Question

TEXplor has purchased a 2-year lease on land adjacent to the land leased by

Clampett. The land leased by TEXplor lies above the same crude oil deposit. Assume each company sinks wells of the same size at the same time. If both companies sink wide wells, each will extract 2 million barrels in 6 months, but each company will receive profit of only GHC 1 million. On the other if each company sinks a narrow well, it will take a year for Clampett and TEXplor to extract their respective shares, but their profits will be GHC14 million apiece. Finally, if one company drills a wide well while the other company drills a narrow well, the first company will extract 3 million barrels and the second company will extract only 1 million barrels. In this case, the first company will earn profits of GHC 16 million and the second company will actually lose GHC 1million.

1. Illustrate this using a normal form game. (5marks)

2. Does either firm have a strictly dominant strategy? If yes, what is (are) these strategies? Explain your answer.

3. What strategy will each firm adopt? Explain your answer.

4.Does this game have a Nash equilibrium?Explain your answer

5.Is collusion possible in this game? Explain your answer.

Answer 1