GAME THEORY

4 GAME THEORY

Average Weightage: 0 to 8 Marks (Category B)

PURE STRATEGY GAMES with SADDLE POINT

QUESTION 1 (NEWLY INSERTED QUESTIONS) (NEW SM)
Find the optimal strategies of the Players for the game having payoff matrix. What is the value of
the Game?
Strategies B1 B2 B3 B4
A1 1 7 3 4
A2 5 6 4 5
A3 7 2 0 3

ANSWER: Optimal Strategies A2 & B3, Value of the game = 4

QUESTION 2 (NEWLY INSERTED QUESTIONS) (NEW SM)

Solve the Game [ ]

ANSWER: Optimal Strategies A2 & B2, Value of the game = 5

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AIR – 1ST IN CMA FINAL 4.1
 GAME THEORY

ODDS / ARITHMETIC Method

QUESTION 3 (NEWLY INSERTED QUESTIONS) (NEW SM)

Solve the game ( )

ANSWER:
 Strategies of the Maximising Player = (1/5, 4/5) &
 For the Minimising Player = (3/5, 2/5).
 Value of the game = 17/5

QUESTION 4 HW. Same as Q.3 (NEWLY INSERTED Q.) (NEW SM)

Solve the Game with the Payoff Matrix* +

ANSWER:
 So A chooses his strategies (A1, A2) with probabilities (1/3, 2/3) &
 B chooses his strategies (B1, B2) with probabilities (1/2, 1/2) and
 Value of the Game = 3

ANSWER 4
Let the given Game is played by the players A and B with A (the maximizing player) having
strategies A1 and A2 represented along the rows and B (the minimizing player) having strategies
B1 and B2 represented along the columns. So the given Payoff Matrix can be written as follows –
Strategies of B
Strategies of A
B1 B2 Row Min
A1 1 5 1
A2 4 2 2=Maximin
Column Max. 4 = Minimax 5
Maximin value (2) ≠ Minimax value (4). Thus, Saddle Point does not exist. So this is a problem
of Mixed Strategy with (2×2) Payoff Matrix.
We apply ODDs Method to solve the problem. Odds are calculated as follows-
Strategies of B
Strategies of A
B1 B2 Row Min
A1 1 = a1 5 = a2 b1 – b2 = 4-2 = 2
A2 4 = b1 2 = b2 a1 - a2 = 1-5 = 4
Odds a1 – b2 = 5-2 = 3 a1 – b1 = 1-4 = 3

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 GAME THEORY

[Note: Though (a1 – b1) = 1-4 = -3, but here it has been taken +3 as per the concept of Odds]
Probabilities of A and B taking their different strategies are calculated as follows –
P (A1) = (b1 – b2) ÷ [(b1 – b2) + (a1 – a2)] = 2/[2+4] = 2/6 = 1/3
P (A2) = (a1 – a2) ÷ [(b1 – b2) + (a1 – a2)] = 4/[2+4] = 4/6 = 2/3
P (B2) = (a2 – b2) ÷ [a2 – b2) + (a1 – b1)] = 3/[3+3] = 3/6 = 1/2
P (B2) = (a1 – b1) ÷ [(a2 – b2) + (a1 – b1)] = 3/[3+3] = 3/6 = 1/2
Value of the game = v = [a1 (b1 – b2) + b1 (a1 – a2)] ÷ [(b1 – b2) + (a1 – a2)] = [1×2 + 4×4] ÷
[2+4] = 18/6 = 3
So A chooses his strategies (A1 , A2 ) with probabilities (1/3,2/3) & B chooses his strategies
(B1, B2) with probabilities (1/2,1/2) and Value of the game = 3 .
[Note: Calculated value of game is the Expected Gain of A which is the same as the expected
loss of B]

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AIR – 1ST IN CMA FINAL 4.3
 GAME THEORY

DOMINANCE PRINCIPLE Method

(With SADDLE POINT)
QUESTION 5 (NEWLY INSERTED QUESTIONS) (NEW SM)

Solve the Game using Dominance Principle[ ]

ANSWER:
Hence optimal strategies of A and B are respectively A2 and B2, Also
value of the game = 5

