STUDY THE GAME THEORY WITH RESPECT TO

MANAGERS IN PRACTICE

A project submitted in partial fulfilment of the course

MANAGERIAL ECONOMICS, 3rd SEMESTER during the
academic year 2017-2018

SUBMITTED BY:
SHREYA SINHA
ROLL NO.- 1648
B.B.A. LL.B.

SUBMITTED TO:
Dr. MANOJ MISHRA
FACULTY OF MANAGERIAL ECONOMICS

OCTOBER, 2017
CHANAKYA NATIONAL LAW UNIVERSITY, NAYAYA
NAGAR, MEETHAPUR, PATNA-800001
 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the BB.A. LL.B (Hons.) Project Report entitled
STUDY THE GAME THEORY WITH RESPECT TO MANAGERS IN PRACTICE
submitted at Chanakya National Law University, Patna is an authentic record of my work
carried out under the supervision of Dr. Manoj Mishra. I have not submitted this work
elsewhere for any other degree or diploma. I am fully responsible for the contents of my
Project Report.

(Signature of the Candidate)

SHREYA SINHA
Chanakya National Law University, Patna
3/10/2017

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 ACKNOWLEDGEMENT

IF YOU WANT TO WALK FAST GO ALONE

IF YOU WANT TO WALK FAR GO TOGETHER
A project is a joint endeavor which is to be accomplished with utmost compassion, diligence
and with support of all. Gratitude is a noble response of ones soul to kindness or help
generously rendered by another and its acknowledgement is the duty and joyance. I am
overwhelmed in all humbleness and gratefulness to acknowledge from the bottom of my
heart to all those who have helped me to put these ideas, well above the level of simplicity
and into something concrete effectively and moreover on time.
This project would not have been completed without combined effort of my revered
Managerial Economics teacher Dr. Manoj Mishra whose support and guidance was the
driving force to successfully complete this project. I express my heartfelt gratitude to him.
Thanks are also due to my parents, family, siblings, my dear friends and all those who helped
me in this project in any way. Last but not the least; I would like to express my sincere
gratitude to our Managerial Economics teacher for providing us with such a golden
opportunity to showcase our talents. Also this project was instrumental in making me know
more about the Study of game theory with respect to managers in practice. This project
played an important role in making me understand more about the use of game theory by the
managers. It was truly an endeavour which enabled me to embark on a journey which
redefined my intelligentsia, induced my mind to discover the intricacies involved in the
competency of the people in the use of game theory.

Moreover, thanks to all those who helped me in any way be it words, presence,
Encouragement or blessings...

- Shreya Sinha
- 3rd Semester
- B.BA LL.B

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 TABLE OF CONTENTS

Declaration.i

Acknowledgement.ii

Table of Contents.iii

Aims and Objectives.iv

Research Methodology.iv

Limitationsiv

Review of Literature.iv

1. Introduction.1-7

2. Different Strategies...8-13

3. Types of Games..14-17

4. Application of Game Theory..18-19

5. Case Study......20-21

6. Findings & Suggestions...22

7. Conclusion....23

Bibliography...24

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 AIMS AND OBJECTIVES

With this project the researcher intends to:

1. Study the transfer of property. (Section 5 of the TP Act)
2. Study the Study the game theory with respect to managers in practice. (Section 7 of
the TP Act)
3. Compare the competency of transfer with other laws.

RESEARCH METHODOLOGY

The researcher has used the doctrinal method of research in the completion of this project on
Study the game theory with respect to managers in practice. The sources are mentioned in
the review of literature.

LIMITATIONS

The presented research is confined to a time limit of one month and this research contains
only doctrinal works which are limited to library sources.

REVIEW OF LITERATURE

The researcher intends to examine the secondary sources in thus project. The secondary
sources include books, websites, photographs, articles, e-articles and reports in appropriate
form, essential for this study.

