Determination of best strategy

using game theory

Introduction:
Game theory is a formal language for modelling and analysing the interactive
behaviours of intelligent, rational decision-makers (or players). Game theory
provides the mathematical methods necessary to analyse the decisions of two or
more players based on their preferences to determine an outcome.
Analysing game theoretic situations is a practical application of linear programming.
These situations can get quite complex mathematically, but one of the simplest forms
of the game is called the Finite Two-Person Zero-Sum Game (or Matrix Game for
short). In a Matrix Game, two players are involved in a competitive situation in which
one player’s loss is the other’s gain.

Formulation of Problem:
Let us consider an example of two companies wanting to launch a new product. Since
they are attempting to launch the same product, they have devised strategies to increase
their preference and attract the common mass towards one’s product.
To improve its market share, company A decides to launch the following strategies:

• A1 = Give discount coupons

• A2 = Home delivery services
• A3 = Free gifts

Company B decides to use media advertising to promote its product:

• B1 = Internet
• B2 = Newspaper
• B3 = Magazine

Next, we have a payoff matrix that summarizes the outcomes of both companies
A and B after implementing their strategies:

Company B

B1 B2 B3

A1 3 -4 2

Company A A2 1 -7 -3

A3 -2 4 7
[Note: Basically, in a payoff matrix, each row describes the strategy of one player
and each column describes the other player’s strategy. The matrix entry at the
intersection of each row and column gives the outcome of each player choosing
the corresponding strategy.]

We are required to use linear programming methods to determine the best

strategies for both companies.

Solution to the given problem:

The first step is approximating the value of the game using the minimax-
maximin method.

Company B Minimum

B1 B2 B3

A1 3 -4 2 -4

Company A A2 1 -7 -3 -7

A3 -2 4 7 -2

Maximum 3 4 7

Therefore, minimax = -2 and maximin = 3.

This game has no saddle point. So, the value of the game lies between –2 and +3.
The value of the game may be negative or zero.

Thus, a constant k is added to all the elements of the pay-off matrix. Let k = 3,
then the given pay-off matrix becomes:

Company B

B1 B2 B3

A1 6 -1 5

Company A A2 4 -4 0

A3 1 7 10
Let
V = value of the game
p1, p2 & p3 = probabilities of selecting strategies A1, A2 & A3 respectively.
q1, q2 & q3 = probabilities of selecting strategies B1, B2 & B3 respectively.

Company B Probability

B1 B2 B3

A1 6 -1 5 p1

Company A A2 4 -4 0 p2

A3 1 7 10 p3

Probability q1 q2 q3

Company A's objective is to maximize the expected gains, which can be achieved
by maximizing V, i.e., it might gain more than V if company B adopts a poor
strategy. Hence, the expected gain for company A will be as follows:

6p1 + 4p2 + p3 ≥ V
-p1 - 4p2 + 7p3 ≥ V
5p1 + 0p2 + 10p3 ≥ V
p1 + p2 + p3 = 1
and p1, p2, p3 ≥ 0

Dividing the above constraints by V, we obtain:

6p1/V + 4p2/V + p3/V ≥ 1

-p1/V - 4p2/V + 7p3/V ≥ 1
5p1/V + 0p2/V + 10p3/V ≥ 1
p1/V + p2/V + p3/V = 1/V

To simplify the problem, we put:

p1/V = x1, p2/V = x2, p3/V = x3

To maximize V, company A can

Minimize 1/V = x1 + x2 + x3

Subject to: 6x1 + 4x2 + x3 ≥ 1

-x1 - 4x2 + 7x3 ≥ 1
5x1 + 0x2 + 10x3 ≥ 1

and x1, x2, x3 ≥ 0

Company B's objective is to minimize its expected losses, which can be reduced
by minimizing V, i.e., company A adopts a poor strategy. Hence, the expected loss
for company B will be as follows:

6q1 - q2 + 5q3 ≤ V
4q1 - 4q2 + 0q3 ≤ V
q1 + 7q2 + 10q3 ≤ V
q1 + q2 + q3 = 1

and q1, q2, q3 ≥ 0.