ANSWER
Let the given game is played by Players A and B with A (the maximizing player) having
strategies A1, A2 and A3 represented along the rows and B (the minimizing player) having
strategies‟ B1, B2, and B3 represented along the columns. So the given Payoff Matrix can be
written as follows –
Strategies of B
Strategies of A B1 B2 B3
A1 15 2 3
A2 6 5 7
A3 -7 -7 0
All the elements of RowA3 are less than the corresponding element of Row A2, So A3 is
dominated by A2, and hence it is ignored and deleted. The new matrix is given below-
Strategies of B
Strategies of A
B1 B2 B3
A1 15 2 5
A2 6 5 7
Here all the elements are more than the corresponding elememts of B2; Hence B3 is dominated by
B2 and ignored to get the new matrix below.
Strategies of B
Strategies of A B1 B2 Row Min.
A1 15 2 2
A2 6 5 5
Column Matrix 15 5

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AIR – 1ST IN CMA FINAL 4.4
 GAME THEORY

Maximum among the Row minimum = 5 = Maximum value and Minimum among the column
maximums = 5 = Minimax value. As, Maximum and Minimax values are equal, there exists a
saddle point. It occurs at the cell A2B2.
Hence optimal strategies of A and B are respectively A2 and B2, Also value of the game = 5
[Note – This is a problem of Pure strategy and could have been solved without the use of
dominance Rules, but the question has specifically asked for the usuage of Dominance Rules, so
the same is used.]

QUESTION 6 (NEWLY INSERTED QUESTIONS) (NEW SM)

Reduce the following game by Dominance Rules and solve it.

Strategies of Minimising Player
P Q R S T
I 1 3 2 7 4
Strategies of II 3 4 1 5 6
Maximizing Player III 6 5 7 6 5
IV 2 0 6 3 1
ANSWER: Optimal Strategy for the Maximising Player is III and that for
the Minimising Player is Q. Value of the game = 5

QUESTION 7 (NEWLY INSERTED QUESTIONS) (NEW SM)

Joy Givers and Milan Toys are the two toy manufacturers who always compete with each other
to increase their respective market shares. For both the companies the Marketing team work with
close coordination with the Design team and always come out with attractive toys which are
normally in great demand. To meet the demand, they have various strategic options like working
for 8 hours a day, 12 hours a day, 16 hours a day, 24 hours a day, Subcontracting etc. which will
ultimately increase the market share. Joy Givers have decided not to go for all the above
mentioned options and set up the following payoff matrix in which the percentage increase in
market share is given against different strategies of Milan Toys
STRATEGIES of Milan Toys
Joy Givers Working 8 Working 12 Working 16 Subcontracting
hrs/day hrs/day hrs/day
Working 12 hrs/day 8 10 9 14
Working 16 hrs/day 10 11 8 12
Working 24 hrs/day 13 12 14 13

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 GAME THEORY

Use Principle of Dominance to find the Optimal Strategies of the two manufacturers and the
value of the Game.

ANSWER
Joy Givers is the Maximising Player with strategies represented along the rows and Milan Toys
is the Minimising Player with strategies represented along the columns. For ease of
representations we consider the respective strategies of Joy Givers as J 1, J2, &J3 and those of
Milan Toys as M1, M2 & M3.
Strategies of Milan Toys
Joy Givers M1 M2 M3 M4
J1 8 10 9 14
J2 10 11 8 12
J3 13 12 14 13

All the elements of the 4th column are either greater than or equal to the corresponding elements
of the 1st Column. So the 4th column‟s strategy (M4) is dominated by the 1st column‟s strategy
(M1). Hence M4 is ignored. The new matrix is given below.
Strategies of Milan Toys
Joy Givers M1 M2 M3
J1 8 10 9
J2 10 11 8
J3 13 12 14

All the elements of 1st Row are less than the corresponding elements of the 3rd Row. Thus,
strategy of 1st Row i.e J1 is dominated by the strategy of the 3rd Row i.e. J3 and ignored. The
reduced matrix becomes-
Strategies of Milan Toys
Joy Givers M1 M2 M3
J2 10 11 8
J3 13 12 14

Apparently first two rules of dominance cannot be applied to either of the rows or columns of the
above matrix, but if the average of the elements of the strategies M2 and M3 be taken then we
get a matrix shown below.

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AIR – 1ST IN CMA FINAL 4.6
 GAME THEORY

Strategies of Milan toys

Joy Givers M1 [M2+M3]/2
J2 10 (11+8)/2=9.5
J3 13 (12+14)/2 = 13

So the elements of the strategy M1 are either more or equal the average of the corresponding
elements of M2 and M3. Hence M1 is dominated by M2 and M3. Thus, M1 is deleted and the
reduced matrix is as below.
Strategies of Milan toys
Row Minimum
Joy Givers M2 M3
J2 11 8 8
J3 12’ 14 12 = Maximin
Column Maximum 12=Minimax 14

So Maximin Value = 12 = Minimax Value. Here there exists a Saddle Point at the junction J3M2

