Fourth EditionOctober, 2013

THE STRTHE KGPian GAME THEORY SOCIETY

TEGISTCola Wars

War Of Wits

TheMad King

White Collar Crimes

Jack, an FBI agent is accused of selling witness information during a criminal trial and is now a

fugitive. He is being chased by a team of US Marshalls led by agent Decker. After being unsuccessful for some t ime, the Federal Bureau of Investigation (FBI) is given the charge to help the US Marshalls in catching Jack.

During his days in FBI Jack had worked with Peter, a special agent at FBI, who now leads a white collar team. Jack manages to contact Peter and tells him that he has been framed for selling witness information in the Sulliven case which had Volcker as the defence attorney. While trying to find evidence for his innocence Jack had in the past hacked into Volcker’s computer and had found a reference in an email chain to a hard copy ledger which is kept at the defence attorney’s office. But he needs Peter’s help to break into Volcker’s office.

Decker is in fact a corrupt official and he was the one who sold witness information. The details of all the

witnesses and how much did Volker pay to Decker to destroy those witnesses is kept in that ledger by Volker, as his leverage against Decker, if ever needed.

Peter trusts Jack and they break into Volker’s office to get that ledger. When they enter Volker’s office there they see Decker was already there shredding the l e d ge r. N ow Pe t e r k n ow s that Decker and Volker are the real criminals and the only e v i d e n c e against them h a s b e e n d e s t r o y e d . Moreover that was the only evidence which could have proven Jack’s innocence.

After watching Peter and Jack in the defence attorney’s office Decker open fires at them. While on the run Peter and Jack steal one of the

Volker’s Lamborghini, kept at his office garage, to escape Decker.Since the ledger has been destroyed the only way the real criminals can be convicted is if Volker and Decker give evidence against each other. Also Jack’s innocence depends on catching the real criminals. What would you do if you were Peter? Think for a while before you read further.

P e t e r being the s m a r t w h i t e c o l l a r t e a m leader at F B I d e c i d e s t o p u t them in a u n i q u e solution

known as the prisoner’s dilemma. He plans to bring both Volker and Decker at a place where they can see each other’s actions but are distant enough to hear or talk to each other.Meanwhile Volker is called into the

Lamborghini’s showroom/service centre where they have tracked the stolen car but it was not in shape since it had encountered a major accident. It is shown that FBI agents ask Volker to confirm his car and sign on a few papers to report its theft. This was also being witnessed by Decker along with the FBI consultant Neal Caffery and another FBI agent.

Neal tricks Decker into thinking that Volker is signing a deal with the FBI agent on destroying witnesses in the Sulliven case, this enrages Decker and he points his gun at the FBI agents. Meanwhile Volker is shown that Decker has given evidence against him, so unless he wants a jail time of 25 years he should better start talking. Volker tells the whole story and thus both the criminals get caught and all the charges against Jack are dropped. Thus Peter was successful in catching the real criminals using the Prisoner’s dilemma. The above article is a plot of one of the episodes of the White Collar TV series (SO2E07).

India-Iran Issue Economics Club, IIT Delhi

The middle-east has been a turbulent spot since quite some time. In past few years, there have been several uprisings throughout the region, popularly known as “Arab Spring”. Some of these led to regime changes, notably in Libya and Egypt. The overall situation has been terrible in these countries. The latest addition to this is of Syria, where rebels are at full scale war with the government for past one year. Iran has its own issues, and tensions between Iran and USA have escalated really high over its alleged nuclear program. As much as this has political implications, there has been a situation of turmoil and panic in the oil market. India, as you might guess, is the 4thit, comes from Iran.

Let’s focus our attention to Iran. Iran is an oil based economy sitting at the heart of middle-east. The country is ruled by an authoritarian regime which is yearning to have nuclear capability to have a greater say in the region. It has set up uranium enrichment plants under disguise to achieve its objective. Even if Iran officially maintains that its nuke project has nothing to do with weapons, T he Uni ted S ta tes

eyebrows were sure to rise. The US has imposed numerous sanctions over Iran and its trade allies over the past years to deter it from pursuing its nuke program. But then, Iran too has been defiant in its attitude and looks to be in no mood of reconciliation.

