Leadership in an oil production game, Game Theory

Leadership in an Oil Production Game

Students can be broken into pairs to play this game once, witheach student's representing one country; then each shouldswitch partners and play as if she were the other country.Students could also play this game individually, indicatingwhich action they choose when playing as each country; youcan pair sets of answers to show outcomes. This game is based on the Rational-Pigs game in John McMillan's Games, Strategies, and Managers; he uses the Saudi Arabia analogy onpage 14.

Ask students to consider a very simplified version of thesituation facing members of OPEC in the 1970s. In this sim-plified story, we assume that OPEC is made up of only twocountries-Saudi Arabia and Kuwait. Suppose that eachcountry can produce a unit of oil (maybe a million barrels)at a cost of $1. Saudi Arabia is a big country and can pro-duce either 4 or 5 units of oil; Kuwait is a small country andcan produce either 1 or 2 units of oil.

Given output and consumption in the rest of the world,the following formula tells us the price at which oil is sold:Price = 10 - (QS + QK), where QS is the number of unitsproduced by Saudi Arabia (SA), and QK is the number of units produced by Kuwait (K). Then profits are calculated as follows. If SA produces 4 units and K produces 1 unit, theprice of a unit of oil equals 5 (from the above formula). Be-cause the cost of producing a unit of oil equals $1, a countryearns a profit of $4 for each unit it makes. Because SA pro-duces 4 units, its total profit equals $16; because K produces 1 unit, its total profit equals $4. Profit per unit obviouslydepends on total production, as the following table illustrates:

1490_leadership in oil production game.png

Finally, tell students to put themselves in this situation,tell them to worry only about their own profits, and ask them:(1) How many units would you produce if you were SaudiArabia? (2) How many units would you produce if you were Kuwait?

When discussing this game, you can first collect studentinput on their choices, writing on the board the number of students who chose 4 as Saudi Arabia and 2 as Kuwait. Thenyou can show how the game can be analyzed more formally.It is nice to show that the symmetric version of the game (inwhich Saudi Arabia and Kuwait each choose either 2 or 3units) is a standard prisoners' dilemma; the smaller output level is the cooperative strategy. Once you change the choices available to the playersto be consistent with the description of the game and changethe payoffs accordingly, you will be able to illustrate how the analysis changes. Encourage students to provide hypothe-ses for why Saudi Arabia's incentives have changed andbuild on their ideas to show that large players often incur a much higher cost of cheating than do small players. Ask students to think of other examples of dilemma situations with leadership or provide some of your own. 

Posted Date: 9/27/2012 5:29:42 AM | Location : United States







Related Discussions:- Leadership in an oil production game, Assignment Help, Ask Question on Leadership in an oil production game, Get Answer, Expert's Help, Leadership in an oil production game Discussions

Write discussion on Leadership in an oil production game
Your posts are moderated
Related Questions
Game Theory: (prisoner's dilemma) Consider the following 2 x 2 pricing game, where rms choose whether to price High or Low simultaneously. Find the equilibrium in dominant s

The best reply dynamic is usally termed the Cournot adjustment model or Cournot learning after Augustin Cournot who first proposed it in the context of a duopoly model. Each of two

A zero add game may be a special case of a continuing add game during which all outcomes involve a add of all player's payoffs of zero. Hence, a gain for one participant is usually

In a Variable add game, the add of all player's payoffs differs counting on the methods they utilize. this can be the other of a continuing add game during which all outcomes invol

Consider two identical firms, for each firm, the total cost of producing q units of output is C(q)=0.5q^2. The price is determined as P(q1,q2)- a-q1-q2. Estimate Cournots outcome;

In a positive add game, the combined payoffs of all players aren't identical in each outcome of the sport. This differs from constant add (or zero add) games during which all outco

A strategy is strictly dominant if, no matter what the other players do, the strategy earns a player a strictly higher payoff than the other. Hence, a method is strictly dominant i

To give Mom a day of rest, Dad Plans to take his two children, Bart and Cassie, on an outing on Sunday.Bart prefers to go to the amusement park (A), Whereas Cassie prefers to go to

Game Theory has evolved since its start as a thought exercise for academic mathematicians. Taught in economics departments , top business schools, and the strategic analysis, even

Winner of the Nobel Prize in 1972, Hicks is acknowledged mutually of the leading economists normally equilibrium theory. he's credited with the introduction of the notion of elasti