Monday, November 17, 2014

OPEC caught in prisoners' dilemma

Oil prices have fallen by 30%.  If the oil producing nations cooperate, and cut back output, then prices would go back up.  While this would be good for everyone in OPEC (and bad for consumers), it is not individually rational.

Students will recognize this as a pricing dilemma, that makes it very hard for rivals to maintain a cooperative outcome.  See earlier post here:  Never start a land war in Asia (or a price war)

1 comment:

  1. Here is another story. Bill has a blue cap and would prefer a red one, while Rose has a red cap and would prefer a blue one. Both prefer two caps to any one and either of the caps to no cap at all. They are each given a choice between keeping the cap they have or giving it to the other. This “exchange game” has the same structure as the story about the prisoners. Whether Rose keeps her cap or gives to Bill, Bill is better off keeping his and she is better off if he gives it to her. Whether Bill keeps his cap or gives it to Rose, Rose is better off keeping hers and he is better off if she gives it to him. But both are better off if they exchange caps than if they both keep what they have. The new story suggests that the Prisoner's Dilemma also occupies a place at the heart of our economic system. It would seem that any market designed to facilitate mutually beneficial exchanges will need to overcome the dilemma or avoid it.
    Game theory is the study of the ways in which interacting choices of economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents.
    Long before game theory had come along to show analysts how to think about this sort of problem systematically, it had occurred to some actual military leaders and influenced their strategies. Thus the Spanish conqueror Cortez, when landing in Mexico with a small force who had good reason to fear their capacity to repel attack from the far more numerous Aztecs, removed the risk that his troops might think their way into a retreat by burning the ships on which they had landed. With retreat having thus been rendered physically impossible, the Spanish soldiers had no better course of action but to stand and fight—and, furthermore, to fight with as much determination as they could muster. Better still, from Cortez's point of view, his action had a discouraging effect on the motivation of the Aztecs. He took care to burn his ships very visibly, so that the Aztecs would be sure to see what he had done. They then reasoned as follows: Any commander who could be so confident as to willfully destroy his own option to be prudent if the battle went badly for him must have good reasons for such extreme optimism. It cannot be wise to attack an opponent who has a good reason (whatever, exactly, it might be) for being sure that he can't lose. The Aztecs therefore retreated into the surrounding hills, and Cortez had his victory bloodlessly.
    Kuhn, Steven, "Prisoner's Dilemma", The Stanford Encyclopedia of Philosophy (Fall 2014 Edition), Edward N. Zalta (ed.), URL = .
    Ross, Don, "Game Theory", The Stanford Encyclopedia of Philosophy (Winter 2014 Edition), Edward N. Zalta (ed.), URL = .