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 INTRODUCTION

In times of uncertainty, game theory should come to forefront as a strategic tool, for it offers
perspectives on how players might act under certain circumstances, as well as other kinds of
valuable information for making decisions. Yet many managers are wary of game theory,
suspecting that its more theoretical than practical. When they do employ this discipline, its
often misused to provide a single, overly precise answer to complex problems. Game theory
can provide timely guidance to managers as they tackle difficult and, sometimes,
unprecedented situations. The key is to use the discipline to develop a range of outcomes
based on decisions by reasonable actors and to present the advantages and disadvantages of
each option. Our model shifts game theory from a tool that generates a specific answer to a
technique for giving informed support to managerial decisions.1
A game represents a competitive or conflicting situation between two or more players. Each
player has a number of choices, called moves (or pure strategies). A player selects his moves
without any knowledge of the moves chosen by the other players. The simultaneous choices
of all players lead to the respective payoffs of the game. If the sum of the payoffs to all
players is zero, then it is called a zero-sum game. A game played by n persons is called an n-
person game. We shall consider only two-person zero-sum games, which are also called
matrix games because the gain of one player signifies an equal loss to the other that it suffices
to express the outcomes (as a result of the selection of moves) in terms of the payoffs to one
player (player I) in a matrix. A strategy for a given player (I or II) is a plan that specifies
which of the available choices he should made with what probabilities. Hence a strategy for
player I is the specification of xi(xi 0, Pxi = 1) and for player II, yj (yj 0, Pyj = 1). A
strategy is generally a mixed strategy to distinguish it from a pure strategy in which xi (or yj )
is 1 for some i (or j) and all other xk (or yk) being 0, k 6= i, j. Furthermore, we explicitly
adopt the rationality assumptions about the players, who are then assumed to be
intelligent players that act so as to maximize his expected payoff (or minimize his expected
loss).2 Game theory deals with the determination of the optimal strategies for each player.
In view of the conflicting nature and lack of information about the specific strategies selected
by each player, optimality is based on a rather conservative criterion, namely, each player
selects his strategy (mixed or pure) which guarantees a payoff that can never be worsened by

1
http://forum4researchers.com/cw_admin/docs/IJIRP-MAR-14-05.pdf
2
http://web.hku.hk/~schu/game.pdf

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the selections of his opponent. This criterion is known as the minimax criterion (or
maximin criterion).
1. Stable game
Consider the following (two-person zero-sum) game matrix which represents the payoff to
player I.

Player I, by playing his first (pure) strategy guarantees a gain of at least 2 = Min {8, 2, 9, 5}.
Similarly the second strategy guarantees at least 5 = Min {6, 5, 7, 8}, and the third, 4 = Min
{7, 3, 4, 7}. Thus the row minimum is the value guaranteed I for each pure strategy.
Player I, if he selects strategy 2, is maximizing his minimum (guaranteed) gain. Hence this
selection is called the maximin strategy and the corresponding gain (= 5) is called the
maximin (or lower ) value of the game. A completely analogous consideration for player II
indicates that he will be interested in the column maximum and that he seeks to minimize
the column minimum by using the minimax strategy leading to a minimax (or upper ) value
of the game. The selections made by I and II are based on the so-called maximin (minimax )
criterion. The criterion expresses a conservative attitude which guarantees the best of the
worst results. For any matrix game, the minimax (upper) value is greater than or equal to the
maximin (lower) value. In the case when equality holds, that is, minimax value = maximin
value, the corresponding pure strategies are called the optimal strategies and the game is
said to be a stable game, which possesses a saddle point that equals to this common value
called the value of the game.3

2. Unstable game
In general, the value of the game must satisfy the inequality, maximin value value of the
game minmax value . The existance of a saddle point immediately yields the optimal pure

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strategies for the game. However, there are unstable games where such a saddle point does
not exist. Consider the very simple game of coin-matching. Each player selects either a head
(H) or a tail (T). If the outcomes match (i.e. H, H or T, T), I wins $1 form II, otherwise II
wins $1 from I. The matrix of the game is

Optimal solution to such games requires each player to use a mixture of pure strategies, or
mixed strategies.

3. Mixed strategies
Each player, instead of selecting pure strategies only, may play all his strategies according to
a predetermined set of ratios. Let xi , i = 1, 2, , m and yj , j = 1, 2, , n be the row and
column ratios representing the relative frequencies by which I and II, respectively, select their
pure strategies.4 Then

We can think of xi and yj as probabilities (generated by some random mechanism) by which I

and II select their i th and j th pure strategies, respectively. The solution of the mixed strategy
problem is based also on the minimax criterion. The only difference is that I selects the ratios
xi (instead of the pure strategies i) which maximize the minimum expected payoff in a
column, while II selects the ratios yj (instead of pure strategies j) which minimize the

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maximum expected payoff in a row. Mathematically, player I selects xi(xi 0, Pxi = 1)
which will yield

And player II selects yj (yj 0, Pyj = 1) which will yield

These values are referred to as the maximin and minimax expected payoffs, respectively. As
in the pure strategies case, the relationship,
Maximin expected payoff Minimax expected payoff,
holds in general. When x i and y i correspond to the optimal solution, the above relation
holds in equality sense and the resulting expected values become equal to optimal expected
value of the game. (This is known as the Minimax Theorem in Game Theory, which we shall
see the justification using duality of linear programming later.) Now if x i and y j are the
optimal solutions, then each payoff element aij will be associated with the probability (x i ,
y j ). Thus, if v denotes the optimal expected value of the game, then

4. (2 2) unstable game
Consider the following (2 2) game in which we assume there is no saddle point.

