1

GAMETHEORY
(Hillier&LiebermanIntroductiontoOperationsResearch,8
th
edition)
Gametheory
Mathematicaltheorythatdeals,inanformal,abstract
way,withthegeneralfeaturesofcompetitive
situations:
Likeparlorgames,militarybattles,politicalcampaigns,
advertisingandmarketingcampaigns etc advertisingandmarketingcampaigns,etc.
Wherefinaloutcomedependsprimarilyuponcombination
ofstrategiesselectedbyadversaries.
Emphasisondecisionmakingprocessesofadversaries
Wewillfocusonsimplestcase:
twoperson,zerosumgames
Optimization &Decision2009 494
Theoddsandevensgame
Player1takesevens,player2takesodds
Eachplayersimultaneouslyshows1or2fingers
Player1winsiftotaloffingersisevenandlosesifitis
odd;viceversaforPlayer2
E h l h t t i hi h? Eachplayerhas2strategies:which?
Payofftable:
Optimization &Decision2009 495
Strategy
Player2(odd)
1 2
Player1
(even)
1 1 1
2 1 1
Twoperson,zerosumgame
Characterizedby:
Strategiesofplayer1;
Strategiesofplayer2;
Payofftable.
Strategy:predeterminedrulethatspecifies
completelyhowoneintendstorespondtoeach
possiblecircumstanceateachstageofgame
Payofftable:showsgain(positiveornegative)for
oneplayerthatwouldresultfromeachcombination
ofstrategiesforthe2players.
Optimization &Decision2009 496
Gametheory
Primaryobjectiveisdevelopmentofrationalcriteria
forselectingastrategy.
Twokeyassumptionsaremade:
1. Both playersarerational; p y ;
2. Both playerschoosetheirstrategiessolelytopromote
theirownwelfare (nocompassionforopponent).
Contrastswithdecisionanalysis,whereassumption
isthatdecisionmakerisplayingagamewithpassive
opponent nature whichchoosesitsstrategiesin
somerandomfashion.
Optimization &Decision2009 497
Prototypeexample
Twopolititians runningagainsteachotherforsenate
Campaignplansmustbemadeforfinal2days
Bothpolititianswanttocampaignin2keycities
Spendeither1fulldayineachcityor2fulldaysinone Spendeither1fulldayineachcityor2fulldaysinone
Campaignmanagerineachcityassessesimpactof
possiblecombinationsforpolititianandhisopponent
Polititianshalluseinformationtochoosehisbest
strategyonhowtousethe2days
Optimization &Decision2009 498
2
Formulation
Identifythe2players,thestrategiesofeachplayer
andthepayofftable
Eachplayerhas3strategies:
1. Spend1dayineachcity p y y
2. Spend2daysinBigtown
3. Spend2daysinMegalopolis
Appropriateentriesforpayofftableforpolitician1
aretotalnetvoteswonfromtheopponentresulting
from2daysofcampaigning.
Optimization &Decision2009 499
Variation1ofexample
Giventhe
payofftable,
whichstrategy
shouldeach
l l t?
Strategy
Total NetVotesWon
byPolitician1
(inUnitsof1,000Votes)
Politician2
1 2 3
1 1 2 4
Applyconceptofdominatedstrategiestoruleout
successionofinferiorstrategiesuntilonly1choice
remains.
playerselect?
Optimization &Decision2009 500
Politician
1
1 1 2 4
2 1 0 5
3 0 1 1
Dominatedstrategy
Astrategyisdominated byasecondstrategyifthe
secondstrategyisalwaysatleastasgood(and
sometimesbetter)regardlessofwhattheopponent
does.Adominatedstrategycanbeeliminated
immediatelyfromfurtherconsideration. y
Payofftableincludesnodominatedstrategiesfor
player2.
Forplayer1,strategy3isdominatedbystrategy1.
Resultingreducedtable:
Optimization &Decision2009 501
1 2 3
1 1 2 4
2 1 0 5
Variation1ofexample(cont.)
Strategy3forplayer2isnowdominatedby
strategies1and2ofplayer1.
Reducedtable: 1 2
1 1 2
2 1 0
Strategy2ofplayer1dominatedbystrategy1.
Reducedtable:
Strategy2forplayer2dominatedbystrategy1.
