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Lecture 2.2.1 Basic Concepts of Game Theory

The document outlines the course structure and outcomes for Operation Research (BAT-308) in a Bachelor of Business Administration program. It covers key concepts in game theory, including definitions, terms, assumptions, and strategies, along with examples to illustrate optimal strategies and the value of games. The course aims to equip students with the ability to develop operational models, understand mathematical tools, and effectively communicate findings in management contexts.

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gakhararmaan
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3 views15 pages

Lecture 2.2.1 Basic Concepts of Game Theory

The document outlines the course structure and outcomes for Operation Research (BAT-308) in a Bachelor of Business Administration program. It covers key concepts in game theory, including definitions, terms, assumptions, and strategies, along with examples to illustrate optimal strategies and the value of games. The course aims to equip students with the ability to develop operational models, understand mathematical tools, and effectively communicate findings in management contexts.

Uploaded by

gakhararmaan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INSTITUTE-USB

DEPARTMENT-BBA
Bachelor Of Business Administration
Operation Research(BAT-308)

Operation Research(BAT-308) Operation Research(BAT-308)


DISCOVER . LEARN . EMPOWER
Operation Research(BAT-308)
OPERATION RESEARCH
Course Outcome
CO Number Title Level

CO1 Identify and develop operational research models from Remember


the verbal description of the real system

CO2 Understand the mathematical tools that are needed to Understand


solve optimization problems.

CO3 Use mathematical software to solve the proposed models Understand

CO4 Develop a report that describes the model and the solving Understand
technique, analyze the results and propose
recommendations in language understandable to the
decision-making processes in Management Engineering

https://www.or.tum.de/en/home/
2
Game Theory
Definition of game theory

• The branch of mathematics concerned with the analysis of strategies for dealing
with competitive situations where the outcome of a participant’s choice of action
depends critically on the actions of other participants. Game theory has been
applied to contexts in war, business, and biology.
Terms Used in Game theory
• Number of Players
• How many players are there?
• If a game involves only two players (competitors), then it is called a two-
person game. However, if the number of players is more, the game is
referred to as n-person game.

• Strategies The strategy for a player is the list of all possible actions (moves or
courses of action) that he will take for every payoff (outcome) that might arise. It
is assumed that the rules governing the choices are known in advance to the
players.
Terms Used in Game theory
• Payoffs are the consequences for each player for every possible profile of
strategy choices for all players.
• Zero-sum (or constant-sum) game : one player's winnings are the others' losses,
so the net gain is zero across all players
• Optimal Strategy The particular strategy by which a player optimises his gains or
losses without knowing the competitor's strategies.
• Value of game The expected outcome per play when players follow their optimal
strategy.
Assumptions of the Game theory
• Each player has available to him a finite number of possible strategies (courses of
action). The list may not be same for each player.

• Player A attempts to maximize gains and player B minimise losses.

• The decision of both players are made individually prior to the play with no
communication between them.
Assumptions of the Game theory
• The decisions are made simultaneously and also announced simultaneously so
that neither player has an advantage resulting from direct knowledge of the other
player’s decision.

• Both the players know not only possible payoffs to themselves but also of each
other.
Note
• By convention, the payoff table for the player whose strategies are represented
by rows (say player A) is constructed.
Types of Strategies
• Pure Strategy It is the decision rule which is always used by the player to select
the particular strategy. Thus, each player knows in advance of all strategies out of
which he always selects only one particular strategy regardless of the other
player’s strategy, and the objective of the player is to maximize profit or minimize
losses.

• Mixed strategy Courses of action that are to be selected on a particular occasion


with some fixed probability are called mixed strategies.
Pure Strategy
• Maximin – minimax principle
• Maximin Criterion: The player who is maximizing his outcome or payoff finds
out his minimum gains from each strategy (course of action) and selects the
maximum value out of these minimum gains.
• Minimax Criterion: In this criterion the minimizing player determines the
maximum loss from each strategy and then selects with minimum loss out of
the maximum loss list.
Example 1

For the game with payoff matrix:

Player Player B
A B1 B2 B3
A1 -1 2 -2
A2 6 4 -6

Determine the best strategies for players A and B. Also determine the value of
game. Is this game (i) fair? (ii) strictly determinable?
Example 1

Player A Player B Row Minimum


B1 B2 B3
Maximin
A1 -1 2 -2 -2
A2 6 4 -6 -6
Column Maximum 6 4 -2

Minimax
Player A adopts A1 strategy.
Player B adopts B3 strategy.
Value of game V = -2
Not fair but strictly determinable.
Saddle Point or Equilibrium Point
• In a payoff matrix the value, which is the smallest in its row and the largest in the
column, is called the saddle point.
THANK YOU

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