India has her own share of problems. T h e e c o n o m y i s undergoing a slump, the inflation is sky high and its currency is rapidly losing its worth, the major cause of which is the shrinking of foreign exchange reserves. Iran accepts payments from India in rupees, which saves a lot of invaluable foreign exchange, which is vital for the economy. But with this perk, comes the threat of US sanctions, which can potentially add up to our growing list of crisis! So, what should we do?

On the international stage, India wants Iran to be its strategic ally. Frankly speaking, it has hardly any other choice. Constantly increasing energy demands, lack of any sizeable domestic petroleum

resource compel India to maintain healthy relations with Iran. Yet, the stats show a different picture altogether. The trade volume from Iran has declined to lower levels than ever before. India also doesn't wants to be seen as a country defying the

i n t e r n a t i o n a l opinions against Iran. It maintains that Tehran has to come clean on its nuclear project for h e a l t h i e r t ra d e relations between the two countries.

There are several key steps that are required to be taken to get the things going. The bilateral trade between New Delhi and Tehran is largely s u p p o r t e d by i n t e r n a t i o n a l insurance companies and shipping companies. With the sanctions effectively put in place, their role has constantly been reducing. India n e e d s t o f i n d h o m e g row n alternatives to put the things in right order. The second factor is the rupee convertibility. India needs to make its currency convertible in order to make exchanges with foreign currencies more efficient. This would

make payments in rupee possible and act as a boost for the Indian economy. The third issue is the massive trade deficit associated with the Indo-Iran trade. The exports from India to Iran are fairly negligible compared to the massive imports. India needs to tackle this issue, as t rade imbalance i s a f a i r ly undesirable thing, given the state of our economy. These are the things that we can do, but the paramount boost to the Indo-Iran relations would come if and only if Tehran subsides to the international community about its alleged nuclear program!

Thus, we see that India stands on shaky grounds regarding the Tehran issue. It has to maintain credible relations with the international community by respecting its sanctions and minimizing trade interactions with Iran. Apart from that, it also doesn't want to lose on a trusted trade ally in Iran. The situation is extremely delicate and demands ser ious diplomat ic strength to tackle it. We can just hope for this hassle in the middle-east to die out, but till then we should have our backup in place!

I

Hello everyone!We are back with our fourth edition of The Strategist- a periodical that aims to spread the culture of game theory and strategic thinking among KGPians. For those of you who are going to read The Strategist for the first time, let us briefly introduce ourselves and The Strategist. Started in April 2012, The Strategist was an initiative by the The Kgpian Game Theory Society (KGTS) which is now the most widely read campus paper of IIT Kharagpur with the highest online viewership. In this endeavour of ours, we try to bring to you some very interesting articles and developments in the field of “Game Theory”. Game theory is the study of

strategic decision making, that is, whenever two or more players are involved in any cooperation or conflict situation, game theory can come in handy. We believe that if you explore the area of game theory you will be able to make better strategies in your daily life. In this edition we have presented some original and inspired ideas in a manner that is easily comprehendible. As you read through the articles you will realize just how integral a role game theory plays in your day to day life.

We would like to share with you some of the achievements of the society. We are working on the "Art of Strategy" Project which is suggested

to us by Professor Avinash Dixit (Emeritus Professor, Princeton University). In the past we have conducted sessions of Strategia Hubs – fortnightly discussions on Game Theory and "The Finance Talk". Apart from this, last semester we also conducted an on spot strategy based competition called the “War of Wits” for our fellow KGPians. You will get to read a short summary of it in this edition. Recently, we have collaborated with Economics Club, IIT Delhi for mutual exchange of ar t ic les in our respective periodicals. We hope this collaboration will lead to fruitful outcomes for both the societies.

And now a big news!!! Our online strategy game “Brethren of the Coast” is ready and will commence on 25th October, registrations for which have already started. So hurry up before you lose gold to others!

To know more about the game follow us on our facebook pagewww.facebook.com/The.KGTS. After reading the above section if you are curious to know more about Game Theory and strategic thinking then dive in, you are going to love reading this edition! And with that we welcome you to take plunge into the fascinating world of strategic thinking.

