Page 181 - DCOM303_DMGT504_OPERATION_RESEARCH

Operations Research

Notes Some of the competitive situations in economic, social, political or military activities are:
(1) Firms trying to snatch each other’s market share.
(2) Military attacks.
(3) Selection of best advertising media.

Game must be thought in a broad sense not as a kind of sport like chess or bridge but competitive
situation, a kind of conflict in which one must win and the other must lose. The following are
some of the fields of application of game theory:
(a) In a competitive market, sometimes companies wage a price war. What should be the bid
to win major government contract in the face of competition from several contractors.

(b) An equipment dealer and a customer may be at Cross purposes regarding price but they
would both want to close a mutual advantageous deal. Similarly, in a collective bargaining
process, the trade union and the management of a company share the objective of striking
at a mutually advantageous deal and keep the company operations going.
(c) Suppose a firm wants to introduce a new product in the market, to get a bigger share in the
market, the marketing manager of the firm would be interested to know the best possible
strategies of a competitor who is also trying to introduce product with different strategies
e.g., price reduction, better quality, etc.

Notes The models in the theory of games can be classified depending upon following
factors:

1. Number of players
2. Sum of gains and losses
3. Strategy

9.1 Terminologies in Game Theory

The participants to the game who act as decision-makers are called players. In a game two or
more participants may be in the conflict. The former of these is called a two person game and the
latter one is known as a person game. Where it does not necessarily imply that in its play exactly
n people would be involved, but rather that the participants can be classified into n mutually
exclusive categories and members of each of the categories have identical interest.
A finite or infinite number of possible courses of action available to a player are called strategies.

Example: Let x and y be two manufacturers and x is faced with a problem of deciding
whether it is worthwhile to reduce the price of the product to counteract competition. He has
two strategies:

1. reduce the price, and
2. maintain the price. Then y too has the same strategies to counter act x’s strategies.

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