Dividing the above constraints by V, we obtain:

6q1/V - q2/V + 5q3/V ≤ 1

4q1/V - 4q2/V + 0q3/V ≤ 1
q1/V + 7q2/V + 10q3/V ≤ 1
q1/V + q2/V + q3/V = 1/V

To simplify the problem, we put:

q1/V = y1, q2/V = y2, q3/V = y3

To minimize V, company B can

Maximize 1/V = y1+ y2+ y3

subject to: 6y1 - y2 + 5y3 ≤ 1
4y1 - 4y2 + 0y3 ≤ 1
y1 + 7y2 + 10y3 ≤ 1

and y1, y2, y3 ≥ 0

To solve this problem, we introduce slack variables to convert inequalities to equalities.
The problem becomes:

Maximize y1 + y2 + y3 + 0y4 + 0y5 + 0y6

subject to: 6y1 - y2 + 5y3 + y4 = 1

4y1 - 4y2 + y5 = 1
y1 + 7y2 + 10y3 + y6 = 1

The initial basic feasible solution is as follows:

y1 = 0, y2 = 0, y3 = 0, z = 0, y4 = 1, y5 = 1, y6 = 1
 Table 1:
cj 1 1 1 0 0 0

cB Basic variables y1 y2 y3 y4 y5 y6 Solution values

B b (=XB)

0 y4 6 -1 5 1 0 0 1

0 y5 4 -4 0 0 1 0 1

0 y6 1 7 10 0 0 1 1

zj - cj -1 -1 -1 0 0 0

Here, key column = y1 ; key row = y4 ; minimum positive value = 1/6 ;

pivot element = 6.

Therefore, y4 departs and y1 enters.

Table 2:
cj 1 1 1 0 0 0

cB Basic variables y1 y2 y3 y4 y5 y6 Solution values

B b (=XB)

1 y1 1 -1/6 5/6 1/6 0 0 1/6

0 y5 0 -10/3 -10/3 -2/3 1 0 1/3

0 y6 0 43/6 55/6 -1/6 0 1 5/6

zj - cj 0 -7/6 -1/6 1/6 0 0

Final Table: Linear Programming Method
cj 1 1 1 0 0 0

cB Basic variables y1 y2 y3 y4 y5 y6 Solution values

B b (=XB)

1 y1 1 0 45/43 7/43 0 1/43 8/43

0 y5 0 0 40/43 -32/43 1 20/43 31/43

1 y2 0 1 55/43 -1/43 0 6/4 3 5/43

zj - cj 0 0 57/43 6/43 0 7/43

The values for y1, y2 & y3 are 8/43, 5/43 & 0 respectively.

I/V = y1 + y2 + y3 = 8/43 + 5/43 + 0 = 13/43

or V = 43/13.

Company B’s optimal strategy:

q1 = V X y1 = 43/13 X 8/43 = 8/13

q2 = V X y2 = 43/13 X 5/43 = 5/13
q3 = V X y3 = 43/13 X 0 = 0
Hence, company B's optimal strategy is (8/13, 5/13, 0).

Company A's optimal strategy

The values for x1, x2 & x3 can be obtained from the final simplex table.

x1 = 6/43, x2 = 0 & x3 = 7/43

p1 = V X x1 = 43/13 X 6/43 = 6/13
p2 = V X x2 = 43/13 X 0 = 0
p3 = V X x3 = 43/13 X 7/43 = 7/13

Hence, company A's optimal strategy is (6/13, 0, 7/13).

Conclusion:
➢ Minimax is a backtracking algorithm used in decision-making and
game theory to determine the best move for a player, provided the
opponent also plays optimally. It is commonly employed in two-player
turn-based games such as tic-tac-toe, chess, backgammon, etc.
➢ The simplex method is a systematic procedure for testing the vertices as possible
solutions.
➢ It examines the feasible set’s adjacent vertices in the sequence to ensure that, at
every new vertex, the objective function increases, or is unaffected.
➢ The simplex algorithm is an iterative process that relies on mathematical
calculations and logical reasoning to find the optimal solution to a linear
programming problem. It is efficient and reliable and is also used in mixed integer
programming.
➢ However, this method is useful only for systems of inequalities involving two
variables.