OPEC from a Game Theory perspective Term Paper Example | Topics and Well Written Essays - 2250 words

OPEC from a play Theory perspective - Term Paper ExampleThe surmisal has its rules and game theorist uses them to predict remainder outcome. One of the world bodies that habituate game theory in its operation is OPEC. The study focuses to find the design of game theory in OPEC and the effect of members and non members states on the strategies in production and market share. OPEC is an intergovernmental group formed by Venezuela, Kuwait and other countries in 1960. The organization aimed to lay claim the benefit of controlling the supply to maximize taxation of member states. The organization also aimed at alter and bringing agreement in the marketplace of fuel to do good to both consumers and producers. This was a unwashed strategy employed to try and influence the prices of crude oil. The idea of OPEC in the initial stages was to pr yett the slip by of prices after an all time high that enabled oil producing countries maximize on their utility. OPEC is referred to as a in ternational reliance in the oil producing countries. Classical economist present a condition that monopolist utilize to maximize profit, MC= P (1-1/e) given that P is the price of oil, e is the elasticity of demand and MC represent marginal damage of oil production. Economist hint that oil price are dead in the short run, and OPEC can increase above the market price. (Source Dye 2) Supposing that there are two firms in a cartel, the maximizing price would be where marginal cost 1 = marginal cost 2 = marginal revenue. The maximizing price would be where the two marginal costs meet marginal revenue. OPEC members state has a reserve of 79.3% of the world crude oil and was producing 63% of the orbicular oil export in 2009. OPEC does not use market force s for marginal revenue and marginal cost to determine equilibrium price. Free market would result with some countries producing none speckle others benefiting so much to the extent of controlling production. For example, Saudi Arab ia could benefit more than the rest of the country because it has ample oil reserves and therefore it can afford to increase production at a dismantle price. Therefore, free competitive market is not possible in the oil production industry and it explains the causal agent behind forming a cartel (Gambits 3). In order to maximize utility, OPEC considered strategies to control production through quotas system. each nation state produces a certain percentage of production capacity. However, the challenges facing OPEC is on determining the factual or the maximizing quota that each members state produces. The solution to these challenges lies on game theory (Gately 1). The OPEC members have a duty to have the same opinion on a strategy to take a hop output such that prices are prolonged at a high level. Nevertheless, some scholars like Friedman argued that Arab countries cartel on oil production would collapse because high prices of petroleum are not sustainable even if the output is put to zero. OPEC, unlike other bodies, is exceptional. The decisions agreed upon are of decisive to every member and misery to adhere has dire consequences. This strength of OPEC has ensured the sustainability of world prices today and will sustain even in the future. harmonize to Osborne cartels faces inherent problem of cheating, and determining quotas and it is wrong to classify them as stable. Gately (3) says that the OPEC as a cartel is hold at Nash equilibrium. At Nash equilibrium, every country