OPEC Game Debrief

  1. Bidding in the auction

In bidding in this auction, the optimal strategy is to bid up to the difference in value between the “inside option” (the country currently up for bid) and the “outside option” (Nigeria). Of course, in order to do this, one needs to arrive at valuations for the inside and outside options. To arrive at these valuations, several characteristics are salient:

(a)What is the likelihood that collusion will succeed and for how long?

(b)What are my risk attitudes about the ending time of the game?

(c)Is collusion more or less likely to succeed if I take leadership of a given country versus some other team?

Part c complicates the analysis in part a since it indicates that because of the social nature of collusion, the success likely depends on the teams running each of the countries.

One needs to do the same sort of analysis with Nigeria.

  1. How to foster collusion

Recall that the rules of thumb for sustaining cooperation collusion:

(a)The expected behavior should be clear and easy to describe.

(b)The ambition of the expected behavior should reflect both the intensity of the threat to defect and the ease of detection

(c)Threats in the even of bad behavior should be clear and proportional.

What also matters is who is in the coalition of “good behavers.” In the OPEC game, there is a trade-off between the potential profits from a larger coalition versus the increased difficulty in modulating the temptation to defect and in detecting bad behavior when it occurs. In practice, collusion in OPEC is much easier to sustain among the “leaders”—the big three countries—rather than in a grand coalition.

Indeed, one key lesson in developing cooperation is to devote the bulk of efforts to those who really matter to the profitability of the coalition rather than marginal players.

  1. How to lead cooperation effectively

Knowing what makes a good system for enforcing good behavior is only part of the story. Game theory tells us that there has to be a meeting of the minds as to what the equilibrium exactly is. In part, leadership is building trust and communication to make this meeting of the minds possible. In the instance of Market A, we saw how, by creating links of knowledge and information and acting as an information broker, Iran was able to “kick start” cooperative behavior.

The lesson here is that a good plan in terms of clarity, proportionality, etc. is only half the battle—execution in the form of leadership is at least as critical.