Question

OPEC is described as a classical example of what kind of market? Why have they had success and failure? If OPEC had only two members, Saudi Arabia and Kuwait use game theory to explain how much production each would supply to the market. What does dominant and optimal strategy mean in the context of this example? Usually, the above example is a one time strategy. In the long run what will decide how much will ultimately be produced?

Answer 1

Oligopoly market

The success and failure of these markets depends solely on the behavior and cooperation of the member nations.

If there are only 2 players, they will compete with each other using prices. They can chose from a low price and high price.

Dominant strategy of each firm will be to chose a low price but optimal will be to cooperate and charge a high price collectively.

In the long run, players will find it beneficial to charge a high price cooperatively.