Bothplayersshouldselecttheirstrategy1.
Optimization &Decision2009 502
1 2
1 1 2
Valueofthegame
Payofftoplayer1whenbothplayersplayoptimallyis
valueofthegame.
Gamewithvalueofzeroisafairgame.
Conceptofdominatedstrategyisusefulfor: Conceptofdominatedstrategyisusefulfor:
Reducingsizeofpayofftabletobeconsidered;
Identifyingoptimalsolutionofthegame(specialcases).
Optimization &Decision2009 503
Variation2ofexample
Giventhepayofftable,whichstrategyshouldeach
playerselect?
Total NetVotesWon
byPolitician1
(inUnitsof1,000Votes)
Saddle point
(equilibrium
solution)
Minimum
3
0 - Maxmin value
4
Maximum 5 0 6
l Minimax value
Optimization &Decision2009 504
Strategy
Politician2
1 2 3
Politician
1
1 3 2 6
2 2 0 2
3 5 2 4
Both politicians
break even:
fair game!
3
Minimax criterion
Eachplayershouldplayinsuchawayastominimize
hismaximumlosseswhenevertheresultingchoiceof
strategycannotbeexploitedbytheopponenttothen
improvehisposition.
Selectastrategythatwouldbebestevenifthe Selectastrategythatwouldbebestevenifthe
selectionwerebeingannouncedtotheopponent
beforetheopponentchoosesastrategy.
Player1shouldselectthestrategywhoseminimum
payoffislargest,whereasplayer2shouldchoosethe
onewhosemaximumpayofftoplayer1isthesmallest.
Optimization &Decision2009 505
Total NetVotesWon
byPolitician1
(inUnitsof1,000Votes)
Variation3ofexample
Giventhepayofftable,whichstrategyshouldeach
playerselect?
Cycle!
Unstable solution
Minimum
2 - Maxmin value
3
4
Maximum 5 4 2
l Minimax value
Strategy
Politician2
1 2 3
Politician
1
1 0 2 2
2 5 4 3
3 2 3 4
Optimization &Decision2009 506
Variation3ofexample(cont.)
Originallysuggestedsolutionisanunstablesolution
(nosaddlepoint).
Wheneveroneplayersstrategyispredictable,the
opponentcantakeadvantageofthisinformationto
improvehisposition improvehisposition.
Anessentialfeatureofarationalplanforplayinga
gamesuchasthisoneisthatneitherplayershouldbe
abletodeducewhichstrategytheotherwilluse.
Itisnecessarytochooseamongalternative
acceptablestrategiesonsomekindofrandombasis.
Optimization &Decision2009 507
Gameswith mixed strategies
Wheneveragamedoesnotpossessasaddlepoint,
gametheoryadviseseachplayertoassigna
probabilitydistributionoverhersetofstrategies.
Let:
x probabilitythatplayer1willusestrategyi (i 1 2 m) x
i
=probabilitythatplayer1willusestrategyi (i =1,2,...,m)
y
j
=probabilitythatplayer2willusestrategyj(j=1,2,...,n)
Probabilitiesneedtobenonnegativeandaddto1.
Theseplans(x
1
,x
2
,...,x
m
)and(y
1
,y
2
,...,y
n
)are
usuallyreferredtoasmixedstrategies,andthe
originalstrategiesarecalledpurestrategies.
Optimization &Decision 2009 508
When the gameis actually played
Itisnecessaryforeachplayertouseoneofherpure
strategies.
Purestrategywouldbechosenbyusingsome
randomdevicetoobtainarandomobservationfrom
theprobabilitydistributionspecifiedbythemixed
strategy.
Thisobservationwouldindicatewhichparticularpure
strategytouse.
Optimization &Decision2009 509
Expected payoff
Supposepoliticians1and2selectthemixedstrategies
(x
1
,x
2
,x
3
)=(V,V,u)and(y
1
,y
2
,y
3
)=(u,V,V).
Eachplayercouldthenflipacointodeterminewhichof
histwoacceptablepurestrategieshewillactuallyuse. p p g y
Usefulmeasureofperformanceisexpectedpayoff:
p
ij
ispayoffifplayer1usespurestrategyi andplayer2
usespurestrategyj.
Optimization &Decision2009 510
1 1
Expectedpayoffforplayer1
m n
ij i j
i j
p x y
= =
=

