Strategic Ga
ming
Game Theo
ry
Dr. Debadut
ta K Panda
“Advanced Micro Devices (AMD) has slashed prices of
its desktop and mobile Athlon processors just days after
a similar move by rival Intel. ‘We’re going to do what it
takes to stay competitive’ on prices, said an AMD
representative. [...] AMD’s aggressive price-chopping
means the company doesn’t want to give up market
share gains, even at the cost of losses on the bottom
line, analysts said.”
History
0 Antecedents in military theory- ---treatise and warfare strategies
----from early civilization on wards
0 Formal structure development in 20th century –use of mathematics
0 Subject development accelerated during world war –II as
international politics
0 Cold war and nuclear weapon proliferation
0 Many American and Russian mathematician entered
0 Later used in other fields like law, biology, economics and business
0 The Oscar winning Movie “A Beautiful Mind” made it more popular
in common life
0 Nash enabled game theory to address a central question: should
we compete or cooperate
0 Game theorists winning the Nobel Prize in Economics in 1994,
1996, 2005, 2007 and 2012
Game Theory
0 Game Theory is an analytical tool that is concerned
with the interrelationship between the competitive
moves of a set of competitors
0 Derived from many subjects-----
Economics: Bertrand model and Cournot model, and
Nash equilibrium
Auction Theory
Political Science: Electoral Competition
Biology: The war of attrition
Law: The accident law
Basic Concepts
0 Elements of a game
I- Players:
0 A player is a decision maker and can be anything from individuals to
groups to the entire nations.
0 Players have the ability to choose among a set of possible actions.
0 Games are often characterized by the fixed number of players.
0 Generally, the specific identity of a play is not important to the game.
What important is action and outcome
II- Strategy:
0 A strategy is a course of action available to a player.
0 Strategies may be simple or complex.
III- Payoff:
0 Payoffs are the final returns to the players at the end of the game.
0 Payoffs are usually measure in utility, sometimes measure monetarily.
0 Players are able to rank the payoffs from most preferred to least preferred.
0 Players seek the highest payoff available
Strategic Gaming focuses on
i. Who are the players
ii. What choices do players have
iii. In what sequence do the players make their choices
iv. What un/certainties do the players have
v. What are the payoff to each players from each
possible outcome
Use of Game Theory in
Business
0 Games against rival firms/ Competitors:
--Pricing, advertising, marketing, auctions, R&D,
joint ventures, investment, location, quality, take
over etc.
0 Games against other players
--Employee/employer, managers/stockholders
Supplier/buyer, producer/distributor,
Government
Prisoner's Dilemma
0 Two prisoners caught and put in two different rooms
0 No communications between the prisoners
0 They are offered following deals
1. If both of you confess, you will both get 5 years in prison (-5
payoff)
2. If one of you confesses whereas the other does not confess, you
will get 0 (0 payoff) and 10 (-10 payoff) years in prison
respectively.
3. If neither of you confess, you both will get 2 years in prison (-2
payoff)
Prisoner’s Dilemma
Prisoner 2
Don’t Confess
Confess
Prisoner 1
-5, -5 0, -10
Confess
Don’t Confess -10, 0 -2, -2
0 They could both become better-off if they reached the
cooperative solution….
which is why police interrogate suspects in separate rooms.
0 Equilibrium need not be efficient. Non-cooperative
equilibrium in the Prisoner’s dilemma results in a solution that
is not the best possible outcome for the parties.
Equilibrium
0 Nash Equilibrium: Neither player has an incentive to
change strategy, given the other player’s choice
(in simple: Nash equilibrium is a pair of strategies (a*,b*) in a
two-player game such that a* is an optimal strategy for A
against b* and b* is an optimal strategy for B against A*)
0 In Prisoner’s dilemma,
Both confess is a Nash Equilibrium
Both don’t confess is not a Nash Equilibrium, rival will
always want to renege
Is Prisoner’s dilemma is possible in competition?????
Tragedy of Commons
Common Property Resource Management
Only one player has a dominant
strategy
0 Two firms, each planning to produce and market a new product
0 These two products will directly compete with each other
0 Consumers divided in two different segment (I) low priced version and
(II) upscale version
0 Profit any firm makes on sale of either low price or upscale product is
same
0 Each firm want to maximize its profit or equivalently sales, so decide its
new product is low priced or high prices
0 People who have low priced version is 60% of population, and upscale
version is 40% of population
0 Firm 1 is much more popular brand than firm 2. If they compete in open
market, firm 1 get 80% of sales and firm 2 gets 20 % of sales
-----Based on this we can determine the payoffs for different strategies
Only one player has a dominant strategy
0 If two firm market two different segment, they each get
sales in that segment. So one that target low priced
segment gets a payoff is 0.60 and one that target high priced
segment gets a payoff is 0.40
0 If both firm target low priced segment, then
Firm I gets 80% of it. So total payoff for Firm I = 0.8 X 0.6= 0.48
Firm II gets 20% of it. So payoff for Firm Ii = 0.2X0.6= 0.12
0 If both firm target upscale segment, then
Firm I gets 80% of it. So total payoff for Firm I = 0.8 X 0.4= 0.32
Firm II gets 20% of it. So payoff for Firm Ii = 0.2X0.4= 0.08
If Firm I target upscale and Firm target low priced, their payoff are 0.6 and
0.4 respectively (since they will not have competitors in their segment.
---see the payoff matrix >>>>>>
Dynamic Games
A Market Entry Example
Payoff
F1 F2
F2
Price Cut 0 30
Not Enter
F2
Price Hold
0 60
F1
F2
Price Cut
-30 20
Enter
F2
20 40
Price Hold
