ZERO-SUM GAME
Maximin & Minimax, Saddle Point
NEUMANN–MORGENSTERN GAME THEORY
• According to their game theory, an oligopolist while choosing his strategy will assume that his rivals
will adopt a strategy which will be worst for him, that is, the rivals will adopt the policy which will be
most unfavourable to him.
• An oligopolist knows the complete set of strategies open to him as well as those available to his
rivals in the industry.
• A strictly adversary game is one in which the outcome which is favourable from the viewpoint of
one, is unfavourable to the other.
• A constant-sum game, in which the outcomesType equation
to the here.
two players, i.e., oligopolists always add up to
the same constant amount. Thus, in a constant sum game, one player’s gain is always another
player’s loss.
• If the constant sum is profits of ₹10 which is to be shared between the two sellers, then if A
receives ₹ 8, then B will be get ₹ 2, and if A gets ₹ 3, then B will obtain ₹ 7 and so on.
• When in a game aggregate of gain (+) and loss (–) is zero, the constant-sum game becomes a
zero sum game.
• In the oligopolistic market situation, if advertising campaign launched by a firm for promoting the
sales of its product merely causes a fixed number of consumers to switch from other brands of the
product to his brand without adding to the total demand of the product, it would be an example of a
zero sum game.
TWO-PERSON ZERO-SUM GAME
Payoff matrix of Firm I
• The payoff of a strategy is the 'net gain' it will bring to the
firm for any given counter strategy of the competitor(s). This
gain is measured in terms of the goal(s) of the firm.
• The payoff matrix of a firm is a table showing the payoffs
accruing to this firm as a result of each possible combination
of strategies adopted by it and by its rival(s).
• For example, assume that there are two firms in the
industry. Firm I has to choose among five strategies(A1. A2,
•••, A5) and Firm II can react by adopting any one of six
strategies open to it (B1, B 2, ••• , B6). Thus to each strategy
of Firm I there are six possible counter strategies of Firm II,
and similarly to each strategy of Firm II there are five
counter strategies of the rival Firm I. Thus the payoff matrix
of each firm will include 5 x 6 = 30 payoffs, corresponding to
the results of each possible combination of strategies
selected by both rivals.
Certainty model
T h e s i m p l e s t m o d e l i s a d u o p o l y m a r k e t i n wh i c h e a c h d u o p o l i s t a t t e m p t s t o
m a x i m i s e h i s m a r k e t s h a r e . g i v e n t h i s g o a l , wh a t e v e r a f i r m g a i n s ( b y i n c r e a s i n g
its share of the market) the other firm loses (because of the decrease in its
s h a r e ) . t h u s a n y g a i n o f o n e r i va l i s o f f s e t b y t h e l o s s o f t h e o t h e r , a n d t h e n e t
gain sums up to zero. hence the name 'zero-sum game'.
The assumptions of the model are:
• 1. The firms have a given, well-defined goal. The goal is maximisation of the market share.
• 2. Each firm knows the strategies open to it and to its rival, or concentrates on the most
important of these strategies.
• 3. Each firm knows with certainty the payoffs of all combinations of the strategies being
considered. This implies that the firm knows its total revenue, total costs and total profit from
each combination of strategies.
• 4. The actions chosen by the duopolists do not affect the total size of the market.
• 5. Each firm chooses its strategy 'expecting the worst from its rival', that is, each firm acts in the
most conservative way, expecting that the rival will choose the best possible counter-strategy
open to him. This behaviour is defined as 'rational’.
• 6. In the zero-sum game there is no incentive for collusion, given assumption 4, since the goals
of the firms are diametrically opposed.
In order to find the equilibrium solution we need information on the payoff matrix of the two firms.
In our example the payoffs will be shares of the market resulting from the adoption of any two
strategies by the rivals. Assume that Firm I has four strategies open to it and Firm II has five
strategies. The payoff matrices of the duopolists are shown in tables
Payoff matrix of Firm I Payoff matrix of Firm II
• Clearly the sum of the payoffs in
corresponding cells of the two payoff tables
add up to unity, since the numbers in these
cells are shares, and the total market is
shared between the two firms.