Thus, optimal strategy of joy givers is J3 that is „‟Working 24 hours/day‟‟ and that for milan toys
is M2 that is the “Working 12 hours/ day”. Value of the Game = 12 (which means a 12%
increase in market share for Joy Givers)

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AIR – 1ST IN CMA FINAL 4.7
 GAME THEORY

DOMINANCE PRINCIPLE Method

(Without SADDLE POINT)
QUESTION 8 (NEWLY INSERTED QUESTIONS) (NEW SM)
The Management of a company is negotiating with its Union for revision of hourly wages of its
employees. The Management deployed a Consulting Firm who has prepared a payoff matrix for
the purpose which indicates the additional hourly cost (in ₹) to the company. It is shown below:
you being a part of the Consulting Firm have to assist the Management in selecting the best
strategy. What is the value of the game? How is it going to affect the company‟s cost?

Management’s Strategies of the Union

Strategies U1 U2 U3 U4
M1 2.50 2.70 3.50 – 0.20
M2 2.00 1.60 0.80 0.80
M3 1.40 1.20 1.50 1.30
M4 3.00 1.40 1.90 0

ANSWER
As the Management‟s objective is to minimize the cost, they can be considered as the
Minimising Player and the Union as the Maximising Player in this problem of Game. Thus, to
solve the problem we have to recast the given Payoff Matrix by transporting it as below:-
Strategies of Management’s Strategies
Row Min
union M1 M2 M3 M4
U1 2.50 2.00 1.40 3.00 1.40=Maximin
U2 2.70 1.60 1.20 1.40 1.20
U3 3.50 0.80 1.50 1.90 0.80
U4 -0.20 0.80 1.30 0 -0.20
Column
3.50 2.00 1.50=Minimax 3.00
Maximum
Maximin value (1.40) ≠ Minimax value (1.50). Thus, Saddle Point does not exist. So this is a
problem of mixed strategy. Since the matrix is not a (2×2) Matrix, Dominance Rules are applied
to reduce its size to make it a (2×2) Matrix.

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AIR – 1ST IN CMA FINAL 4.8
 GAME THEORY

As the elements of the 3rd Row of the above matrix are either greater than or equal to the
corresponding elements of the 4th Row, the 3rd Row can be considered to dominate the 4th. So the
4th Row is ignored and the new matrix is shown below.
Strategies of Management’s Strategies
union M1 M2 M3 M4
U1 2.50 2.00 1.40 3.00
U2 2.70 1.60 1.20 1.40
U3 3.50 0.80 1.50 1.90
Again all the elements of the 1st Column are greater than the corresponding elements of the 2nd
Column, the 1st Column is dominated by the 2nd Column. Hence the 1st Column is ignored and
the new Matrix is shown below.
Management’s Strategies
Strategies of union
M2 M3 M4
U1 2.00 1.40 3.00
U2 1.60 1.20 1.40
U3 0.80 1.50 1.90
All the elements of the 3rd column (i.e for Strategy M4 ) of this matrix are more than the
corresponding elements of the 2nd Column (i.e for Strategy M3), Hence M4 is dominated by M3
and ignored. The new matrix is shown below.
Management’s Strategies
Strategies of union
M2 M3
U1 2.00 1.40
U2 1.60 1.20
U3 0.80 1.50
Again all the elements of the 1st Row (for strategy U1) are greater than the corresponding
elements of the 2nd Row (for strategy U2). So U2 is dominated by U1 and ignored. The next matrix
is shown below.
Management’s Strategies
Strategies of union
M2 M3
U1 2.00 1.40
U3 0.80 1.50
This is (2×2) Matrix. Now the problem of game is solving by using ODDs Method. Odds are
calculated as below.

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AIR – 1ST IN CMA FINAL 4.9
 GAME THEORY

