John Loucks: Slides by

Slides by
John
Loucks
St. Edward’s
University
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1
Chapter 5, Part B
Advanced Linear Programming Applications
 Game Theory
• Competing for Market Share
• Identifying a Pure Strategy Solution
• Identifying a Mixed Strategy Solution
2
Introduction to Game Theory
 In decision analysis, a single decision maker seeks to

select an optimal alternative.
 In game theory, there are two or more decision
makers, called players, who compete as adversaries
against each other.
 It is assumed that each player has the same
information and will select the strategy that provides
the best possible outcome from his point of view.
 Each player selects a strategy independently without
knowing in advance the strategy of the other player(s).
continue
3
Introduction to Game Theory
 The combination of the competing strategies provides

the value of the game to the players.
 Examples of competing players are teams, armies,
companies, political candidates, and contract bidders.
4
Two-Person Zero-Sum Game
 Two-person means there are two competing players in

the game.
 Zero-sum means the gain (or loss) for one player is
equal to the corresponding loss (or gain) for the other
player.
 The gain and loss balance out so that there is a zero-
sum for the game.
 What one player wins, the other player loses.
5
Two-Person Zero-Sum Game Example
 Competing for Vehicle Sales

Suppose that there are only two vehicle dealer-
ships in a small city. Each dealership is considering
three strategies that are designed to take sales of
new vehicles from the other dealership over a
four-month period. The strategies, assumed to be
the same for both dealerships, are on the next slide.
6
 Strategy Choices
Strategy 1: Offer a cash rebate
on a new vehicle.
Strategy 2: Offer free optional
equipment on a
new vehicle.
Strategy 3: Offer a 0% loan
on a new vehicle.
7
 Payoff Table: Number of Vehicle Sales

Gained Per Week by Dealership A
(or Lost Per Week by Dealership B)
Dealership B
Cash Free 0%
Rebate Options Loan
Dealership A b1 b2 b3
Cash Rebate a1 2 2 1
Free Options a2 -3 3 -1
0% Loan a3 3 -2 0
8
 Step 1: Identify the minimum payoff for each

row (for Player A).
 Step 2: For Player A, select the strategy that provides
the maximum of the row minimums (called
the maximin).
9
 Identifying Maximin and Best Strategy

Dealership B
Cash Free 0%
Rebate Options Loan Row
Dealership A b1 b2 b3 Minimum
Cash Rebate a1 2 2 1 1
Free Options a2 -3 3 -1 -3
0% Loan a3 3 -2 0 -2
Best Strategy Maximin
For Player A Payoff
10
 Step 3: Identify the maximum payoff for each column

(for Player B).
 Step 4: For Player B, select the strategy that provides
the minimum of the column maximums
(called the minimax).
11
 Identifying Minimax and Best Strategy

Dealership B Best Strategy
Cash Free 0% For Player B
Rebate Options Loan
3 -2 0 Minimax
0% Loan a3 Payoff
Column Maximum 3 3 1
12
Pure Strategy
 Whenever an optimal pure strategy exists:

 the maximum of the row minimums equals the
minimum of the column maximums (Player A’s
maximin equals Player B’s minimax)
 the game is said to have a saddle point (the
intersection of the optimal strategies)
 the value of the saddle point is the value of the
game
 neither player can improve his/her outcome by
changing strategies even if he/she learns in
advance the opponent’s strategy
13
Pure Strategy Example
 Saddle Point and Value of the Game Value of the

game is 1
Dealership B
Cash Free 0%
Rebate Options Loan Row
Dealership A b1 b2 b3 Minimum
Cash Rebate a1 2 2 1 1
Free Options a2 -3 3 -1 -3
0% Loan a3 3 -2 0 -2
Column Maximum 3 3 1 Saddle
Point
14
Pure Strategy Example
 Pure Strategy Summary

