Game Theory

Part 1: Introduction
and Types of Games

What is Game Theory?

Game theory is the study of the strategic interaction among rational

players.

The games studied can be quite serious and are studied in many
areas of the natural and social sciences: military, political and
marketing campaign strategy can be modeled with game theory,
also phenomena in natural science, for example, in the study of
evolutionary biology.

Participants in a game are called players, sometimes one of the

players could be nature or chance. Players may have one or more
possible options for play. These options are referred to as moves or
strategies. We study the rational selection of strategies, the
interaction of players and the resulting outcomes.

We assume players are rational in the sense that they seek the
outcome where the resulting payoff is in their best interest.

Types of Games
Alternate-move games (like chess and tic-tac-toe) players take
turns, strategies involve many moves and can evolve during play.
Simultaneous-move games (like rock-paper-scissors) players
commit to a move without knowledge of the other players strategy.
Economic, political or military decisions, and many other real-life
situations, can be modeled by simultaneous-move games even if the
players dont make their move at the same time. For example, once
a strategy is chosen, regardless of an opponents move, it may be too
late for a player to change strategy. One player making a move after
the other may be equivalent to a simultaneous-move game if each
had predetermined strategies (with which they are committed to play)
chosen without knowing the intentions of the other.
In this chapter, we study simultaneous move games. However, we
will consider situations where simultaneous move games are
repeated and then can become similar to alternate move games.

Types of Games

Zero-sum games: Games of total conflict one players gain

equals the other players loss. If we sum the payoffs at each
outcome, the result is always zero.

Constant-sum games: If we sum the payoffs at each outcome, the

result is always the same constant. Any constant-sum game can be
easily converted to a zero-sum game by an appropriate translation
of the payoff amounts. Thus constant-sum games are equivalent to
zero-sum games.

Variable-sum games: Games of partial conflict outcomes may

involve gains for both players, a gain for only one or the other, or a
loss for both players.

This chapter is only a brief introduction to game theory: we study

only the basics with simultaneous-move zero sum and variable sum
games, there is much more to game theory than that.

Matrix Games

Two-player simultaneous move games (both zero and variable sum

types) can be written in matrix form (also called strategic form) as
shown below.

The strategies of one player form the rows of the matrix, while the
strategies of the other player form the columns. Each entry in the
matrix represents a possible outcome based on a corresponding
selection of strategies.
This is an example of a two- Column Player ( player 2 )
player matrix game where
each player has a choice of A
B
two possible strategies.

Row Player
( player 1 )

(m1,m2)

(m3,m4)

(m5,m6)

(m7,m8)

Matrix Games A 2X2 Matrix Game

Player II ( column Player )

Player I
( row player )

(m1,m2)

(m3,m4)

(m5,m6)

(m7,m8)

Each outcome consists of two values which represent payoffs to

each player.
For example, if the column player chooses strategy A and the row
player chooses strategy X, the outcome is represented by the values
(m1, m2), where m1 is the payoff for player I and m2 is the payoff for
player II.

Matrix Games A 2X2 Matrix Game

Player II ( Column Player )

Player I
( row player )

(m1,m2)

(m3,m4)

(m5,m6)

(m7,m8)

For all matrix games, when outcomes are written using two
coordinates, lets assume the payoff to the row player is the first
coordinate, while the second coordinate represents the payoff to the
column player.

An Example of a 2x2 Matrix Game

Player II ( Column Player )

Player I
( row player )

(1,2)

(4,-3)

(2,1)

(3,3)

Consider the above example of a matrix game.

Well use the convention that larger payoff values are better.
Assuming player I and II move simultaneously, what should they
pick?
If you are player I, what is your strategy to optimize your payoff? Do
you pick X or Y?
If you are player II, what is your strategy? Is it better to pick A or B?

An Example 2x2 Matrix Game

Player II ( Column Player )

Player I
( row player )

(1,2)

(4,-3)

(2,1)

(3,3)

Suppose you are player I and have to decide between choices X

or Y (called pure strategies).
If you pick X, then you get either 1 point if player II picks A or 4
points if player II picks B.
But if you pick Y, then you get either 2 points if player II picks A or 3
points if player II picks B.

A Matrix Game
Player II ( Column Player )

Player I
( row player )

(1,2)

(4,-3)

(2,1)

(3,3)

On the other hand, if you are player II, you are choosing between
pure strategies A or B.
If you pick A, then you get a payoff of 2 points if player I picks X
and a payoff of 1 if player I picks Y.
If you pick B, then you get a payoff of 3 (a loss) if player I picks X
and a payoff of 3 points if player I picks strategy Y.

Matrix Games Payoffs are known by both Players

Player II ( Column Player )

Player I
( row player )

(1,2)

(4,-3)

(2,1)

(3,3)

Because this is a simultaneous move game, neither player knows

the strategy choice of the other player until the game is played.
In matrix games, we assume both players know the payoffs
associated with each strategy (and we assume both players know
that both players know the payoffs associated with each strategy,
etc.)

Choosing a Strategy Cyclic Reasoning

Player II ( Column Player )

A
Player I
( row player )

(1,2)

(4,-3)

(2,1)

(3,3)

In deciding which strategy to follow, player I might go through the

following reasoning:

If I choose option X, then I could get the highest payoff of 4 if player II chose
B. However, player II is unlikely to pick B because he could suffer a loss of 3
if I pick X. Thus player II may choose A. If player II is going to choose A
then I should choose Y which is a better payoff for me when player II is
playing A. But then if player II knows that I am reasoning in this way, and am
therefore more likely to pick strategy Y, he may choose to pick strategy B, in
which case I am better off with strategy X

Matrix Games
Player II ( Column Player )

A
Player I
( row player )

(1,2)

(4,-3)

(2,1)

(3,3)

Can we find an optimal strategy for either or both players?

The answer is yes, but before doing so, well need to understand
certain terms.

Well continue by defining some of those terms and also

considering some easier special cases