Management’s Strategies
Strategies of union
M2 M3 ODDs
b1 – b2 = 0.80 – 1.50
U1 2.00=a1 1.40 = a2
=0.70
a1 – a2 = 2.00 – 1.40
U3 0.80=b1 1.50 = b2
=0.60
a2 – b2 = 1.40-1.50 = a1 – b1 = 2.00 – 0.80
ODDs Sums of Odds = 1.30
0.10 = 1.20
P(U1) = (b1 – b2) ÷ [(b1 – b2) + (a1 – a2)] = 0.70/[0.70+0.60] = 0.70/1.30 = 7/13
P(U3) = (a1 – a2) ÷ [(b1 – b2) + (a1 – a2)] = 0.60/[0.70+0.60] = 0.60/1.30 = 6/13
P(M2) = (a2 – b2) ÷ [(a1 – b2) + (a1 – b1)] = 0.10/[0.10+1.20] = 0.10/1.30 = 1/13
P(M3) = (a1 – b1) ÷ [(a2 – b2) + (a1 – b1)] = 1.20/[0.10+1.20] = 1.20/1.30 = 12/13
Value of the game = v = [a1 (b1 – b2) + b1 (a1 – a2)] ÷ [(b1 – b2) + (a1 – a2)]
= [2.00×0.70 + 0.80×0.60] ÷ [0.70+0.60] = [1.40+0.48]/1.30 = 1.88/1.30 = 1.45
So the union chooses its strategies U1, U2,U3,&U4 with probabilities (7/13, 0, 6/13,0 ) with the
management chooses its strategies M1,M2,M3,&M4 with probabilities (0,1/13,12/13,0)
Expected Gain to the union is ₹1.45 and the corresponding Loss to the Management is ₹1.45.
Thus, the hourly cost of company will increase by ₹1.45.

QUESTION 9 (NEWLY INSERTED QUESTIONS) (NEW SM)

In the suburban area of a large city there are two stores Laxmi Bhandar and Goswami Stores who
handle sundry goods. The total number of customers is equally divided between the two due to
the fact that the price, quality of goods, services etc. of the two are at par. Assume that a gain of
customers for Laxmi Bhander is a loss to Goswami Stores and vice versa. Both the stores plan to
run annual sales during the festival period of the year. Sales are advertised through Social Media,
Cable TV local channel and Printed Leaflets. Based on the past experience, Laxmi Bhander has
prepared the following payoff matrix for the gain or loss in percentage of customers for its
different strategies against various counter strategies of Goswami Stores.
Strategies of Goswami Stores
Strategies of Laxmi Bhander Printed leaflets Cable TV Social media
Printed leaflets 30 40 – 80
Cable TV 0 15 – 20
Social media 90 20 50

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 GAME THEORY

Determine the optimal strategies and worth of such strategies for the stores. What is meant by the
cell entry – 80 in the above payoff matrix?

ANSWER:
Optimal strategies of Laxmi Bhander = (1/5, 0, 4/5) and for Goswami
Stores = (0, 13/15, 2/15), Value of the game = 24
Cell entry (-80) means when Laxmi Bhander will take the strategy of
distributing Printed Leaflets against the counter strategy of Goswami
Stores of Social Media advertisement then they will lose 80% of their
customer which will be gained by Goswami Stores.

QUESTION 10 (NEWLY INSERTED QUESTIONS) (NEW SM)

Two competing firms (A and B) produce consumer goods of different kind. Among the products
one is considered as their bread and butter in terms of the revenue generated. Both the firms are
very cautious about the market share for this particular product and keep on doing advertisement
campaigns throughout the year to retain the existing customers and also to attract the new ones.
For this the marketing teams of both work round the clock and that of a developed data
corresponding to varying degrees of advertisement. Same is given below:

A. If both the firms take same strategy to counter each other than their market share will be
equal.

B. Against firm A‟s strategy of “No marketing” if B goes for “Medium marketing” then A‟s
share of the market will be 40%. For the same strategy of A the market share will be 28% if
B takes the strategy “Large marketing”
C. Against firm A‟s strategy of “Medium marketing” if B goes for “No marketing” then A‟s
share of the market will be 70%. For the same strategy of A the market share will be 45% if
B takes the strategy “Large marketing”

D. Against firm A‟s strategy of “Large marketing” if B goes for “No marketing” then A‟s share
of the market will be 75%. For the same strategy of A the market share will be 47.5% if B
takes the strategy “Medium marketing”
Based on the above information prepare the Payoff Matrix. Solve the game problem to get
the optimal strategies of the player A. What is the value of the game?

ANSWER: Probabilities of A’s strategies are (0, 1/3, 2/3). Value of the
game = 145/3 = 48.3. Thus, A can expect to have 48.3% market share.

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AIR – 1ST IN CMA FINAL 4.11
 GAME THEORY

QUESTION 11 (NEWLY INSERTED QUESTIONS) (NEW SM)

Using the data of the above problem prepare the Payoff Matrix for A when you are supplied with
the Following information.

