LECTURE CONDUCTED BY APOORVA SRIVASTAVA FOR BBA GLOSSARY Serial Number 1.

Game Theory Reference Details The modeling of economic decisions by games whose outcome depends on the decisions taken by two or more agents, each having to make decisions without information on what choices the others are making. Game Theory distinguishes between one-off games and repeated games, where reputation established through earlier games affects the conduct of subsequent ones. It also distinguishes between zero-sum games, where the game affects only the distribution of a given total of resources, positive-sum games, where some players can gain more than others lose, and negative-sum games, such as fighting over resources, where the game itself can decrease the amount available to be shared. Game Theory is widely used in analyzing both industrial organization and economic policy. The use of a random

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Mixed Strategy

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Nash Equilibrium

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Zero-Sum Game

mixture of strategies. The choice between two or more strategies on any particular occasion depends on using some randomizing device has been used. The benefit of adopting a mixed strategy is to make it impossible for any opponent to predict a players actions with certainty, however well they understand the players psychology. A situation is which two or more agents are taking decisions on their strategies, where no agent can gain by any change in their strategy given the strategies currently being pursued by the others. Such a noncooperative equilibrium is usually not Pareto Optimal, and could be improved on by some form of co-operation. A game in which the participants are determining the distribution of a fixed cost of costs or benefits between them. Market shares, for example, sum to 100 percent by definition, so one firms gain is another firms loss.

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Competitive Game

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Dominance

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Game

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Maximin- Minimax Principle

Zero-sum game are contrasted with positive-sum games, where gains for all participants are possible, for example, international trade, and with negative-sum games, where the contest reduces the prize, for example was over the possession of resources. A competitive situation with a finite number of competitors with conflicting interests and where the action of one depends upon the actions take n by the other. One of the strategies of either player may be inferior to at least one of the remaining ones. The superior strategies are said to dominate the inferior one. A procedure that is used to reduce the size of the game. Situation of conflict between two or more players. Situation of conflict between two or more players. The maximum of minimum gains is maximin value of the game and the corresponding strategy is the maximin strategy. In a similar way, the minimum of the

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Mixed Strategy

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N-Person Game Pay-of Matrix

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Rules of Dominance

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Saddle Point

maximum losses will be called the minimax value of the game and the corresponding strategy is the minimax strategy. - When the maximin value is equal to minimax principle which guarantees the best of the worst results. In a game without saddle point, the optimal policy is to use mixed strategies, i.e., to use some optimal combination of available strategies. A game involving n persons. Is a tabular representation payments that should be made at the end of a game. - A rectangular arrangement of payoffs for different pairs of game strategies, arranged in columns and rows. 1. If all the elements in a column are greater than or equal to the corresponding elements in another column, then that column is dominated. 2. If all the elements in a row are less than or equal to the corresponding in another column, then that column is dominated. - A Saddle Point of a payoff matrix is that position in the matrix where the maximum of row maxima is equal to

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Strategy

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Two-Person, Zero-Sum Game

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Zero-sum Game

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Co-operative Games

the column minima. The payoff at the saddle point is called the value of the game and the corresponding strategies are the pure strategies. The number of competitive actions(choices or alternatives) that are called strategies to that player. Zero Sum Games with two players( competitors) are called two-person, zero-sum or rectangular games. In this case, the gains( loss) of one player is exactly equal to the loss( gain) of the other. Games with the algebraic sum of gains and losses of all the players equal to zero, i.e. losses for one player equal the gains for the other player. The players are assumed to be rational to realize that it is mutually advantageous to cooperate on any and every action which is likely to benefit at least one of the players without affecting the others adversely. While in a non-cooperative game there is no communication between the participants and there is no way to reach or enforce agreements.

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Non-cooperative Games

The most popular form of a non-cooperative game is known as the Prisoners Dilemma. Expansion of the original prisoners dilemma is likely to be helpful in understanding the behavior of firms faced with uncertainty about their rivals actions.