Cola Wars: The Battle Of BrandsShould you enter the market? Very often in businesses, firms come across the challenge to enter a new market where its competitors are already present. In such situations how does a firm decide whether to enter that market or not? Let us try to understand that by taking the example of Pepsi and Coca-Cola, the two soft-drink giants.

Pepsi and Coke compete with each other in a number of geographies by producing products that are substitutes of each other. Now suppose that Pepsi is the market leader in a particular region and Coke is initially absent from that market. Coke wants to enter this market seeing its huge potential. How should Coke go about analyzing this situation? Firstly Coke should consider the possible actions taken by its competitor (Pepsi) if it enters the market. If Coke enters the market Pepsi has two options, either to share the market with Coke or retaliate C o ke ’s e n t r y by l a u n c h i n g a g g r e s s i v e m a r k e t i n g a n d

advertisement campaigns. To these strategies of Pepsi, Coke has the option either to fight aggressively i.e. also spend huge amount of money on marketing and advertisement or do nothing i.e. passive response.Keeping these responses into consideration we can draw a game tree showing the payoffs and strategies for both Coke and Pepsi. Payoffs represent the benefits to the c o m p a ny, a p o s i t ive p ayo f f represents profit and a negative payoff shows a loss. While framing the payoffs you should consider the fact that aggressive marketing and advertisement costs a lot of money and also fighting against a market leader by the entering firm leads to losses for the entrant. In the diagram below the first payoff in the parenthesis is for Coke.

Framing the optimal strategy might be difficult in such games because our payoff depends on the actions of our opponents. These kinds of games can be analyzed using the process of backward induction. In this process we look at the final node and decide the f inal move of the game, depending on this final move, we shall be able to predict final but one move and carrying this procedure further we may be able to predict the first move of the game. Such games are known as sequential games where one player moves first and then the other responds to it. The other type of game is a sequential game where players play their strategies simultaneously, as you shall see in the article on prisoner’s dilemma.

Can you predict the outcome of the above game? Think for a while before you read further.

Since Coke is the last mover in this game, it gains the most when it reacts passively in the last node (since 2 is better than all the other payoffs of Coke). Also Pepsi is aware of this game and knows that Coke shall choose Passive in the last step, then for Pepsi remaining passive in the second last step is the best response. In the third last step, Coke has the options of gaining 2 in the market by entering or earning nothing by staying out. Hence Coke shall enter the market and the market will be shared by Coke and Pepsi both, the final payoff being 2 and 4 for Coke and Pepsi respectively. Often it might be possible that players are not fully aware of the strategies and motives of their opponents. It might be possible that Pepsi reduces the price of its soft drink hence this might be a new strategy for Pepsi. Also rather than earning profits now, Pepsi may lay more emphasis on retaining market share for now by aggressive campaigning and earning profits later by raising prices once the new entrant had left the market after f ac ing losses in aggress ive responses. So to utilize the power of backward reasoning and game trees a player must be fully aware of the strategies and motives of his opponents.

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The Strategist 2The KGPian Game Theory Society

Welcome

War Of WitsWar of Wits is the first of its kind strategy based competition of IIT Kharagpur. The event took place on Saturday, 30th March 2013 and saw a participation from 79 teams (237 participants). Considering the fact that many people were away from campus on the extended weekend of Holi and the close proximity of this event to end semester exams, this was a good number. The event took place in two stages:

Stage 1 : PrelimsA written quiz to test the analytical and logical reasoning skills of the participants. It consisted of quite a few original questions designed by the team itself. Totally 28 questions were to be answered in 30 minutes. Top 6 teams made it to the finals.

Stage 2: FinalsIt consisted of 2 elimination rounds and final face off. The unique and challenging part of these elimination rounds was that each participant from each team was playing the game against another participant from another team and he/she had to make his/her move based on their prediction of how their opponents and other team members might behave. One wrong move and they could have lost the round for their team. All the rounds were modeled using game theoretic tools and concepts and were based on three p o p u l a r ga m e s n a m e ly T h e Traveler’s Dilemma, The Centipede Game and The Prisoner’s Dilemma.

1st elimination round: 6 teams start, 2 got eliminated.

Name: Make a Claim; modeled on t h e T r a v e l l e r ’s d i l e m m a formulated by Indian economist Mr. Kaushik Basu in 1994.

