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Game Theory
Mathematical theory that deals with the general
features of competitive situations.
Examples: parlor games, military battles, political
campaigns, advertising and marketing campaigns, etc.
Final outcome depends primarily upon combination of
strategies selected by adversaries.
Emphasis on decision-making processes of adversaries.
We will focus on the simplest case:
two-person, zero-sum games
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Strategy
Player 1
(even)
-1
-1
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Game theory
Primary objective is the development of rational
criteria for selecting a strategy.
Two key assumptions are made:
1. Both players are rational;
2. Both players choose their strategies solely to promote
their own welfare (no compassion for opponent).
Contrasts with decision analysis, where it is assumed
that the decision maker is playing a game with
passive opponent nature which chooses its
strategies in a random fashion.
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Prototype example
Two politicians are running against each other for
Senate.
Campaign plans must be made for final two days.
Both politicians can do campaign in two key cities,
spending either one full day in each city, or two full
days in one city.
Campaign manager in each city assesses the impact of
possible combinations for politician and his opponent.
Politician shall use information to choose his best
strategy on how to use the two days.
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Formulation
Identify the two players, the strategies of each player
and the payoff table.
Each player has three strategies:
1. Spend one day in each city.
2. Spend two days in Bigtown.
3. Spend two days in Megalopolis.
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Variation 1 of example
Total Net Votes Won
by Politician 1
(in Units of 1,000 Votes)
Politician 2
1
-1
Strategy
Politician
1
Dominated strategy
A strategy is dominated by a second strategy if the
second strategy is always at least as good (and
sometimes better) regardless of what the opponent
does. A dominated strategy can be eliminated
immediately from further consideration.
Payoff table includes no dominated strategies for
player 2.
For player 1, strategy 3 is dominated by strategy 1.
Resulting reduced table:
1
2
3
1
2
1
1
2
0
4
5
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1
1
2
0
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Variation 2 of example
Given the payoff table, which strategy should each
player select?
Total Net Votes Won
by Politician 1
(in Units of 1,000 Votes)
Saddle point
(equilibrium
solution)
Politician 2
1
Minimum
-3
-2
-3
-2
-4
-4
Strategy
Politician
1
Maximum
Minimax value
Maxmin value
Both politicians
break even:
fair game!
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Minimax criterion
Each player should play in such a way as to minimize
his maximum losses whenever the resulting choice of
strategy cannot be exploited by the opponent to then
improve his position.
Select a strategy that would be best even if the
selection were being announced to the opponent
before the opponent chooses a strategy.
Player 1 should select the strategy whose minimum
payoff is largest, whereas player 2 should choose the
one whose maximum payoff to player 1 is the
smallest.
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Variation 3 of example
Given the payoff table, which strategy should each
player select?
Total Net Votes Won
by Politician 1
(in Units of 1,000 Votes)
Cycle!
Unstable solution
Politician 2
1
Minimum
-2
-2
-3
-3
-4
-4
Strategy
Politician
1
Maximum
Maxmin value
Minimax value
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Expected payoff
Suppose politicians 1 and 2 select the mixed strategies
(x1, x2, x3) = (,,0) and (y1, y2, y3) = (0,,).
Each player could then flip a coin to determine which
of his two acceptable pure strategies he will actually
use.
Useful measure of performance is expected payoff:
m
pij xi y j
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Minimax theorem
Minimax theorem: If mixed strategies are allowed, the
pair of mixed strategies that is optimal according to
the minimax criterion provides a stable solution with
(the value of the game), so that neither
player can do better by unilaterally changing her or his
strategy.
Mixed strategies becomes quite intuitive if the game is
played repeatedly, it requires some interpretation
when the game is to be played just once.
How to find the optimal mixed strategy for each
player?
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Politician
1
Probability
y1
y2
y3
Probability
Pure strategy
x1
-2
1 - x1
-3
Expected payoff
(1, 0, 0)
(0, 1, 0)
(0, 0, 1)
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x1*
*
2
11
11
2
11
Minimum expected
payoff
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y2* (4 6 x1 )
5 x1 )
y3* (3 5 x1 )
11
11
Also y y
So y1* 0, y2*
*
1
*
2
y1*
11
y2*
11
y3*
11
*
3
y 1
5 and y *
3
11
11
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xm
yn
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subject to
p11 x1 p21 x2 ...
pm1 xm
xm
p12 x1
p22 x2 ...
pm 2 xm
xm
p1n x1
p2 n x2 ...
pmn xm
xm
...
x1
and
xi
x2 ... xm
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subject to
p11 y1 p12 y2 ...
p21 y1
p22 y2 ...
pm1 y1
pm 2 y2 ...
p1n yn
yn
p2 n yn
yn
...
yn
pmn yn
y1
y2 ...
yj
yn
and
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Duality
Player 2 LP problem and player 1 LP problem are dual
to each other.
Optimal mixed strategies for both players can be found
by solving only one of the LP problems.
Duality provides simple proof of the minimax theorem.
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Example
Consider again variation 3 after dominated strategy 3
for player 1 is eliminated.
Maximize x3
subject to
5 x1
x3
2 x1 4 x2
2 x1 3x2
x1
and
x1
x2
x3
x3
0
0
0, x2
0
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Example
Applying the simplex method to this LP problem (after
adding the constraint x3 0) yields:
x1*
11
, x2*
11
, x3*
11
y1*
0, y2*
5 , y*
11 3
11
, y4*
11
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Extensions
Two-person, constant-sum game: sum of payoffs to
two players is fixed constant (positive or negative)
regardless of combination of strategies selected.
N-person game, e.g., competition among business
firms, international diplomacy, etc.
Nonzero-sum game: e.g., advertising strategies of
competing companies can affect not only how they will
split the market but also the total size of the market
for their competing products. Size of mutual gain (or
loss) for the players depends on combination of
strategies chosen.
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Extensions
Nonzero-sum games classified in terms of the degree
to which the players are permitted to cooperate.
Noncooperative game: there is no preplay
communication between players.
Cooperative game: where preplay discussions and
binding agreements are permitted.
Infinite games: players have infinite number of pure
strategies available to them. Strategy to be selected
can be represented by a continuous decision variable.
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Conclusions
General problem of how to make decisions in a
competitive environment is a very common and
important one.
Fundamental contribution of game theory is a basic
conceptual framework for formulating and analyzing
such problems in simple situations.
Research is continuing with some success to extend
the theory to more complex situations.
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