4
Expected payoff (cont.)
4possible payoffs (2,2,4,S),each with probability
Expected payoff is (2+2+4S)=
Thismeasureofperformancedoesnotdisclose
anythingabouttherisksinvolvedinplaying the game anythingabouttherisksinvolvedinplaying the game
Itindicateswhattheaveragepayoffwilltendtobeif
thegameis played many times
Gametheoryextendstheconceptoftheminimax
criterion togamesthatlackasaddlepointandthus
needmixedstrategies
Optimization &Decision 2009 511
Minimax criterion formixed strategies
Agivenplayershouldselectthemixedstrategythat
maximizesthe minimumexpected payoff tothe player
Optimal mixedstrategyforplayer1istheonethat
providestheguarantee (minimumexpectedpayoff)
h i b ( i l) thatisbest (maximal).
Valueofbestguaranteeisthemaximin value
Optimal strategy forplayer2providesthebest
(minimal)guarantee (maximumexpectedloss)
Valueofbestguaranteeistheminimax value
Optimization &Decision 2009 512

Stable and unstable solutions

Usingonlypurestrategies,gamesnothavinga
saddlepointturnedouttobeunstable because
Playerswantedtochangetheirstrategiestoimprove
theirpositions
<
p
Forgameswithmixedstrategies,itisnecessarythat
foroptimalsolutiontobe stable
Thisconditionalwaysholdsforsuchgamesaccording
totheminimax theoremofgametheory
Optimization &Decision2009 513
=
Minimax theorem
Minimax theorem: Ifmixedstrategiesareallowed,
thepairofmixedstrategiesthatisoptimalaccording
totheminimax criterionprovidesastablesolution
with(thevalueofthegame),sothatneither = =
playercandobetterbyunilaterallychangingheror
hisstrategy.
Buthowtofindtheoptimalmixedstrategy
foreachplayer?
Optimization &Decision2009 514
Graphical solution procedure
Consideranygamewithmixedstrategiessuchthat,
afterdominatedstrategiesareeliminated,oneofthe
playershasonlytwopurestrategies
Mixedstrategiesare(x
1
,x
2
)andx
2
=1 x
1
,soitis
f f necessarytosolveonlyfortheoptimalvalueofx
1
Plot expected payoffasafunctionofx
1
foreachof
heropponentspurestrategies
Thenidentify:
pointthatmaximizestheminimumexpectedpayoff
opponents minimax mixed strategy
Optimization &Decision2009 515
Back tovariation 3of example
Probability
Politician 2
y
1
y
2
y
3
Probability Purestrategy 1 2 3
Politician1
x
1
1 0 2 2
1x
1
2 5 4 3
Foreachofthepurestrategiesavailabletoplayer2,
theexpectedpayoffforplayer1is
Optimization &Decision2009 516
(y
1
,y
2
,y
3
) Expectedpayoff
(1,0,0)
(0,1,0)
(0,0,1)
0x
1
+5(1 x
1
)=5 5x
1
2x
1
+4(1 x
1
)=4 6x
1
2x
1
3(1 x
1
)=3+5x
1
5
Optimal solution forpolitician 1
1
1 1
0 1
max{min{ 3 5 ,4 6 }}
x
x x

= = +
*
1
*
2
7
11
4
11
x
x
=
=
Optimization &Decision2009 517
Minimum expected
payoff
2
11
= =
Optimal solution forpolitician 2
Expectedpayoffresultingfromoptimalstrategyfor
allvaluesofx
1
satisfies:
* * *
1 2 3
2
(5 5 1) (4 6 1) (3 5 1)
11
y x y x y x + + = =
7
Whenplayer1isplayingoptimally,and
Also
So
Optimization &Decision2009 518
1
7
11
x =
* * *
1 2 3
20 2 2 2

