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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: SargeK who wrote (39900)3/14/1999 5:55:00 PM
From: Razorbak  Read Replies (3) of 95453
 
Analytical Illustration of OPEC's Dilemma...

<<The example was also provided to stimulate or provoke thoughtful
analysis.>>

Sarge: Here is an opposing analysis to consider. It's a well-known
game of strategy called the "Prisoner's Dilemma" which highlights the
tension between the individual incentives within OPEC to "defect"
(i.e., cheat by overproducing beyond agreed production quotas) and
the collective goals within the cartel to "cooperate" (i.e., abide by
the agreed quotas).

Suppose that each of two players has two options at any time. They
can either cooperate or defect. Consider the payoff matrix below.

Player B

Cooperate Defect
-------------------------
| 2 | 4 |
| | |
Cooperate | Outcome 1 | Outcome 2 |
| | |
| 2 | -1 |
Player A -------------------------
| -1 | 0 |
| | |
Defect | Outcome 3 | Outcome 4 |
| | |
| 4 | 0 |
-------------------------

In this game, there are only four possible outcomes:

Outcome 1) If Player A cooperates and Player B cooperates, then
Player A scores 2 and Player B scores 2.

Outcome 2) If Player A cooperates and Player B defects, then Player A
scores -1 and Player B scores 4.

Outcome 3) If Player A defects and Player B cooperates, then Player A
scores 4 and Player B scores -1.

Outcome 4) If Player A defects and Player B defects, then Player A
scores 0 and Player B scores 0.

Notice that the dominant strategy of the game (i.e., the strategy
that yields the best outcome for an individual player) is to defect.

Hence the inherent dilemma.

IMO, the Prisoner's Dilemma helps explain why OPEC has such a hard
time obtaining compliance to agreed production cuts and why history
is littered with a trail of stories about rampant cheating within the
cartel.

Just my opinion, of course.

Razor
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