Player Is expected payoffs corresponding to the pure strategies of II are given by

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Since the optimal x 1 and x 2 have been chosen to make Is mixture of moves optimal
against any of the two possible IIs moves, the two expected payoffs for I must be equal if x
1 and x 2 are optimal.

Hence we have
(a11 a21)x 1 + a21 = (a12 a22)x 1 + a22 ,
from which x 1 (and x 2 = 1 x 1 ) can be determined. A similar analysis for II leads to
(a11 a12)y 1 + a12 = (a21 a22)y 1 + a22 ,
from which y 1 (and y 2 = 1 y 1 ) can be determined.5

5. Graphical solution of (2 n) and (m 2) games

Consider a game in which one of the player (say I) has avaiable to him only two pure
strategies. This is then a (2 n) game as follows:

It is assumed that the game does not have a saddle point. As before, the expected payoffs to I
corresponding to IIs pure strategies are

According to the minimax criterion, player I should select the value of x1 so as to maximize
his minimum expected payoffs. This may be done by plotting the straight lines of expected
payoffs as functions of x1. Typically, we have

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Each line is numbered according to its corresponding IIs pure strategy. The lower envelope
of these lines give the minimum expected payoff as a function of x1:
Lower envelope (x1) = Min[(a11 a21)x1 + a21, - ,(a1n a2n)x1 + a2n] .
The highest point in this lower envelope then gives the maximum of the minimum expected
payoff and hence the optimal value of x1(= x 1 ), with optimal value of the game:
v = Max x1 { Min[ (a11 a21)x1 + a21, ,(a1n a2n)x1 + a2n ]}
The optimal y j for II can be obtained by observing that y j have been chosen to make IIs
mixture of moves optimal against any of the possible strategies of I. Hence

We claim that all lines {(a1j a2j )x1 + a2j} that do not pass through the maximin point must
have their corresponding y j = 0. (Why? Hint: Py j = 1, y j 0.) Because the maximin
point is determined by the intersection of two straight lines (if more than two, can be any two
with opposite slopes), we have the important result that any (2 n) game is basically
equivalent to a (2 2) game because only two of the n moves are effective. For notational
simplicity, assume the first two pure strategies of II are effective. Now, the expected payoffs
(loss) to II corresponding to Is pure strategies are

Typically the situation is as follows:

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Of course, algebraically, this intersection can also be obtained by solving the two linear
equations for y1.
The (m 2) games are treated similarly as in the (2 n) games except that IIs optimal
strategies y j , j = 1, 2, are first determined using the minimax criterion. This automatically
determines the two effective strategies for I, from which the application of maximin criterion
determines the optimal x i , i = 1, 2, , m. (Note the close connection of having only two
(positive) effective strategies with the number of positive entries for a BFS in an linear
program.)6

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 DIFFERENT STRATEGIES

In the game theory, different players adopt different types of strategies on the basis of the
outcome, which is obtained by adopting the strategy.
For instance, the player may adopt a single strategy every time as it provides him/her
maximum outcome or he/she can adopt multiple strategies.
Apart from this, a player may also adopt a strategy that provides him/her minimum loss.
Therefore on the basis of outcome, the strategies of the game theory are classified as pure and
mixed strategies, dominant and dominated strategies, minimax strategy, and maximin
strategy.
1. Pure and Mixed Strategies:
In a pure strategy, players adopt a strategy that provides the best payoffs. In other words, a
pure strategy is the one that provides maximum profit or the best outcome to
players. Therefore, it is regarded as the best strategy for every player of the game.
This is because if both of them increase the prices of their products, they would earn
maximum profits. However, if only one of the organization increases the prices of its
products, then it would incur losses. In such a case, an increase in prices is regarded as a pure
strategy for organizations ABC and XYZ.
On the other hand, in a mixed strategy, players adopt different strategies to get the possible
outcome. For example, in cricket a bowler cannot throw the same type of ball every time
because it makes the batsman aware about the type of ball. In such a case, the batsman may
make more runs.7
However, if the bowler throws the ball differently every time, then it may make the batsman
puzzled about the type of ball, he would be getting the next time.
Therefore, strategies adopted by the bowler and the batsman would be mixed strategies,
which are shown ion Table

