OPEC and Game Theory
In the last few years, OPEC(Organization of the Petroleum Exporting Countries) has been seriously challenged for its near-monopoly of the global oil supply. It is an organization of diverse oil exporting countries, such as Saudi Arabia, Iraq, Nigeria, and Venezuela, that have traditionally banded together to help maintain favorable oil prices by setting production quotas amongst themselves. Their ability to do so was thanks to their combined large market share and relatively low production cost. However, OPEC’s primacy has been challenged by the technological improvements of shale oil production in the United States, which has led to a worldwide oil glut and depression of oil prices due to a record high of US oil production.
OPEC members are faced with various ways to respond to this new development. The most beneficial one would be to come into a sort of agreement with the rest of the major non-OPEC oil producers to collude on setting the best possible oil price. However, this scenario resembles the “prisoner’s dilemma”. That is, all sides would benefit the most if they all worked together to control prices. That is unlikely to happen though due to the distrust the various players have for each other due to the inability to predict their competitor’s decisions and the benefit they would receive if they chose to not collude on setting production quotas and instead decided to produce as much as possible. As a result, it is likely that this strategy will not be utilized due to each individual player not being willing to choose collusion as a viable option.
Another alternative for OPEC is simply to initiate a price war with the upstart oil producers. That is, intentionally drive down prices even further by ramping up production in hopes that competing producers will be driven out of business. The downside to this strategy is that it is unclear how long it will take for their competitors to be priced out of the market and OPEC members will suffer in the short term. This strategy, while easier to carry out, carries a significant downside in that many of the current OPEC members have unstable government regimes that would be reluctant to endanger their financial stability.
This article shows how game theory is prevalent in international business, and that while exists certain strategies that can be utilized by individuals/groups that could benefit an entire group(the oil suppliers) better than any other , the lack of perfect information in the marketplace will prevent the implementation of said strategy.
https://www.bloomberg.com/view/articles/2017-08-02/opec-s-game-theory-dilemma