 Player A should choose Strategy a (offer a cash
1
rebate).
 Player A can expect a gain of at least 1 vehicle
sale per week.
 Player B should choose Strategy b (offer a 0%
3
loan).
 Player B can expect a loss of no more than 1
vehicle sale per week.
15
Mixed Strategy
 If the maximin value for Player A does not equal the

minimax value for Player B, then a pure strategy is not
optimal for the game.
 In this case, a mixed strategy is best.
 With a mixed strategy, each player employs more than
one strategy.
 Each player should use one strategy some of the time
and other strategies the rest of the time.
 The optimal solution is the relative frequencies with
which each player should use his possible strategies.
16
Mixed Strategy Example
 Consider the following two-person zero-sum game.

The maximin does not equal the minimax. There is
not an optimal pure strategy.
Player B
Row
Player A b1 b2 Minimum
Maximin
a1 4 8 4
a2 11 5 5
Column
Maximum 11
Minimax
8
17
p = the probability Player A selects strategy a1

(1 - p) = the probability Player A selects strategy a2
If Player B selects b1:

EV = 4p + 11(1 – p)
If Player B selects b2:
EV = 8p + 5(1 – p)
18
To solve for the optimal probabilities for Player A

we set the two expected values equal and solve for
the value of p.
4p + 11(1 – p) = 8p + 5(1 – p)
4p + 11 – 11p = 8p + 5 – 5p
11 – 7p = 5 + 3p Hence,
-10p = -6 (1 - p) = .4
p = .6
Player A should select:
Strategy a1 with a .6 probability and
Strategy a2 with a .4 probability.
19
q = the probability Player B selects strategy b1

(1 - q) = the probability Player B selects strategy b2
If Player A selects a1:

EV = 4q + 8(1 – q)
If Player A selects a2:
EV = 11q + 5(1 – q)
20
 Value of the Game Expected gain

per game
for Player A
For Player A:
EV = 4p + 11(1 – p) = 4(.6) + 11(.4) = 6.8
For Player B:
EV = 4q + 8(1 – q) = 4(.3) + 8(.7) = 6.8
Expected loss
per game
for Player B
21
Dominated Strategies Example
Suppose that the payoff table for a two-person zero-

sum game is the following. Here there is no optimal
pure strategy.
Player B
Row
Player A b1 b2 b3 Minimum
a1 6 5 -2 -2
a2 1 0 3 0
a3 3 4 -3 -3
Column Maximin
Maximum 6 5 3
Minimax
22
If a game larger than 2 x 2 has a mixed

strategy, we first look for dominated strategies in
order to reduce the size of the game.
Player B
Player A b1 b2 b3
a1 6 5 -2
a2 1 0 3
a3 3 4 -3
Player A’s Strategy a3 is dominated by

Strategy a1, so Strategy a3 can be eliminated.
23
We continue to look for dominated strategies

in order to reduce the size of the game.
Player B
Player A b1 b2 b3
a1 6 5 -2
a2 1 0 3
Player B’s Strategy b2 is dominated by

Strategy b1, so Strategy b2 can be eliminated.
24
The 3 x 3 game has been reduced to a 2 x 2.

It is now possible to solve algebraically for the
optimal mixed-strategy probabilities.
Player B
Player A b1 b3
a1 6 -2
a2 1 3
25
Two-Person Zero-Sum Game Example #2
 Competing for Vehicle Sales

Let us continue with the two-dealership game
presented earlier, but with a change to one payoff.
If both Dealership A and Dealership B choose to
offer a 0% loan, the payoff to Dealership A is now
an increase of 3 vehicle Sales per week. (The
revised payoff table appears on the next slide.)
26
 Payoff Table: Number of Vehicle Sales

Gained Per Week by Dealership A
(or Lost Per Week by Dealership B)
Dealership B
Cash Free 0%
Rebate Options Loan
3 -2 3
0% Loan a3
27
 The maximin (1) does not equal the minimax (3), so a

pure strategy solution does not exist for this problem.
 The optimal solution is for both dealerships to adopt a
mixed strategy.
 There are no dominated strategies, so the problem
cannot be reduced to a 2x2 and solved algebraically.
 However, the game can be formulated and solved as a
linear program.
28
 Let us first consider the game from the point of view of