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In the Table, when the batsmans expectation and the bowlers ball type are same, then the
percentage of making runs by batsman would be 30%. However, when the expectation of the
batsman is different from the type of ball he gets, the percentage of making runs would
reduce to 10%. In case, the bowler or the batsman uses a pure strategy, then any one of them
may suffer a loss.
Therefore, it is preferred that bowler or batsman should adopt a mixed strategy in this case.
For example, the bowler throws a spin ball and fastball with a 50-50 combination and the
batsman predicts the 50-50 combination of the spin and fast ball. In such a case, the average
hit of runs by batsman would be equal to 20%.8
This is because all the four payoffs become 25% and the average of four combinations
can be derived as follows:
0.25(30%) + 0.25(10%) + 0.25(30%) + 0.25(10%) = 20%
However, it may be possible that when the bowler is throwing a 50-50 combination of spin
ball and fastball, the batsman may not be able to predict the right type of ball every time. This
would decrease his average run rate below 20%. Similarly, if the bowler throws the ball with
a 60-40 combination of fast and spin ball respectively, and the batsman would expect either a
fastball or a spin ball randomly. In such a case, the average of the batsman hits remains 20%.
The probabilities of four outcomes now become:
Anticipated fastball and fastball thrown: 0.50*0.60 = 0.30
Anticipated fastball and spin ball thrown: 0.50*0.40 = 0.20
Anticipated spin ball and spin ball thrown: 0.50*0.60 = 0.30
Anticipated spin ball and fastball thrown: 0.50*0.40 = 0.20
When we multiply the probabilities with the payoffs given in Table-2, we get
0.30(30%) + 0.20(10%) + 0.20(30%) + 0.30(10%) = 20%
This shows that the outcome does not depends on the combination of fastball and spin ball,
but it depends on the prediction of the batsman that he can get any type of ball from the
bowler.
2. Dominant and Dominated Strategies:
A dominant strategy is the one that is best for an organization (player) and is not influenced
by the strategies of other organizations (players). Let us understand the dominant strategy

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with the help of the example given in Table-1. Suppose organizations ABC or XYZ adopt a
dominant strategy.
In such a case, their payoff matrix is shown in Table

As shown in Table, when ABC is not making any change in prices, then XYZ has also not
changed its prices. This would results as the best strategy of XYZ. However, when ABC has
increased its prices, then XYZ would earn profit of Rs. 300 crores by keeping its prices
constant. When XYZ increases its prices, it would earn Rs. 500 crores.
Therefore, it is better for XYZ to make its price constant so that it can earn more. The
dominant strategy- for XYZ is to keep the prices of its products constant. On the other hand,
the dominant strategy- of ABC would also be to keep the price constant. This is because ABC
would incur losses if it increases the prices of its products.
While analyzing games, the player who has adopted the dominant strategy is identified and
then the strategies of other players in the game are judged on the basis of the dominant
strategy. However, the existence of the dominant strategy in every game is not possible.
On the other hand, a dominated strategy is the one that provides players the least payoff as
compared to other strategies in a game. In the analysis of the game theory, dominated
strategies are identified so that they can be eliminated from the game. Let us understand the
dominated strategy with the help of an example.
Suppose in a football match, the aim of offense team is to maximize its goals, while that of
defense team is to minimize the offenses goal. Now, assume that there are only two plays
left and the ball is with the offense team.9
In this case, the offense team would adopt two strategies; one is to run and another is to pass.
On the other hand, the defense team would have three strategies; one is to defend against
running, defend against pass through line-backers and defend against pass through
quarterback blitz.
Table shows the outcomes of the strategies adopted by offense and defense team:

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In Table, the numerical value represents the goals made by the offense team. In this case,
neither offense nor defense team have a dominant strategy. However, the defense team does
have one dominated strategy that is quarterback blitz.
Either in case of defending run or pass, quarterback blitz strategy would yield more goals to
the offense team. Therefore, the defense team should avoid quarterback blitz strategy.
Dominated strategy helps in making the analysis of game easier by reducing the number of
options.
3. Maximin Strategy:
As we know, the main aim of every organization is to earn maximum profit. However, in the
highly competitive market, such as oligopoly, organizations strive to reduce the risk factor.
This is done by adopting the strategy that increases the probability of minimum outcome.
Such a strategy is termed as maximin strategy.
In other words, maximin strategy is the one in which a player or organization maximizes the
probability of minimum profit so that the degree of risk can be reduced. Let us understand the
maximin strategy with the help of an example. Suppose two organizations, A and B, want to
launch a new product in a duopoly market.
The outcomes for these two organizations are shown in Table

