Game Theory is a study of behavior and strategy between rational decision-makers, with the goal of maximizing their payoffs in the game. Game Theory is beneficial for making decisions in cases where multiple decision-makers have conflicting interests.
Real-world situations such as pricing and product releases could be modeled using Game Theory. One of the simplest models of Game Theory is Two-Person Zero-Sum Model.
This model has two players, row and column players, and both of them must choose one strategy. Each strategy gives a specific reward for the row player and the column player loses the same amount of the reward.
These rewards are represented in a table called Reward Matrix. This model is called zero-sum because the sum of rewards to both players is zero. Using the example of the reward matrix below, if row player choose Row 1 strategy and the column player choose Column 2, then the row player would receive reward of 5 and the column player would lose 5.
Game Theory assumes each player would pick the strategy that benefits the most for them. Hence, on the row player’s perspective, the column player would always try to limit the reward of player 1 since this is the most advantageous move for the column player. For example, if the row player chooses Row 2, then column Player would choose column 3. Therefore, the best move for row player is choosing the strategy that have the largest minimum, that is row 3 (max (5,1,7) = 7).
From the column player’s point of view, the row players would try to choose a strategy that creates the biggest loss for the column player. Hence, the best strategy for column player is minimizing the maximum loss (min (7,6,12) = 6) that is column 2.
Moreover, if the best move for row player provides the same amount of reward as the best strategy for column player, then the two-person zero-sum game has a saddle point
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