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OPEC Debrief
1. What is the prescription for successful cooperation in OPEC?
Successful cooperation requires incorporating several of the elements we highlighted in
class: clarity in what the price targets are and what happens if they’re not met, clear
statement and actual enforcement of punishment strategies (typically Saudi flooding the
market) if these criteria are triggered, and a sensible set of price targets that account for
the noise in the game.
2. Do the currently higher price levels make it easier or harder to cooperate?
Several of the teams noted that Saudi had limited power to move prices even if it flooded
the market. At current high levels of demand, the relative overcapacity in the market is
less than it was a year or two ago. Ironically, this makes cooperation harder rather than
easier by limiting the ability to punish.
3. Why did cooperation break down so much? What advice would you offer future
players?
The main advice seems to be to build an enforcement mechanism early in the game.
Decisions made in the first round had strong effects throughout the game. It’s key to
coordinate expectations about prices, punishments, production levels, right from the start.
4. What was Iranian strategy? As a large player, how do you operate effectively?
Like all of the players, Iran stands to gain if others cooperate and it cheats. However,
given its size, Iranian cheating is more likely to be detected. Iran, Iraq, Venezuela and
Saudi have to recognize their mutual interdependence and mutual advantage from high
prices and build an enforcement mechanism regardless of what the smaller countries do.
5. What was an effective strategy for a smaller country like the UAE?
Deviations by small countries are undetectable. Large countries have to realize this and
not think the non-participation by small countries is a deal-breaker. For UAE, the role
should be to foster cooperation among bigger countries and to help create enforcement
mechanisms whereby the big three won’t have incentives to cheat. A smaller country
will, of course, overproduce relative to any quotas under such deals.
6. How should I bid in the auction?
The key observation is the value of the outside option---Nigeria. Since you’re
guaranteed to get this country for $100 million, the bidding calculation one should make
is to determine the profitability of that country versus the profitability of other countries
and to bid such that profitability net of bidding costs is equalized. A non-optimal bdding
strategy is to bid up to a breakeven amount, which ignores the value of the option.