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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.