In Table, it is assumed that the main motive of both the organizations is to maximize their
profits. Let us first analyze the outcome of organization B. Organization B would earn profit
of Rs. 4 crores when both the organizations, A and B, launch a new product However, if only
organization A launches a new product, then the profit of organization B would be Rs. 6
crores.10

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However, if organization B launches a new product, then it would earn profit of Rs. 4 crores.
Therefore, the minimum gain of organization B is Rs. 4 crores after launching a new product.
Similarly, the minimum gain of A is Rs. 4 crores by launching a new product. Maximin
strategy is not used only for profit maximization problems, but it is also used for restricting
the unrealistic and highly unfavorable outcomes.
For applying the maximin strategy, firstly, an organization needs to identify the minimum
output or profit that it would get from a particular strategy. Table-5 shows that the minimum
output for organization A is Rs. 6 crores when it does not launch a new product. However, if
it launches a new product, the minimum output would be Rs. 4 crores.
On the other hand, organization B also has the same amount of profit in both the cases. Now,
both the organizations, A and B, would find out the strategy that would yield them maximum
of the minimum output. In the present case, for both the organizations, A and B, it would be
better if they do not launch any new product to yield maximum profit.
4. Minimax Strategy:
Minimax strategy is the one in which the main objective of a player is to minimize the loss
and maximize the profit. It is a type of mixed strategy. Therefore, a player can adopt multiple
strategies. It can be applied to complex as well as simple decision-making process. Let us
understand the minimax strategy with the help of an example.
Suppose Mr. Ram wants to manufacture cream biscuits. For this, he selected three flavors,
namely strawberry, chocolate, and pineapple, which he denoted with A, B, and C respectively
He wants to select one of the flavors to produce cream biscuits and introduce them in the
market on the basis of their demand.
He needs to predict the future events that can occur from the options he has selected. These
future events are termed as the states of nature in decision analysis. The states of nature
selected by Ram with respect to demand are high demand, medium demand, and low
demand.11
The payoff matrix for biscuits is shown in Table:

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Here, we are assuming that Mr. Ram adopts minimax strategy. Now, if he selects strategy A
in a high demand market, then he would incur a loss of Rs. 150000. This is because he has
not selected the strategy B that would yield maximum payoff of Rs. 550000.
In such a case, he would determine the maximum loss for each alternative and then select the
alternative that would give minimum loss. Among each state of nature, the highest payoff is
selected and subtracted from all other values in the state of nature.
Table shows the loss or regret values of A, B, and C strategies:

In Table, the maximum regret in each state of nature is highlighted with blue color. Among
the highlighted regret values, strategy C has the least regret value of Rs. 120000. Therefore,
Ram would select the strategy- C or pineapple flavour to produce biscuits.

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 TYPES OF GAMES

In the game theory, different types of games help in the analysis of different types of
problems.
The different types of games are formed on the basis of number of players involved in a
game, symmetry of the game, and cooperation among players.
1. Cooperative and Non-Cooperative Games:
Cooperative games are the one in which players are convinced to adopt a particular strategy
through negotiations and agreements between players. Let us take the example cited in
prisoners dilemma to understand the concept of cooperative games. In case, John and Mac
had been able to contact each other, then they must have decided to remain silent. Therefore,
their negotiation would have helped in solving out the problem.
Another example can be cited for pan masala organizations. Suppose pan masala
organizations have high ad-expenditure that they want to reduce. However, they are not sure
whether other organizations would follow them or not.
This creates a situation of dilemma among pan masala organizations. However, the
government restricts the advertisement of pan masala on televisions. This would help in
reducing the ad-expenditure of pan masala organizations. This is an example of cooperative
game.
However, non-cooperative games refer to the games in which the players decide on their own
strategy to maximize their profit. The best example of a non-cooperative game is prisoners
dilemma. Non-cooperative games provide accurate results. This is because in non-
cooperative games, a very deep analysis of a problem takes place.12
2. Normal Form and Extensive Form Games:
Normal form games refer to the description of game in the form of matrix. In other words,
when the payoff and strategies of a game are represented in a tabular form, it is termed as
normal form games. Normal form games help in identifying the dominated strategies and
Nash equilibrium. In normal form games, the matrix demonstrates the strategies adopted by
the different players of the game and their possible outcomes.
On the other hand, extensive form games are the one in which the description of game is done
in the form of a decision tree. Extensive form games help in the representation of events that