Dealership A.
 Dealership A will select one of its three strategies based
on the following probabilities:
PA1 = the probability that Dealership A selects strategy a1
29
 Weighting each payoff by its probability and summing

provides the expected value of the increase in vehicle
sales per week for Dealership A.
Dealership B Strategy Expected Gain for Dealership A

b1 EG(b1) = 2PA1 – 3PA2 + 3PA3
b2 EG(b2) = 2PA1 + 3PA2 – 2PA3
b3 EG(b3) = 1PA1 – 1PA2 + 3PA3
30
 Define GAINA to be the optimal expected gain in vehicle

sales for Dealership A, which we want to maximize.
 Thus, the individual expected gains, EG(b1), EG(b2) and
EG(b3) must all be greater than or equal to GAINA.
 For example,
2PA1 – 3PA2 + 3PA3 > GAINA
 Also, the sum of Dealership A’s mixed strategy
probabilities must equal 1.
 This results in the LP formulation on the next slide …..
31
 Dealership A’s Linear Programming Formulation

Max GAINA
s.t.
2PA1 – 3PA2 + 3PA3 – GAINA > 0 (Strategy b1)
2PA1 + 3PA2 – 2PA3 – GAINA > 0 (Strategy b2)
1PA1 – 1PA2 + 0PA3 – GAINA > 0 (Strategy b3)
PA1 + PA2 + PA3 = 1 (Probabilities sum to 1)
PA1, PA2, PA3, GAINA > 0 (Non-negativity)
32
 Computer Solution: Dealership A
OBJECTIVE FUNCTION VALUE = 1.333

VARIABLE VALUE REDUCED COSTS
PA1 0.833 0.000
PA2 0.000 1.000
PA3 0.167 0.000
GAINA 1.333 0.000
33
 Computer Solution: Dealership A

CONSTRAINT SLACK/SURPLUS DUAL VALUES
1 0.833 0.000
2 0.000 -0.333
3 0.000 -0.667
4 0.000 1.333
34
 Dealership A’s Optimal Mixed Strategy

• Offer a cash rebate (a1) with a probability of 0.833
• Do not offer free optional equipment (a2)
• Offer a 0% loan (a3) with a probability of 0.167
The expected value of this mixed strategy is a gain of

1.333 vehicle sales per week for Dealership A.
35
 Let us now consider the game from the point of view of

Dealership B.
 Dealership B will select one of its three strategies based
on the following probabilities:
PB1 = the probability that Dealership B selects strategy b1
36
 Weighting each payoff by its probability and summing

provides the expected value of the decrease in vehicle
sales per week for Dealership B.
Dealership A Strategy Expected Loss for Dealership B
a1 EL(a1) = 2PB1 + 2PB2 + 1PB3
a2 EL(a2) = -3PB1 + 3PB2 – 1PB3
a3 EL(a3) = 3PB1 – 2PB2 + 3PB3
37
 Define LOSSB to be the optimal expected loss in vehicle

sales for Dealership B, which we want to minimize.
 Thus, the individual expected losses, EL(a1), EL(a2) and
EL(a3) must all be less than or equal to LOSSB.
 For example,
2PA1 + 2PA2 + 1PA3 < LOSSB
 Also, the sum of Dealership B’s mixed strategy
probabilities must equal 1.
 This results in the LP formulation on the next slide …..
38
 Dealership B’s Linear Programming Formulation

Min LOSSB
s.t.
2PB1 + 2PB2 + 1PB3 – LOSSB < 0 (Strategy a1)
-3PB1 + 3PB2 – 1PB3 – LOSSB < 0 (Strategy a2)
3PB1 – 2PB2 + 3PB3 – LOSSB < 0 (Strategy a3)
PB1 + PB2 + PB3 = 1 (Probabilities sum to 1)
PB1, PB2, PB3, LOSSB > 0 (Non-negativity)
39
 Computer Solution: Dealership B
OBJECTIVE FUNCTION VALUE = 1.333

