Game Theory

Game Theory

 Game theory is a mathematical study which helps us to know the courses of actions picked up by entities (more
than two) who are playing against each other. The study takes into account the psychological aspect of the
entities.

 Game theory is used widely in war strategies, business, biology etc.

 Components of a Game Theory:

 Number of Entities playing against each other
 Alternative strategies present for each player
 Outcome / Pay-off each player gets

The Final outcome of the game depends on the alternative strategies chosen by all the players.
 Game Theory

 Forms of expression: a) Tree form b) Matrix Form

a) b) Up Down
Right (7, 3) (0, 10)
Left (10, 0) (5 ,5)

 Types of Game:

 Constant Sum / Zero Sum Game: Here the total pay-off between the players remains constant. (e.g. ?)

 Non-Zero Sum Game: Here the total pay-off between the players is not constant (e.g. ?)
 Dominant Strategy

 Dominant Strategy is the strategy where an entity decides his optimal move, having an pessimistic mindset as
he feels that something worse will happen.

 Hence in Dominant Strategy entities play with a risk averse psychology

 Forms of Dominant Strategy:

 Pure Strategy: In Pure strategy the final equilibrium shows that each player settles with one specific strategy
(through Max-Min strategy)

 Mixed Strategy: In Mixed strategy the final equilibrium shows that each player settles with a combination of
strategies. (assigning probabilities)

Nash Equilibrium: The final equilibrium condition is called as the Nash equilibrium where the optimal outcomes of
each player is found out from a pure strategy
 Problems of Game Theory

Q1) Player 2
Strategies B1 B2 B3
Player 1 A1 10 50 80
A2 80 60 70
A3 90 30 20
 Problems of Game Theory

Q2) Player 2
Player 1 Strategies B1 B2 B3
A1 70,20 60,15 50,50
A2 30,15 10,40 40,70
A3 20,30 30,20 15,60
 Problems of Game Theory

Q3) Player 2
Player 1 Strategies B1 B2
A1 5 1
A2 3 4
 Problems of Game Theory

Q4) A two-player price strategy choice game. (Pay-offs are revenue earned by each company)

Indigo Airlines
Spice Jet
Cut Stick
Cut 3, 4 1,4
Stick 2,6 3, 3
 Problems of Game Theory

Q5) In a small town, there are only two stores that handle sundry goods – ABC and XYZ. Both stores have reputation in the
community for equally good services they render. Gain of a customer by ABC is a loss to XYZ and vice-versa. Both stores plan to
run pre-Diwali sales during first week of October. Sales are advertised through local press, radio and T.V. with the aid of an
advertising firm. The pay-off matrix for ABC is given below:

XYZ
ABC Press Radio T.V
Press 30 40 -80
Radio 0 15 -20
T.V 90 20 50