(Solved): Game Theory and Strategic Choices - End of Chapter Problem The Organization of Petroleum Exporting C ...

Game Theory and Strategic Choices - End of Chapter Problem The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental organization of 14 nations that meets periodically in order to establish oil production quotas for each individual nation, resulting in greater profits overall. However, OPEC has a history of failing to enforce its own quota limits. Consider a simplified example with just two countries: Venezuela and Kuwait. Currently, both countries are producing 2.5 million barrels per day. If both countries agree to cooperate with each other, they will each restrict output to 2 million barrels per day, causing the price of oil to rise. If one of the countries defects from the agreement, it will produce 2.5 million barrels and total output will rise from 4 million barrels to 4.5 million barrels. As a result, the price will fall slightly. If both nations defect from the agreement, each nation will again produce 2.5 million barrels and the price will fall to the original level. The payoffs for each possible outcome are illustrated in the accompanying payoff table. \table[[,Veriezuela cooperates,Venezuela defects],[Kuwait cooperates,\table[[Kuwait receives

million worth of profits],[Venezuela receives

million worth of profits]],\table[[Kuwait receives

million worth of profits],[Venezuela receives

million worth of profits.]]],[\table[[Kuwait],[defects]],\table[[Kuwait receives

million worth of profits],[Venezuela receives

million worth of profits.]],\table[[Kuwait receives],[

million worth of profits],[Venezuela receives],[

million worth of profits.]]]]