Question

For this discussion, consider the recent actions by OPEC regarding oil output goals. The cartel has established output goals to impact price. The cartel met with non-OPEC producers to obtain compliance with output limits to increase oil prices to some specified level. Using game theory, what do you predict for compliance with output levels? Why? Does a dominant strategy exist? Nash equilibrium?

Answer 1

An oligopoly is an industry that is dominated by few large firms that display highly coordinated behavior. Examples of oligopoly are auto and oil industries. Firms produce in an industry dominated by few firms that display highly coordinated behavior where output and price decisions are highly linked. The goods produced by these firms are relatively homogeneous and control majority of output produced in the industry. There are barriers to entry as high setup cost or limited resources. They behave closely related to their competitors.

A cartel is an organization through which members jointly make decisions about prices and production. One well-known example is OPEC whose members limit production in order to support oil price.

In terms of game theory model it can be as the following payoff matrix: