GAME THEORY

MINIMAX STRATEGY , MAXIMIN

STRATEGY , SADDLE POINT
 ZERO-SUM GAMES
• ZERO-SUM GAME : A ZERO-SUM GAME IS ONE IN WHICH THE SUM OF THE
INDIVIDUAL PAYOFFS FOR EACH OUTCOME IS ZERO.
• MINIMAX STRATEGY : MINIMIZING ONE’S OWN MAXIMUM LOSS
• MAXIMIN STRATEGY : MAXIMIZE ONE’S OWN MINIMUM GAIN
• SINCE THE PAYOFFS OF THE COLUMN PLAYER (SHOWN RED) ARE JUST THE
NEGATIVE OF THE PAYOFFS OF THE ROW PLAYER, WE CAN WRITE A MATRIX ONLY
SHOWING PAYOFFS OF THE ROW PLAYER (ON THE RIGHT). ONCE WE HAVE THAT,
WE CAN FIND THE MAXIMIN & MINIMAX.
• MAXIMIN STRATEGY FOR PLAYER 1: MAXIMIZE THEIR OWN MINIMUM GAIN.
• IF PLAYER 1 PLAYS THE FIRST STRATEGY (STRATEGY A) THEN THEIR MINIMUM
GAIN IS 0.
• MINIMAX STRATEGY FOR PLAYER 2 : MINIMIZE THEIR OWN MAXIMUM LOSS

• IF PLAYER 2 PLAYS STRATEGY A THEN THEIR MAXIMUM LOSS IS 4 (THEIR MAX

LOSS IS PLAYER 1’S MAX GAIN)
• TAKE THE MAXIMUM OF THE MINIMUM GAINS, I.E. THE MAXIMUM OF ROW
MINIMA (MAXIMIN), AND THE MINIMUM OF THE MAXIMUM LOSSES, I.E. THE
MINIMUM OF COLUMN MAXIMA (MINIMAX). IF THEY ARE EQUAL, YOU HAVE A
SADDLE POINT.
• IF A SADDLE POINT EXISTS, IT SHOULD ALWAYS BE PLAYED. HERE PLAYER 1
PLAYS A AND PLAYER 2 PLAYS B.
• A SADDLE POINT IS A NASH EQUILIBRIUM
 SEQUENTIAL GAMES
• GAME IN WHICH PLAYERS MOVE IN TURN, RESPONDING TO EACH OTHER’S
ACTIONS AND REACTIONS.
• EXAMPLES: AN ADVERTISING DECISION BY ONE FIRM AND THE RESPONSE BY ITS
COMPETITOR; OR A NEW GOVERNMENT REGULATORY POLICY AND THE
INVESTMENT AND OUTPUT RESPONSE OF THE REGULATED FIRMS.
• SUPPOSE THAT BOTH FIRMS, IN IGNORANCE OF EACH OTHER’S INTENTIONS,
MUST ANNOUNCE THEIR DECISIONS INDEPENDENTLY AND SIMULTANEOUSLY.
IN THAT CASE, BOTH WILL PROBABLY INTRODUCE THE SWEET CEREAL—AND
BOTH WILL LOSE MONEY.
• NOW SUPPOSE THAT FIRM 1 CAN GEAR UP ITS PRODUCTION FASTER AND
INTRODUCE ITS NEW CEREAL FIRST. WE NOW HAVE A SEQUENTIAL GAME: FIRM
1 INTRODUCES A NEW CEREAL, AND THEN FIRM 2 INTRODUCES ONE. WHEN
MAKING ITS DECISION, FIRM 1 MUST CONSIDER THE RATIONAL RESPONSE OF
ITS COMPETITOR. IT KNOWS THAT WHICHEVER CEREAL IT INTRODUCES, FIRM 2
WILL INTRODUCE THE OTHER KIND. THUS IT WILL INTRODUCE THE SWEET
CEREAL, KNOWING THAT FIRM 2 WILL RESPOND BY INTRODUCING THE CRISPY
ONE.
 COURNOT- DUOPOLY MODEL
• A MODEL OF OLIGOPOLY ( DUOPOLY CASE) WAS FIRST OF ALL PUT FOURTH BY
COURNOT , A FRENCH ECONOMIST .
ASSUMPTIONS :
1. THERE ARE ONLY TWO FIRMS PRODUCING IDENTICAL PRODUCTS.
2. THE COST OF PRODUCTION IS ZERO .
3. THE DUOPOLISTS FULLY KNOW THE MARKET DEMAND. MOREOVER , THE
MARKET DEMAND FOR THE PRODUCT IS ASSUMED TO BE LINEAR.
4. DUOPOLISTS ACT INDEPENDENTLY .
EACH FIRM ASSUMES THAT THEIR COMPETITOR WILL NOT CHANGE ITS OUTPUT AND FIX OUTPUT.
PHASE 1: FIRM A PRODUCES ½ OF THE TOTAL DEMAND . AT POINT A , FIRM A’S PROFIT ARE
MAXIMIZED
( MC=MR=0) .PRICE LEVEL IS FIXED AT P.
FIRM B PRODUCES HALF OF THE MARKET WHICH IS NOT SUPPLIED BY FIRM A .I.E.,1/2 (1/2) = ¼.
PHASE 2: FIRM A PRODUCE ONE HALF OF THE MARKET WHICH IS NOT SUPPLIED BY B.1/2( 1-1/4) = 3/8.
FIRM B WILL PRODUCE ONE HALF OF THE UNSUPPLIED SECTION OF THE MARKET .I.E. ½ ( 1-3/8) =
5/16.
THIS ACTION- REACTION CONTINUES AND EQUILIBRIUM REACHES WHERE BOTH FIRMS
PRODUCING 1/3RD OF TOTAL MARKET.
COURNOT MODEL LEADS TO STABLE EQUILIBRIUM.
 BETRAND’S DUOPOLY MODEL
• MAJOR DIFFERENCE FROM COURNOT'S MODEL : EACH FIRM ASSUMES THAT THE
OTHER WILL KEEP ITS PRICE CONSTANT AND TAKE DECISION ACCORDINGLY.
• EACH AIMING AT MAXIMIZING ITS OWN PROFIT ON THE ASSUMPTION THAT THE
COMPETITOR WILL NOT CHANGE ITS PRICE.
• THE MODEL LEADS TO STABLE EQUILIBRIUM . IT NEVER MAXIMIZES THE
INDUSTRY PROFIT BUT MAXIMIZES THEIR OWN PROFIT .