LECTURE CONDUCTED BY APOORVA SRIVASTAVA FOR MBA-EFT-102

LECTURE CONDUCTED BY APOORVA SRIVASTAVA FOR MBA-EFT-102 SUMMARY 1. Oligopolies would like to reach to monopoly outcome, but doing so requires cooperation, which at times is difficult to maintain. 2. Game Theory is the study of how people behave in strategic situations. By strategic, we mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action. Because the number of firms in an oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce. In making its production decision, each firm in an oligopoly should consider how its decision might affect the production decisions of all the other firms. Game Theory is not necessary for understanding competitive or monopoly markets. In a competitive market, each firm is so small compared to the market that strategic interactions are absent because the market has only one firm. Game Theory is quite useful for understanding the behavior of oligopolies. A particularly important game is called the prisoners dilemma. This game provides insight into the difficulty of maintaining cooperation. Many times in life, people fail to cooperate with one another even when cooperation would make them all better off. An oligopoly is just one example. The story of the prisoners dilemma contains a general lesson that applies to any group trying to maintain among its members. Prisoners Dilemma The Prisoners Dilemma is a story about two criminals who have been captured by the police. Lets call them B and C. The police have enough evidence to convict B and C. The police have enough evidence to convict a bank robbery together, but they lack hard evidence to convict them of this major crime. The police question B and C in separate rooms, and they offer each of them the following deal: Right now, we can look up for 1 year. If you confess to the bank robbery and implicate your partner, however, well give you immunity and you can go free. Your partner will get 20 years in jail. But if you confess to the crime, we wont need your testimony and we can avoid the cost of a trial, so you will each get an intermediate sentence of 8 years. If B and C, heartless bank robbers that they are, care only about their own sentences, what would you expect them to do? Would you confess or remain silent?

LECTURE CONDUCTED BY APOORVA SRIVASTAVA FOR MBA-EFT-102 Each prisoner has two strategies: confess or remain silent. The sentence each prisoner gets depends on the strategy he or she chooses and the strategy chosen by his or her partner in crime. Consider first Bs decisions. She reasons as follows: I dont know what C is going to do. If he remains silent, my best strategy is to confess, since then Ill go free rather than spending a year in jail. If he confesses, my best strategy is still to confess, since then Ill spend 8 years in jail rather than 20. So regardless of what C does, I am better off confessing. In the language of game theory, a strategy is called a dominant strategy if it is the best strategy for a player to follow regardless pursued by other players. In this case, confessing is a dominant strategy for B. she spends less time in jail if she confesses, regardless of whether C confesses or remains silent. Now consider Cs decision. He faces exactly the same choices as B, and he reasons in much the same way. Regardless of what B does, C can reduce time in jail by confessing. In other words, confessing is also a dominant strategy for C. In the end, not B and C confess, and both spend 8 years in jail. Yet from their standpoint, this is a terrible outcome. If they had both remained silent, both of them would have been better off, spending only 1 year in jail on the gun charge. By each pursuing his or her own interests the prisoners together reach outcome that is worse for each of them. To see how difficult it is to maintain cooperation, imagine that, before the police captured B and C, the two criminals had made a pact not to confess. Clearly, this agreement would make them both better off if they both live up to it because they would each spend only 1 year in jail. But would the two criminals if fact remain silent simply because they had agreed to? Once they are being questioned separately, the logic of self-interest take over and leads them to confess. Cooperation between the two prisoners Is difficult to maintain because cooperation is individually irrational. 3. A game is a competitive situation where players pursue their own interests and no player is in a position to dictate the outcome. These games can be cooperative(where players can get in touch with each other and arrive at binding contracts) or can be noncooperative(where players cannot communicate with each other and collude. 4. Payoff Matrix contains the outcomes of the pair of strategies in a two-person game, 5. Two-person zero-sum game have a saddle point if the optimal strategies for other players have the same value. These are pure strategy games, since each player should always play a single strategy. Games without saddle point require mixed strategies-randomly

selecting a strategy in accordance with optimal proportions. The analysis of 2*m pure strategy games and 2*2 mixed strategy games has been described. Mixed Strategies have been covered as situations where the saddle point does not exist. The principle of dominance and its importance in reducing the size of a games payoff matrix has been dealt with. The algebraic solution giving the mixed strategies for the players and the value of the game has been derived. 6. Although the applications of game theory in business have been quite limited, the concepts of maxi min, mixed strategies, game value, and game classes shed lights on the competitive situations facing managers. 7. In a two-person game, if the gain of A is the loss of B, it is called zero sum. A game may have a saddle point where maxi min of row-columns. The pure strategies of A or B will be decided by that point. In case there is no saddle point the strategies will be mixed. 8. If there is no saddle point, then if possible reduce the size of the game by using the dominance rules. 9. In case a dominating column or rows and the matrix can be reduced to a 2*n or m*2, the problem can be solved graphically. 10. A general linear programming model also has been explained