Reference no: EM132519311

Russia and Qatar made the first serious moves in October 2008 toward forming an OPEC-style cartel for natural gas. The two strategies these countries face are to comply with the cartel agreement or to cheat on the cartel agreement. If both countries comply, the economic profit for each will be $140 million. If one country cheats, that country earns $200 million in economic profit and the other country will have an economic loss of $10 million. If all countries cheat, the cartel breaks down and the economic profit for each country will be $80 million. Address the questions below, considering that countries make their decisions simultaneously and this as a one-shot game (played only once).

a. Draw the payoff matrix. What is the Nash equilibrium in this game?

b. Are there incentives to cheat on the cartel agreement by each country? Why or why not?

c. Is the cartel agreement sustainable? If not, make the cartel sustainable by suggesting specific amount of punishment (in dollars) to be applied in case of deviation from the cartel agreement (assumption: cheating is detected and punished). Draw the new payoff matrix and find the Nash equilibrium in this game. Are there Pareto optimal strategies in this game?