GAME THEORY
Game theory is a theoretical frame work to conceive social situations among
competing players and produce optimal decision-making of independent and
competing actors in a strategic setting.
The key term commonly used to study game theory.
Game: any set of circumstance that has a result dependant on the action of
two or more decision-makers (players).
Player: a strategic decision-maker within the context of game.
Strategy: a complete plan of action a player will take given the set of
circumstance that might arise within the game.
Payoff: the payout a player receives from arriving at a particular outcome.
( payout can be any quantifiable form from dollar to utility).
Equilibrium: the point in a game where both players have made the
decisions and an out came is reached.
Rationality: a player is said to be rational if he seeks to play in manner
which maximizes his own pay off.
Nash equilibrium: is a set of strategy given what the other player, such that
no player has incentive to change his or her own payoff.
TYPES OF GAME THEORY
There are different types of game in game theory. These games help to analysis
different problems.
The different games are formed on the basis of number of player involved
in game, symmetry of the game and cooperation among players
There is symmetric/asymmetric, simultaneous/sequential, normal
form/extensive form, constant sum, zero sum, non- zero sum games. Out of
all of them cooperative and non cooperative game theories are most
common.
1 symmetric/ asymmetric
Symmetric game: is a game where there are identical strategy sets for both
players.
In symmetric game the payoff for playing a particular strategy depends only on
the other strategies employed not on who is playing them.
Asymmetric game is game where there are not identical strategic sets for
both players.
2 simultaneous/sequential
A simultaneous: game is a game where one player chooses his action
without knowledge of the actions chosen by other players.
Normal form representations are usually used for simultaneous game.
Example prisoner dilemma, rock-paper-scissors
A sequential game: is a game where one player chooses his action before
the other choose theirs. Importantly, the later players must have some
information of the first choice. Otherwise, the difference in time would
have no strategic effect.
Extensive form representation usually used for sequential games.
Example a game of Chess, salary negations between employer and employee
3 Normal form and Extensive form games
Normal form games: refers to the description of game in the form of
matrix.
This means when the payoff and strategies of a game are represented in a
tabular form.
It helps us to identifying the dominated strategies and Nash Equilibrium.
Extensive form: refers the description of game is done in the form of
decision tree.
It helps us to representation of events that can occur by chance.
4 constant -sum, zero- sum and non-zero sum game
Constant sum game is the one in which the sum of out came of all the
players remains constant even in the outcomes are different.
Zero-sum game is type of constant sum game in which the sum of out came
of all players is zero.
In zero sum game the strategies of different players can not affect the available
resources.
In this game the gains of one player is always equal to the loss of the other player.
Example chess and gambling
In other hand non -zero sum game are the games in which the sum of the
outcome of all the players not zero.
5 cooperative and non cooperative
Cooperative game theory: deals with how coalitions or cooperative
groups, interact when only the pay off are known. It is a game between
coalitions of players rather than between individuals, and it is questions
how groups form and how they allocate the payoff among players.
Non cooperative game theory: deals with how rational economic
agents deal with each other to achieve their own goals.
The most common cooperative game is the strategic game, in which the
available strategies and the outcomes that result from a combination of
choices are listed
Example of non cooperative game is rock-paper-scissors.
EXAMPLE OF GAME THEORY
1 Advertisement : two companies share market in which they currently
make $5,000,000 each. Both need to determine whether they should advertise
for each company advertising costs$2,000,000 and capture $3,000,000 from the
competitor provided the competitor does not advertise what should the
companies do?
Solution let’s call the two companies A and B if both advertise both low their
gain to $3,000,000 if A advertise ,but B does not A gets $6,000,000 and B gets
only $2,000,000 and conversely if B advertise and A does not. The payoff is shown
in the following table. The numbers are in million dollars. The row
corresponding to the options of player A and the columns corresponding to the
option of player B. the entries are payoff for A and B respectively.
B advertise B does not advertise
A advertise 3,3 6,2
A does not advertise 2,6 5,5
From the example the best result for both companies are dose not advertise their
market.
2 the prisoner’s dilemma: consider the example of two criminals arrested
for a crime. Prosecutors have no hard evidence to convict them. However to gain
a confession, officials remove the prisoners from their solitary cells and question
each other. Officials four deals.
Solution
If both confess(C) they will each receive five years prison sentence
If both remain silent(S) they will receive two year
If prisoner1 confess but, prisoner2 remain silent, prisoner1 gets three year and
prisoner2 gets ten year and conversely if prisoner 2 confess and prisoner1 does
not. Let’s show in a matrix form to understand easy
Prisoner2
confess Remain silent
confess 5,5 3,10
Remain silent 10,3 2,2
Prisoner1
In the prisoners dilemma the most favorable is to not confess.
Example 3 assume Ann and Beth are playing rock-scissors-paper
for one dollar then the payoff matrix is
rock scissors paper
rock 0 1 -1
scissors -1 0 1
paper 1 -1 0
The first cell says “0”, which stands for “0”,”0” a payoff of 0 for
both players the second cell entry of “1” should be read as
“1’,1”,a payoff of 1 for Ann which has to be paid by Beth, there
for a payoff of -1 for Beth.
