Game Theory Real World

Game Theory Real World

The Organization of the Petroleum Exporting Countries (OPEC), a cartel of twelve countries, and its principal goal is the determination of the best means for safeguarding the cartel's interests, individually and collectively. In 1973, OPEC's share of the market was over 50 percent of world oil production. The increasing oil price in one hand encouraged greater level of production in non-OPEC countries, in the other hand reduced demand for crude oil for consumers increased insulation. Moreover, the improvement of the usage of energy of factories and automobiles leads to several years world consumption declined. In order to maintain prices, OPEC lowered production. However, that price cut was not enough, prices continued to decline. As a result of lower consumption and increased non-OPEC production, the market share for OPEC dropped below 30 percent by 1985. In an attempt to achieve OPEC’s price goals, during the first half of the 1980's, Saudi Arabia disproportionately reduced its output.

With a cartel, other OPEC members need to reduce their output as well to boost oil price. This situation is similar to prisoner’s dilemma. In the chart below, numbers are just made up, which are the profit for each individual country and just easy for your understanding.

| Individual |

OPEC (other individual) | | Not Cheat | Cheat |

| Not Cheat | 80, 80 | 30,100 |

| Cheat | 90, 10 | 50, 50 |

In this case, Saudi Arabia did not cheat and really tried to help out by reducing its output, with wish that other OPEC countries would also not cheat and reduced their output. However, in fact, throughout that same time period other OPEC members continually cheated on their agreements. The chart’s creating logic is that when they all play (not cheat, not cheat), they would have lower total outcome, higher price and higher profit for all of them. If only one individual cheat, then total they have higher outcome and lower price than the previous scenario,...