Friday, April 15, 2016

OPEC Oil Cartel and Game Theory

In Principles of Microeconomics and a few other courses that I teach I use a simple game to examine the incentives of players to behave cooperatively and non-cooperatively.  In the classic Prisoner's Dilemma, both players have an incentive to play cooperatively together in the sense that they will earn more than if they each play non-cooperatively.  Yet, we would expect each to play non-cooperatively - hence the dilemma.  The Wall Street Journal has a good article on exactly that within the oil production output decisions by the members of OPEC.  If all the members agree to restrict output, then profits to the members will be higher than if all the members increase their output beyond the proposed agreement, since as output increases prices fall.  This is exactly what was happening at the time the article linked above was published.

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