The document discusses game theory and its applications to modeling conflict situations. It provides examples of classical game theory models - the coordination game, battle of the sexes game, chicken game, and prisoner's dilemma game. Each game represents a different type of strategic interaction between two players with competing preferences. The document also discusses a real-world example of bidding strategy, showing how a two-tiered bid can be advantageous by creating a prisoner's dilemma for other bidders.

1. Game Theory and Conflict
Mohammad Tawfik
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Game Theory and Conflict
Based on: “Games People Play”
By Prof. Scott Stevens
The Teaching Company

2. Game Theory and Conflict
Mohammad Tawfik
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Game Theory

3. Game Theory and Conflict
Mohammad Tawfik
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http://WikiCourses.WikiSpaces.com
What is game theory?
• Game theory is a branch of applied
mathematics that studies strategic situations
where participants choose different actions in
an attempt to maximize their returns.

4. Game Theory and Conflict
Mohammad Tawfik
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It may be used to explain …

5. Game Theory and Conflict
Mohammad Tawfik
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… Predict …

6. Game Theory and Conflict
Mohammad Tawfik
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… Evaluate …

7. Game Theory and Conflict
Mohammad Tawfik
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… Human Behavior

8. Game Theory and Conflict
Mohammad Tawfik
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9. Game Theory and Conflict
Mohammad Tawfik
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Attention!
• Bad news:
Knowing game theory does not guarantee
winning
• Good news:
Framework for thinking about strategic
interaction

10. Game Theory and Conflict
Mohammad Tawfik
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Why game theory?
• Because we can formulate effective strategy…
• Because we can predict the outcome of
strategic situations…
• Because we can select or design the best
game for us to be playing…

11. Game Theory and Conflict
Mohammad Tawfik
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Classical Games!
2x2 Simultaneous Games

12. Game Theory and Conflict
Mohammad Tawfik
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Definition
• 2 players
• One of two moves
• Neither of the players know what the other is
doing before he/she decides

13. Game Theory and Conflict
Mohammad Tawfik
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14. Game Theory and Conflict
Mohammad Tawfik
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The coordination game!
• YOU prefer one of two choices
• YOU prefer to have same choice as OTHER
• Luckily, OTHER prefers the same choice!

15. Game Theory and Conflict
Mohammad Tawfik
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Example
• YOU prefer developing software using
Windows
• YOU and OTHER are developing software to
the same customer
• YOU and OTHER prefer developing using the
same operating system
• Operating system choices are Windows or
Linux!

16. Game Theory and Conflict
Mohammad Tawfik
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Payoff Matrix
Payoff
YOU
Windows Linux
OTHER
Windows 2+2 0+1
Linux 1+0 1+1
Sometimes, the solution is not obvious!
1- If you BOTH do not think in the same way!
2- If OTHER is Irrational!!!

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Mohammad Tawfik
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18. Game Theory and Conflict
Mohammad Tawfik
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The battle of the sexes game!
• YOU prefer one of two choices
• YOU prefer to have same choice as OTHER
• Unfortunately, OTHER prefers the other
choice!

19. Game Theory and Conflict
Mohammad Tawfik
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Same Example
• YOU prefer developing software using
Windows, while, OTHER prefers Linux
• YOU and OTHER are developing software to
the same customer
• YOU and OTHER prefer developing using the
same operating system
• Operating system choices are Windows or
Linux!

20. Game Theory and Conflict
Mohammad Tawfik
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Different Payoff Matrix!
Payoff
YOU
Windows Linux
OTHER
Windows 2+1 0+0
Linux 1+1 1+2
NO GOOD SOLUTION!

21. Game Theory and Conflict
Mohammad Tawfik
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Solutions!
• Communicate both ways
• Send a message  one way communication
• Select your preference and guarantee at least
one point!
• Guess based on previous experience of OTHER
preferences
• The use of a focal point

22. Game Theory and Conflict
Mohammad Tawfik
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23. Game Theory and Conflict
Mohammad Tawfik
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The Chicken game!
• YOU prefer one of two choices
• YOU prefer that OTHER have opposite choice
• Unfortunately, OTHER prefers the same
choice!

24. Game Theory and Conflict
Mohammad Tawfik
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Same Example
• YOU and OTHER prefer developing software using
Windows
• YOU and OTHER are developing software to the
same customer
• YOU and OTHER prefer developing using the
different operating systems so that the customer
remains dependent on you only!
• Operating system choices are Windows or Linux!

25. Game Theory and Conflict
Mohammad Tawfik
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Different Payoff Matrix!
Payoff
YOU
Windows Linux
OTHER
Windows 0+0 1+3
Uniux 3+1 1+1
You both end crashing into Windows!

26. Game Theory and Conflict
Mohammad Tawfik
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Solution!
• One player has to commit to a choice!

27. Game Theory and Conflict
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28. Game Theory and Conflict
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The Prisoners’ Dilemma game!
• If YOU and OTHER choose choice A, you both
win 3 points
• If YOU choose A and OTHER chooses B, you
win 1 point, and OTHER wins 4 points
• If YOU choose B and OTHER chooses A, you
win 4 points and OTHER wins 1 point
• If you both chose B, you both get 2 points

29. Game Theory and Conflict
Mohammad Tawfik
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Same Example
• If YOU and OTHER develop using Windows, you
get paid 3 M$ each
• However, if only one of you develops for Linux, he
gets 4 M$ for being distinguished, while the other
only gets 1 M$ for being so old fashioned
• If you both develop for Linux, you get paid only 2
M$ each as there is no distinguishing and you
probably used open source code!

30. Game Theory and Conflict
Mohammad Tawfik
#WikiCourses
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Different Payoff Matrix!
Payoff
YOU
Windows Linux
OTHER
Windows 3+3 4+1
Linux 1+4 2+2
What would you do?

31. Game Theory and Conflict
Mohammad Tawfik
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Solutions!
• The only RATIONAL solution for both of us is
to develop using Linux! … It is safer!!!
• We both reach the less than best solution
• UNLESS we cooperate!

32. Game Theory and Conflict
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Bidding Example!

33. Game Theory and Conflict
Mohammad Tawfik
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Two-Tiered bidding
• In 1988 “Bloomingdales” had a market price of
100$ per share … it is being sold out!
• “Macy’s” offered 102$ per share provided that
they get majority of stocks (50% +1)
• Robert Campeau offered a two-tiered offer of
105-90$ per share  for the first 50% of shares,
he pays 105$ per share for all shares and for the
rest he pays an extra 90$ per share for all shares!

34. Game Theory and Conflict
Mohammad Tawfik
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Let’s use numbers
• If there are only 10 shares … the total share
price is 1000$
• If Macy’s took over, they will pay 102$ for
each of the first 5 shares and the rest remains
for 100$, the total price will be 1010$
• If Campeau gets the first 5 shares, he will pay
525$ for them, for the other 5 shares, he will;
pay 450$ for a total of 975$ !!!

35. Game Theory and Conflict
Mohammad Tawfik
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Every body loses except Campeau!
• Campeau created a prisoners’ dilemma