validation and evaluation or performance 5 – Model
application and interpretation of results
2- Problem definition and formulation – (a) identification of the decision
variables (b) formulation of the model objective(s), (c )the formulation of the
model constraints

3- Model development includes: 1– the mathematical description, 2–

parameter estimation, 3– input development 4– software development

4- Model validation and evaluation or performance- Model validation consists of

validation of the assumptions and parameters of the model

Classification of optimization problem-

1- type of constraints 2-nature of design variables 3- nature of the equations

involved 4- deterministic nature of the variables 4- physical structure of the
problem 6-permissible value of the design variables 7-separability of the
functions 8-number of objective functions
1- Classification based on type of constraints
(a) Constrained optimization problems: which are subject to one or
more constraints.
(b) Unconstrained optimization problems: in which no constraints exist

2- Classification based on nature of the equations- linear, nonlinear, geometric

and quadratic programming problems.

3-Classification based on permissible value of the design variables- 1- Integer

programming problem 2- Real-valued programming problem
 4- permissible value of the design variables -deterministic and stochastic
programming problems .
5- classification objective functions can be classified as single and multi
objective programming problems.

Optimization Technique-

1- classical optimization techniques, 2– linear programming, 3– nonlinear

programming, 4– geometric programming, 5– dynamic programming, 6–
integer programming, 7– stochastic programming, – evolutionary algorithms,
etc

OR Problem solved----- decision variable values obtained---- optimize the

solution
DYNAMIC PROGRAMMING- The dynamic programming approach divides the
problem into several sub- problems or stages and then these sub-problems are
solved sequentially until the initial problem is finally solved. The common
characteristic of all dynamic programming models is expressing the decision
problem by means of recursive formulation.

Stage: The point at which a decision is made is known as a stage.

State: The variable that links two stages in a multistage decision problem is called
a state variable.

• Linkage between the stages of a DP problem is performed through

recursive computations. Depending on the nature of the problem at hand,
forward recursive equation or backward recursive equation will be
developed for finding solution.

Characteristics of Dynamic Programming The basic features which characterize

the dynamic programming problem are as follows:

(a) The problem can be subdivided into stages with a policy decision required at
each stage. A stage is a device to sequence the decisions. That is, it decomposes a
problem into sub-problems such that an optimal solution to the problem can be
obtained from the optimal solutions to the sub-problems.

(b) Every stage consists of a number of states associated with it.

(c) Decision at each stage converts the current stage into state associated with
the next stage.

(d) The state of the system at a stage is described by a set of variables, called
state variables.

(e) When the current state is known, an optimal policy for the remaining stages
is independent of the policy of the previous ones.

(f) To identify the optimal policy for each state of the system, a recursive
equation is formulated with n stages remaining, given the optimal policy for
each state with (n − 1) stages left.
(g) Using recursive equation approach each time, the solution procedure moves
backward stage by stage for obtaining the optimum policy of each state for that
particular stage, till it attains the optimum policy beginning at the initial stage.

Dynamic Programming Algorithm

computational procedure for solving a problem by dynamic programming

approach can be summarized in the following steps:

Step 1. Decompose (or divide) the given problem into a number of smaller sub-
problems (or stages). Identify the state variables at each stage and write down
the transformation function as a function of the state variables and decision
variables at the next stage.

Step 2. Write down a general recursive relationship for computing the optimal
policy. Decide whether forward or backward method is to be followed to solve
the problem.

Step 3. Construct appropriate stages to show the required values of the return
function at each stage.

Step 4. Determine the overall optimal policy or decisions and its value at each
stage. There may be more than one such optimal policy.

Bellman’s principle of optimality : It states that “an optimal policy (a sequence of

decisions) has the property that whatever the initial state and decisions are, the
remaining decisions must constitute an optimal policy with respect to the state
resulting from the first decision.”
The basic DP approach can be illustrated by the following diagram:
Stage n Stage n  1

sn sn+1

state  state 
rn sn , xn 
Linear Programming-

Application of Linear Programming-

1. Production Management-Product planning, Research and

development ,Product portfolio management
2. Personnel Management -Recruitment and staffing decisions,Wage or salary
management, Job evaluation and allocation
3. Financial Management -Portfolio decision , Profit planning , Investment on
inventories
4. Marketing Management- Media planning and selection ,Travelling
salesman problem ,Product development.

Difference Between Transportation and Assignment Model- Mobile Image

Difference between optimal Solution and feasible solution-

an optimal solution is one that yields the best possible value of the
objective function, subject to the given constraints. On the other
hand, a feasible solution is one that satisfies all the constraints of
the problem, but may not necessarily be the best possible solution.