• In general, in the two-person zero-sum
game we need not write both payoff
matrices because of the nature of the
game: the goals are opposing, and, in our
example, the payoff table of Firm I contains
indirectly information about the pay off of
Firm II.
• Still we start by showing both tables, and
then we show how the equilibrium solution
can be found from only the first payoff
matrix.
Choice of strategy by Firm I
Firm I examines the outcomes of each strategy open to it. That is, Firm I examines each row of its payoff
matrix and finds the most favourable outcome of the corresponding strategy, because the firm expects
the rival to adopt the most advantageous action open to him. This is the behavioural rule implied by
assumption 5 of this model.
Thus:
• If Firm I adopts strategy A1, the worst outcome that it may expect is a share of 0·10 (which will be
realised if the rival Firm II adopts its most favourable strategy B1).
• If Firm I adopts strategy A2 , the worst outcome will be a share of 0.30 (if the rival adopts the best
action for him, B2).
• If Firm I adopts strategy A3 , the worst outcome will be a share of 0·20 (if Firm II chooses the best
open alternative, B3).
• If Firm I adopts strategy A4 , the worst outcome will be a share of 0·15 (which would be realised by
action B2 of Firm II).
Among all these minima (that is, among the above worst outcomes) Firm I chooses the maximum, the
'best of the worst'. This is called a maximin strategy, because the firm chooses the maximum among the
minima. In our example the maximin strategy of Firm I is A2 , that is, the strategy which yields a share of
0·30.
Choice of strategy by Firm II
• Firm II behaves in exactly the same way. The
only difference is that Firm II examines the
columns of its payoff table, because these
columns include the results-payoffs of each of
the strategies open to Firm II.
• For each strategy, that is, for each column,
Firm II finds the worst outcome (on the
assumption that the rival will choose the best),
and among these worst outcomes Firm II
chooses the best. Thus, if Firm II uses its own
payoff table, its behaviour is a maximin
behaviour identical to the behaviour of Firm I.
• Raw player is the first player here. Maximin strategy is especially for this first player.
• Thus concentrating on the first payoff table we may restate the decision-making
process of Firm II as follows. Firm II examines the columns of the (first) payoff matrix
because these columns contain the information about the payoffs of its strategies.
• For each column-strategy Firm II finds the maximum payoff (of Firm I) because this is
the worst situation the firm (II) will face if it adopts the strategy corresponding to that
column.
• Thus for strategy B1 the worst outcome (for Firm II) is 0.40; for strategy B2 the worst
outcome is 0.30; for strategy B3 the worst outcome is 0.50; for strategy B4 the worst
result is 0.60; for strategy B5 the worst result is 0.50.
• Among these maxima of each column-strategy Firm II will choose the strategy with
minimum value. Thus the strategy of Firm II is a minimax strategy, since it involves the
choice of a minimum among the maxima payoffs.
Combined payoff matrix
• It should be stressed that although different terms are used for the choice of the two firms
(maximin behaviour of Firm I, minimax behaviour of Firm II), the behavioural rule for both
firms is the same: each firm expects the worst from its rival.
• In our example the equilibrium solution is strategy A2 for Firm I and B2 for Firm II. This
solution yields shares 0.30 for Firm I and 0.70 for Firm II.
• It is an equilibrium solution because it is the preferred one by both firms. This solution is
called the 'saddle point', and the preferred strategies A2 and B2 are called 'dominant
strategies'. It should be clear that there exists no such equilibrium (saddle) solution if there is
no payoff which is preferred by both firms simultaneously.
Example B
A’s Pay-off matrix
1 II
I -7 6
A
II -10 8
1. Constant sum of the game is zero
2. This A’s pay-off matrix is exactly opposite of B’s pay-off matrix
3. The raw player is A and the column player is B
4. First player is A. Given B’s strategy A can choose his/her dominant strategy
5. Under zero sum game Maximin approach for first player and Minimax approach for
second player. If they get an equilibrium point that point is here called saddle point.
B
-7 6 Minimum is -7
A Maximin is -7
-10 8 Minimum is -10
Maximum is -7 Maximum is 8
Minimax is -7