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can occur by chance. These games consist of a tree-like structure in which the names of
players are represented on different nodes.
In addition, in this structure, the feasible actions and pay offs of each players are also given.
Let us understand the concept of extensive form games with the help of an example. Suppose
organization A wants to enter a new market, while organization B is the existing organization
in that market.
Organization A has two strategies; one IS to enter the market and challenge to survive or do
not enter the market and remain deprived of the profit that it can earn. Similarly, organization
B also has two strategies either to fight for its existence or to cooperate with organization A.
Figure-2 shows the decision tree for the present situation:

In Figure-2, organization A takes the first step that would be followed by organization B later
on. In case, organization A does not enter the market, then its payoffs would be zero.
However, if it enters the market, the market situation would be totally dependent on
organization B.
If they both get into the price war, then both of them would suffer the loss of 3. On the other
hand, if organization B cooperates, then both of them would earn equal profits. In this case,
the best option would be that organization A enters the market and organization B
cooperates.13
3. Simultaneous Move Games and Sequential Move Games:
Simultaneous games are the one in which the move of two players (the strategy adopted by
two players) is simultaneous. In simultaneous move, players do not have knowledge about
the move of other players. On the contrary, sequential games are the one in which players are
aware about the moves of players who have already adopted a strategy.

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However, in sequential games, the players do not have a deep knowledge about the strategies
of other players. For example, a player has knowledge that the other player would not use a
single strategy, but he/she is not sure about the number of strategies the other player may use.
Simultaneous games are represented in normal form while sequential games are represented
in extensive form.
Let us understand the application of simultaneous move games with the help of an example.
Suppose organizations X and Y want to minimize their cost by outsourcing their marketing
activities. However, they have a fear that outsourcing of marketing activities would result in
increase of sale of the other competitor. The strategies that they can adopt are either to
outsource or not to outsource the marketing activities.
The payoff matrix for the two organizations is shown in Table-10:

In Table-10, it can be seen that both the organizations X and Y are unaware about the strategy
of each other. Both of them work on the perception that the other one would adopt the best
strategy for itself. Therefore, both the organizations would adopt the strategy, which is best
for them.
The same example can also be used for the explanation of sequential move games. Suppose
organization X is the first one to decide whether it should outsource the marketing activities
or not.14
The game tree that represents the decision of organization X and Y is shown in Figure-
3:

In Figure-3, the first move is taken by organization X while organization Y would take
decision on the basis of the decision taken by X. However, the final outcome depends on the

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decision of organization Y. In the present case, the second player is aware of the decision of
the first player.
4. Constant Sum, Zero Sum, and Non-Zero Sum Games:
Constant sum game is the one in which the sum of outcome of all the players remains
constant even if the outcomes are different. Zero sum game is a type of constant sum game in
which the sum of outcomes of all players is zero. In zero sum game, the strategies of different
players cannot affect the available resources.
Moreover, in zero sum game, the gain of one player is always equal to the loss of the other
player. On the other hand, non-zero sum game are the games in which sum of the outcomes
of all the players is not zero.
A non-zero sum game can be transformed to zero sum game by adding one dummy player.
The losses of dummy player are overridden by the net earnings of players. Examples of zero
sum games are chess and gambling. In these games, the gain of one player results in the loss
of the other player. However, cooperative games are the example of non-zero games. This is
because in cooperative games, either every player wins or loses.15
5. Symmetric and Asymmetric Games:
In symmetric games, strategies adopted by all players are same. Symmetry can exist in short-
term games only because in long-term games the number of options with a player increases.
The decisions in a symmetric game depend on the strategies used, not on the players of the
game. Even in case of interchanging players, the decisions remain the same in symmetric
games. Example of symmetric games is prisoners dilemma.
On the other hand, asymmetric games are the one in which strategies adopted by players are
different. In asymmetric games, the strategy that provides benefit to one player may not be
equally beneficial for the other player. However, decision making in asymmetric games
depends on the different types of strategies and decision of players. Example of asymmetric
game is entry of new organization in a market because different organizations adopt different
strategies to enter in the same market.