VARIABLE VALUE REDUCED COSTS
PB1 0.000 0.833
PB2 0.333 0.000
PB3 0.667 0.000
LOSSB 1.333 0.000
40
 Computer Solution: Dealership B

CONSTRAINT SLACK/SURPLUS DUAL VALUES
1 0.000 0.833
2 1.000 0.000
3 0.000 0.167
4 0.000 -1.333
41
 Dealership B’s Optimal Mixed Strategy

• Do not offer a cash rebate (b1)
• Offer free optional equipment (b2) with a probability of
0.333
• Offer a 0% loan (b3) with a probability of 0.667
 The expected payoff of this mixed strategy is a loss of

1.333 vehicle sales per week for Dealership B.
 Note that expected loss for Dealership B is the same as
the expected gain for Dealership A. (There is a zero-
sum for the expected payoffs.)
42
Other Game Theory Models
 Two-Person, Constant-Sum Games

(The sum of the payoffs is a constant other than zero.)
 Variable-Sum Games
(The sum of the payoffs is variable.)
 n-Person Games
(A game involves more than two players.)
 Cooperative Games
(Players are allowed pre-play communications.)
 Infinite-Strategies Games
(An infinite number of strategies are available for the
players.)
43
End of Chapter 5, Part B
44

John Loucks: Slides by

Uploaded by

Copyright:

Available Formats

You might also like

John Loucks: Slides by

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

John Loucks: Slides by

Uploaded by

Copyright:

Available Formats

Slides by

 In decision analysis, a single decision maker seeks to

 The combination of the competing strategies provides

 Two-person means there are two competing players in

 Competing for Vehicle Sales

 Payoff Table: Number of Vehicle Sales

 Step 1: Identify the minimum payoff for each

 Identifying Maximin and Best Strategy

 Step 3: Identify the maximum payoff for each column

 Identifying Minimax and Best Strategy

 Whenever an optimal pure strategy exists:

 Saddle Point and Value of the Game Value of the

 Pure Strategy Summary

 If the maximin value for Player A does not equal the

 Consider the following two-person zero-sum game.

p = the probability Player A selects strategy a1

If Player B selects b1:

To solve for the optimal probabilities for Player A

q = the probability Player B selects strategy b1

If Player A selects a1:

 Value of the Game Expected gain

Suppose that the payoff table for a two-person zero-

If a game larger than 2 x 2 has a mixed

Player A’s Strategy a3 is dominated by

We continue to look for dominated strategies

Player B’s Strategy b2 is dominated by

The 3 x 3 game has been reduced to a 2 x 2.

 Competing for Vehicle Sales

 Payoff Table: Number of Vehicle Sales

 The maximin (1) does not equal the minimax (3), so a

 Let us first consider the game from the point of view of

 Weighting each payoff by its probability and summing

Dealership B Strategy Expected Gain for Dealership A

 Define GAINA to be the optimal expected gain in vehicle

 Dealership A’s Linear Programming Formulation

 Computer Solution: Dealership A

OBJECTIVE FUNCTION VALUE = 1.333

 Computer Solution: Dealership A

 Dealership A’s Optimal Mixed Strategy

The expected value of this mixed strategy is a gain of

 Let us now consider the game from the point of view of

 Weighting each payoff by its probability and summing

 Define LOSSB to be the optimal expected loss in vehicle

 Dealership B’s Linear Programming Formulation

 Computer Solution: Dealership B

OBJECTIVE FUNCTION VALUE = 1.333

 Computer Solution: Dealership B

 Dealership B’s Optimal Mixed Strategy

 The expected payoff of this mixed strategy is a loss of

 Two-Person, Constant-Sum Games

You might also like