11 11 11 11
y y y + + = =
* * *
1 2 3
1 y y y + + =
* * *
1 2 3
5
6
0, and
11 11
y y y = = =
Other situation
Ifthereshouldhappentobemorethantwolines
passingthroughthemaximin point,sothatmore
thantwoofthey
j
*
valuescanbegreaterthanzero,
thisconditionwouldimplythattherearemanyties
fortheoptimalmixedstrategyforplayer2.
Setallbuttwoofthesey
j
*
valuesequaltozeroand
solvefortheremainingtwointhemannerjust
described.Fortheremainingtwo,theassociated
linesmusthavepositiveslopeinonecaseand
negativeslopeintheother.
Optimization &Decision2009 519
Solving by linearprogramming
Anygamewithmixedstrategiescanbetransformed
toalinearprogramming problemapplying the
minimax theoremandusingthedefinitionsof
maximin value andminimax value .
Define
Optimization &Decision2009 520
1 1 m n
x y
+ +
= =
LPproblemforplayer 1
1
11 1 21 2 1 1
12 1 22 2 2 1
Maximize
subjectto
... 0
... 0
m
m m m
m m m
x
p x p x p x x
p x p x p x x
+
+
+
+ + +
+ + +
Optimization &Decision2009 521
1 1 2 2 1
1 2
...
... 0
... 1
and
0for =1,2,...,
n n mn m m
m
i
p x p x p x x
x x x
x i m
+
+ + +
+ + + =

LPproblemforplayer 2
1
11 1 12 2 1 1
21 1 22 2 2 1
Minimize
subjectto
... 0
... 0
n
n n n
n n n
y
p y p y p y y
p y p y p y y
+
+
+
+ + +
+ + +
Optimization &Decision2009 522
1 1 2 2 1
1 2
...
... 0
... 1
and
0for =1,2,...,
m m mn n n
n
j
p y p y p y y
y y y
y j n
+
+ + +
+ + + =

6
Duality
Player2LPproblemandplayer1LPproblemaredual
toeachother
Optimalmixedstrategiesforbothplayerscanbe
foundbysolvingonlyoneoftheLPproblems g
Dualityprovidessimpleproofoftheminimax
theorem(showit)
Optimization &Decision2009 523
Stillalooseend
Whattodoaboutx
m+1
andy
n+1
beingunrestrictedin
signintheLPformulations?
Ifu,addnonnegativityconstraints
If<u,either:
1. Replacevariablewithoutanonnegativityconstraintby
thedifferenceoftwononnegativevariables;
2. Reverseplayers1and2sothatpayofftablewouldbe
rewrittenasthepayofftotheoriginalplayer2
3. Addasufficientlylargefixedconstanttoallentriesin
payofftablethatnewvalueofgamewillbepositive
Optimization &Decision2009 524
Example
Consideragainvariation3
afterdominatedstrategy3
forplayer1iseliminated
Addingx
3
0yields
3
1 3
1 2 3
Maximize
subjectto
5 0
2 4 0
x
x x
x x x

+
Dualproblemyields(y
4
0)
Optimization &Decision2009 525
1 2 3
1 2 3
1 2
1 2
4
2 3 0
1
and
0, 0
x x x
x x
x x

+ =

* * *
1 2 3
7 4
2
, ,
11 11 11
x x x = = =
* * *
1 2 3
*
4
5
6
0, , ,
11 11
2
11
y y y
y
= = =
=
Extensions
Twoperson,constantsumgame:sumofpayoffsto
twoplayersisfixedconstant(positiveornegative)
regardlessofcombinationofstrategiesselected
Npersongame, e.g.,competitionamongbusiness
firms internationaldiplomacy etc firms,internationaldiplomacy,etc.
Nonzerosumgame:e.g.,advertisingstrategiesof
competingcompaniescanaffectnotonlyhowthey
willsplitthemarketbutalsothetotalsizeofthe
marketfortheircompetingproducts.Sizeofmutual
gain(orloss)fortheplayersdependsoncombination
ofstrategieschosen.
Optimization &Decision2009 526
Extensions(cont.)
Nonzerosumgamesclassifiedintermsofthedegree
towhichtheplayersarepermittedtocooperate
Noncooperativegame:thereisnopreplay
communicationbetweenplayers
Cooperativegame:wherepreplaydiscussionsand Cooperativegame:wherepreplaydiscussionsand
bindingagreementsarepermitted
Infinitegames:playershaveinfinitenumberofpure
strategiesavailabletothem.Strategytobeselected
canberepresentedbyacontinuous decisionvariable
Optimization &Decision2009 527
Conclusions
Generalproblemofhowtomakedecisionsina
competitiveenvironmentisaverycommonand
importantone
Fundamentalcontributionofgametheoryisabasic g
conceptualframeworkforformulatingandanalyzing
suchproblemsinsimplesituations
Researchiscontinuingwithsomesuccesstoextend
thetheorytomorecomplexsituations
Optimization &Decision2009 528