Due to a fire accident in an area, two warehouses were burnt down. Being representatives of two retail giants, players were asked to make a claim for the loss between 80000 and 200000. If both made the same claim, then that amount was treated as the true value and given to both. However, if the two claims differed, then they got an amount that equaled the minimum of the two claims. Also, a reward of 20,000 was given to the person making the smaller claim (for honesty) and penalty of 20,000 to other(for deceit).All teams played each other once in this round. The frequency with which the participant’s chose the minimum value of 80000 increased with each set which was in agreement with theory. We purposely chose a reward/penalty value of 20000 to get average team payment equal to 11000 (based on experiments we conducted with society members and our wingies). The actual average came out to be103000 which speaks a lot about the academic proficiency of team KGTS.

2nd elimination round : 4 teams start, 1 got eliminated.

1st part was Pass or Take based on the centipede game.

The players of the respective teams were given the options to either pass or end the game by accepting the offer. Every pass lead to an increase

Each team played this game once against every other team. Theory suggests they should take the bounty as soon as they are asked to play. On many occasions, the teams failed to think forward and despite having the option to play first, they passed the mantle to their opposition who claimed the bounty immediately. Perhaps they were not able to put themselves in their opponent’s shoes, which is a basic requirement in game theory.

2nd part was Split or Steal based on a similar game in British Game show Golden Balls.The two players were jointly rewarded with an amount c. Then each was given an option to either split or steal the money with their opponents. The whole game can be summarized by the payoff table:

in total payoff and at the same time, increased the risk of the passing player. The whole game can be summarized in the table below:

Teams A and B were the best of this round with B3 bringing his team to the finals. Team C got eliminated. They couldn’t convince their opponents to split.

Grand FinalsA business strategy based simulation game by Harvard Business review which was provided by the Consulting Club VGSOM. The participants acted as distr ict managers for a car rental firm with an aim of increasing its profits with respect to their competitors. They had to strategically place their price and sales each month for 6 month. In the end team B emerged winner, followed by team D and A.

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Mad King And His Witty Ministers

Once upon a time, there lived a great king. There were100 ministers to assist him in his work. The ministers were not only brave and powerful, but also sharp and intelligent. As a result even though the king grew old, and had no heir, his kingdom prospered.

In the olden days, it was custom to treat the word of the king as that of God, and thus, it was not to be disobeyed under any circumstance. And thus came a twist in the tale. The king, in his old age, contacted a very

serious mental illness (now known as senile dementia). One day, he announced that he did not need so many ministers and wanted to get rid of some of them. So he called them asked them to stand in a line ,and put hat on each of them, which was either black or white in color (the ministers were aware of this). The situation was such that the minister standing in the front was able to see no one's hat (not even his own), the one 2nd in the line could see the hat of only the 1st minister, while the one standing last (the 100th minister) could see everyone's hat but his. They could all hear each other. The king then announced that starting from the last minister, each one had to shout out the color of his hat (and nothing else). If he was right, he was safe, otherwise he'd be killed. The king also added that if any sort of communication took place between any of the ministers (except the prior discussion which they had done) or if they indulged in any unsought movement, all of them would be killed instantly . The ministers wanted to save as many of them, if not all. You may think that the fate of the kingdom was sealed, but the ministers did not –They thought of a strategy. Can you?

The ministers during their discussion decided that if the 100th in line saw odd number of white hats and even number of black hats out of the 99 before him he would shout out white as the color of his own hat. If he saw even number of white hats he would shout out black. Since the 100th minister did not have any knowledge of the hat on his head his probability of dying would be 0.5. Now suppose the 100th minister was killed on saying white. 99th minister now knows that the including him there are now odd number of white hats left. If he sees odd number of white hats before him out of 98, it means he is wearing a black hat. And if he sees even number of white hats, he too is wearing a white hat to make a total of odd number of white hats. Either way the 99th minister is sure of the color of his hat; so are the ones in front of him!It turned out that the 100th minister saw even number of black hats in front of him and luckily he was wearing black hat. So all the ministers were saved and as far as the people of the kingdom were concerned, they killed the mad king and all lived happily ever after.

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