15
http://www.economicsdiscussion.net/game-theory/5-types-of-games-in-game-theory-with-diagram/3827

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 APPLICATION OF GAME THEORY

In game theory, the term game means a particular sort of conflict in which n of individuals or
groups participate. A list of rules stipulates the conditions under which the game begins, the
possible legal moves at each stage of play, the total number of moves constituting the
entirety of the game, and the terms of the outcome at the end of play. Payoff, or outcome, is a
game-theory term referring to what happens at the end of a game. In such games as chess or
checkers, payoff may be as simple as declaring a winner or a loser. In poker or other
gambling situations the payoff is usually money; its amount is predetermined by antes and
bets amassed during the course of play, by percentages or by other fixed amounts calculated
on the odds of winning, and so on. A game is said to be a zero-sum game if the total amount
of payoffs at the end of the game is zero. Thus, in a zero-sum game the total amount won is
exactly equal to the amount lost. In economic contexts, zero-sum games are equivalent to
saying that no production or destruction of goods takes place within the game economy in
question. Von Neumann and Oskar Morgenstern showed in 1944 that any n-person non-zero-
sum game can be reduced to an n + 1 zero-sum game, and that such n + 1 person games can
be generalized from the special case of the two-person zero-sum game. Consequently, such
games constitute a major part of mathematical game theory. One of the most important
theorems in this field establishes that the various aspects of maximal-minimal strategy apply
to all two-person zero-sum games. Known as the minimax theorem, it was first proven by
von Neumann in 1928; others later succeeded in proving the theorem with a variety of
methods in more general terms.16
Applications of game theory are wide-ranging and account for steadily growing interest in the
subject. Von Neumann and Morgenstern indicated the immediate utility of their work on
mathematical game theory by linking it with economic behavior. Models can be developed,
in fact, for markets of various commodities with differing numbers of buyers and sellers,
fluctuating values of supply and demand, and seasonal and cyclical variations, as well as
significant structural differences in the economies concerned. Here game theory is especially
relevant to the analysis of conflicts of interest in maximizing profits and promoting the widest
distribution of goods and services. Equitable division of property and of inheritance is
another area of legal and economic concern that can be studied with the techniques of game
theory. In the social sciences, n-person game theory has interesting uses in studying, for

16
Managerial Economics: Principles and Worldwide Application by Dominick Salvatore

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example, the distribution of power in legislative procedures. This problem can be interpreted
as a three-person game at the congressional level involving vetoes of the president and votes
of representatives and senators, analyzed in terms of successful or failed coalitions to pass a
given bill. Problems of majority rule and individual decision making are also amenable to
such study. Sociologists have developed an entire branch of game theory devoted to the study
of issues involving group decision making. Epidemiologists also make use of game theory,
especially with respect to immunization procedures and methods of testing a vaccine or other
medication. Military strategists turn to game theory to study conflicts of interest resolved
through battles where the outcome or payoff of a given war game is either victory or
defeat. Usually, such games are not examples of zero-sum games, for what one player loses
in terms of lives and injuries is not won by the victor. Some uses of game theory in analyses
of political and military events have been criticized as a dehumanizing and potentially
dangerous oversimplification of necessarily complicating factors. Analysis of economic
situations is also usually more complicated than zero-sum games because of the production of
goods and services within the play of a given game.17

17
Carbaugh, Robert (2006). Contemporary Economics: An Applications Approach. Cengage Learning

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 CASE STUDY

Assume that two Business Firms in Srikakulam are competing for Market Share for a
particular product. Each firm is considering what promotional strategy to employ for the
coming period. Assume that the following payoff matrix describes the increase in market
share for firm A and decrease in market share for firm B. Determine the optional strategy for
each firm.

Applying saddle point approach in game theory strategy

From the above table it is observed that the maximum value of row minimum was equals to
minimum value of column maximum ad both equals to the corresponding value i.e. 13 Hence
we can conclude that the value of the game is 13 Also applying the dominance rule in game
theory strategy

All the elements of Low advt. row were dominated by corresponding elements of Medium
advt. hence the inferior low advt. row to be deleted.

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Similarly all the elements of High advt. row were dominated by corresponding
elements of Medium advt. hence the inferior high advt. row to be deleted.

Also the column wise, all the elements of Medium advt. column were
dominated by corresponding elements of Low advt. hence the superior Low
advt. column to be deleted. Firm B

Similarly all the elements of Medium advt. column were dominated by

corresponding elements of High advt. hence the superior High advt. column to
be deleted.

Hence the selected strategy to be implemented was Medium Advertisement is

needed for the promotion of market share.