A. Selling price of the product = ₹ 4 per unit

B. Variable cost of the product = ₹ 2.50 per unit

C. Annual cost for Medium advertising = ₹ 5000

D. Annual cost for Large advertising = ₹ 15000

E. Annual sales volume of the product for Firm A = 30000 units what advertising policy should
firm A pursue?

Hints-
Find out the Annual sales volume, for different combination of strategies of A and B. As an
example, Annual Sales volume corresponding to A‟s strategy of “Medium advertisement” and
B‟s strategy of “Large advertisement” is 45% of 30000 = 13500 units
Calculate Annual Profit to the Firm a using the formula below for various combination of
strategies of A and B.
Annual Profit = (Selling price – Variable cost) × Annual Sales volume – Annual cost of
advertising Example of this calculation is:-
For A‟s strategy of “Medium advertisement” and B‟s strategy of “Large advertisement” the
Annual Profit of Firm A is (4 – 2.5) × 13500 – 5000 = ₹ 15250/-
When the Profit figures for all the combinations of strategies of A and B are calculated then the
following payoff matrix is obtained.

Strategies of B
Strategies of A No advertising Medium advertising Large advertising
No advertising 22500 18000 12600
Medium advertising 26500 17500 15250
Large advertising 18750 6375 7500
From the above matrix we find, against the various strategies of A, the minimum profit figures
are as follows – For No advertising – ₹ 12,600
For Medium advertising – ₹ 15250 For Large advertising – ₹ 6375
Thus, to maximize the minimum profit, A should opt for Medium advertising and spend ₹ 5000
per annum.

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 GAME THEORY

GRAPHICAL METHOD

QUESTION 12 (NEWLY INSERTED QUESTIONS) (NEW SM)

Solve the Game represented by the payoff matrix: -* + using Graphical Method.

ANSWER
Let the given game is played by Players A and B with A (the maximizing player) having
strategies A1 , A2 and A3 represented along the rows and B (the minimizing player) having
startegies B1,B2,and B3 represented along the columns. So the given Payoff Matrix can be written
as follows –
Strategies of B
Row Minimum
Strategies of A B1 B2 B3
A1 1 3 12 1
A2 8 6 2 2 = maximum
Column
8 6= minimax 12
Maximum
Maximin value (2) ≠ Minimax value (6). Thus, Saddle Point does not exist. So this is a problem
of mixed strategy. Since the matrix is not a (2×2) Matrix, Dominance Rules are applied to reduce
its size to make it a (2×2) Matrix, but it is observed that the Dominance Rules are also not
suitable for reducing the size of the given matrix. Hence we go for solving the problem using
Graphical Method suitable matrix because the given matrix is (2×3)
As the shown below the vertical lines are drawn on a horizontal lines 1unit apart to represent the
axes x0 = 0 & x1 = 1 and marked them to scale. Now, the value 1,3 and 12 of the 1st Row of the
given matrix are plotted as points on the axis x1 = 1 and the value 8,6, and 2 of 2nd Row are
plotted at point of axis x1 = 0. Then the pair of points 12 & 2, 3&6 and 1 & 8 is joined with the
help of straight lines. These lines represent the expected payoff the Player A against the
strategies B3, B2&B1 respectively of Player B. The lower envelope of the area bounded by these
lines and the axes is shaded as shown. Highest point P of this envelope is the Maximin point. As
P is the point of the intersection of A‟s expected Payoff lines against strategies B2 & B3 of B we
can say that B will opt for these two strategies and ignore strategy B1

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 GAME THEORY

So the reduced payoff matrix is given as follows –

Strategies of Strategies of B
A B2 B3 Odds
A1 3 = a1 12 = a2 b1 – b2 = 6-2 = 4
A2 6 = b1 2 = b2 a1 – a2 = 3-12 = 9
Sums of the ODDs =
ODDs a2 – b2 = 12-2 = 10 a1 – b1 = 3-6 = 3
13
Probabilities of A and B taking their different strategies are as below;
P (A1) = (b1 – b2) ÷ [(b1 – b2) + (a1 – a2)] = 4/[4+9] = 4/13, P(A2) = 1 – P(A1) = 1- 4/13 = 9/13
P (A1) = (a2 – b2) ÷ [a2 – b2) + (a1 – b1)] = 10/[10+3] = 10/13, P(B1) = 1- P(B2) = 1 – 10/13 = 3/13
Value of the game = v = [a1 (b1 – b2) + b1 (a1 – a2)] ÷ [(b1 – b2) + (a1 – a2)] = [3×4 + 6×9] ÷ [4+9] =
66/13
So A chooses the strategies with probabilities (4/13, 9/13) and B chooses strategies with
probabilities (0, 10/13, and 3/13).

QUESTION 13 (NEWLY INSERTED QUESTIONS) (NEW SM)

Solve the game using Graphical method.

ANSWER: Optimal strategy of the Maximising Player (0.3, 0.7, 0) and for
the Minimising Player (0.9, 0.1). Value = 2.3

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