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 ANALYSIS & FINDINGS

Increasingly, companies are utilizing the science of Game Theory to help them make high
risk/high reward strategic decisions in highly competitive markets and situations. Modern
Game Theory has been around for over 50 years old and has demonstrated an ability
to generate the ideal strategic choice in a variety of different situations, companies and
industries. Game Theory principles are leveraged through the use of strategy games. These
games are well-defined mathematical scenarios that encompass a set of players (individuals
or firms), a set of strategies available to those players, and a payoff specification for each
combination of strategies. One simple and well-known example of a strategy game, familiar
to first year psychology students, is the four quadrant Prisoners Dilemma.
Game Theory is a powerful tool for predicting outcomes of a group of interacting firms
where an action of a single firm directly affects the payoff of other participating players.
Given that each firm functions as part of a complex web of interactions, any business
decision or action taken by a firm impacts multiple entities that interact with or within that
firm, and vice versa. Said another way, each decision maker is a player in the game of
business. Therefore, when making a decision or choosing a strategy firms must take into
account the potential choices and payoffs of others, keeping in mind that while making their
choices, other players are likely to think about and take into account your strategy as
well. This understanding quantified through payoff calculations enables a company to
formulate their optimal strategy.
Game Theory is ideal for strategic situations where competitive or individual behaviors can
be modeled. These situations include: auctions (e.g., sealed project bids), bargaining
activities (e.g., union vs management, pricing buy-back and revenue-sharing negotiations),
product decisions (e.g., entry or exit markets), principal-agent decisions (e.g., compensation
negotiations, supplier incentives) and supply chain design (e.g., capacity management, build
vs outsource decisions).
Typically, multiple strategy games are played to model different competitors, various
payoffs and potential strategies. The objective of these games is to deliver 1) a
recommended set of strategic decisions to guide competitive behavior to a desirable outcome,
and; 2) an analysis of how a series of possible strategic moves can predict various
competitive outcomes. Different types of games can be utilized depending on the strategic

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situation, the number of players, the amount of information available and the timing
constraints.
These methodologies are not without their shortcomings which need to be considered in to
the strategy development process. Firstly, game theory assumes the players act rationally and
in their self-interest. We know that as humans, this is not always the case. Secondly, Game
Theory assumes players act strategically and consider the competitive responses of their
actions. Again, our experience tells us that not every manager thinks within a strategic
context. Finally, Game Theory is most effective when managers understand the expected
positive and negatives payoffs of each of their actions. In reality, most companies often do
not have enough knowledge of their own payoffs let alone those of their competition.
Despite its shortcomings, a properly constructed game can perceptibly reduce business risk,
yield valuable competitive insights, improve internal alignment around decisions and
maximize strategic utility. The Economist magazine put it succinctly Managers have much
to learn from game theory provided they use it to clarify their thinking, not as a substitute for
business experience.

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 CONCLUSION & SUGGESTIONS

Game theory has many applications. It can be applied to multiple fields of study and many
different situations. It is used in both everyday life and in mathematical analysis. We can use
payoff matrices and game trees to represent games. There are two main types of games: zero-
sum games and non-zero-sum games. We can use the minimax theorem to analyze zero-sum
games, and we can use the Nash equilibrium to analyze both zero-sum and non-zero-sum
games. Game theory is the study of rational behavior in situations involving interdependence.
It is a formal way to analyze interaction among a group of rational individuals who behave
strategically. A game consists of a set of players, a set of moves (or strategies) available to
those players, and a specification of payoffs for each combination of strategies. Most
cooperative games are presented in the characteristic function form, while the extensive and
the normal forms are used to define noncooperative games. Game theory is a study of
strategic decision making. Specifically, it is "the study of mathematical models of conflict
and cooperation between intelligent rational decision-makers". An alternative term suggested
"as a more descriptive name for the discipline" is interactive decision theory. Game theory is
mainly used in economics, political science, and psychology, as well as logic and biology.
The subject first addressed zero-sum games, such that one person's gains exactly equal net
losses of the other participant(s). Today, however, game theory applies to a wide range of
behavioral relations, and has developed into an umbrella term for the logical side of decision
science, including both humans and non-humans.

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 BIBLIOGRAPHY

BOOKS
1. Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice
Hall
2. Carbaugh, Robert (2006). Contemporary Economics: An Applications Approach.
Cengage Learning
3. Principles of Economics, 3rd ed., Prentice Hall Englewood Cliffs, New Jersey
4. Managerial Economics By Suma Damodaran
5. Managerial Economics: Principles and Worldwide Application by Dominick
Salvatore

WEBSITES
1. http://forum4researchers.com/cw_admin/docs/IJIRP-MAR-14-05.pdf
2. http://web.hku.hk/~schu/game.pdf
3. http://www.economicsdiscussion.net/game-theory/5-types-of-games-in-game-theory-
with-diagram/3827
4. https://en.wikipedia.org/wiki/Game_theory
5. http://www.economicsdiscussion.net/game-theory/4-strategies-of-the-game-theory-
explained/3825

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