(3) The motivation of the participating individuals.
(Eichberger, J. page1)
The easiest way for firms to make sure that they will all maintain their joint profit maximising output is to make an explicit agreement to do so. Such collusive agreements have occurred in the past although they have been illegal for a long time in the UK. However, they are not illegal everywhere and are sometimes even supported by national governments. (Chrystal, K.A and Lipsey,R.G. Page 255)
A cartel is created when the individuals firms in an industry make an agreement to restrict their outputs to some agreed amounts, and to charge a common price.
The Organisation of Petroleum Exporting Countries (OPEC) is a form of cartel, it is a permanent, intergovernmental organisation, created at the Baghdad Conference by Iran, Kuwait, Saudi Arabia and Venezuela. Other countries joined later on like Nigeria, Qatar United Arab Emirates. Their objectives is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations and fair return on capital to those investing in the industry.
Illustrations
The table below is an illustration of the tension between collusion and competition. In this example, it appears that the output-restricting cartel will never get formed, since each player can already foresee the overwhelming incentive for the other to cheat on such an arrangement.
Firm B output
Firm A
Output
The bold and italics numbers in each box indicate profits to firms A and B, respectively. Whether B pursues high or low output, A makes more profit going high; so does B, whichever A adopts. In equilibrium both go high. Yet both would make greater profits if both went low!
If firms in an industry behave as price-taking competitors, they earn no profit, but if they can collectively behave like monopolist, they can each share in the resulting monopoly profit. When a group of firms act together like a monopolist by restricting output and raising its price they said to form a cartel.
!980’s The Third oil pricing Crisis
Prices peaked at the beginning of the decade, before beginning a dramatic decline, which culminated in a collapse in 1986. Prices rallied in the final years of the decade, without approaching the high levels of the early 1980s a awareness grew of the need for joint action among oil produces if market stability with reasonable process was to be achieved in the future. Environmental issues began to appear on the international agenda. A fourth pricing crisis was averted at the beginning of the decade, on the outbreak of hostilities in the Middle East, when a sudden steep in prices on a panic-stricken market was moderated by output increases from OPEC Members. Prices then remained relatively stable until 1998, when there was a collapse in the wake of the economic downturn in Southeast Asia. Collective action by OPEC and some leading non-OPEC producers brought about a recovery. As the decade ended, there was a spate of mergers among the major international oil companies in an industry that was experiencing major technological advances. For most 1990’s, the ongoing international climate change negotiations threatened heavy decreases in future oil demand.
Analysis
The main reason why so many countries and companies decided to form and join a cartel was the mutual beneficiary shared by the member. The principal aim of the organisation was for the coordination and unification of the petroleum policies of member countries and determined of the best means for safe-guarding their interest, individually and collectively.
However, by forcing up the oil-prices the exploration of marginal field such as North sea and Alaska became a yielding investment for ‘oil-speculators’. Thereby reducing OPEC’s influence, few members departed from the OPEC.
Rationality
The key link between neoclassical economics and game theory is rationality. Neoclassical economics is based on the assumption that human being are absolutely rational in their economic choices. Especially, the assumption that each person maximises his or her rewards; profits, incomes or subjective benefits. This hypothesis serves a double purpose in the study of allocation of resources. First, it narrows the range of possibilities somewhat. Absolutely rational behaviour is more predictable than irrational behaviour. Second, it provides a criterion for evaluation of the efficiency of an economic system. If the system leads to a reduction in the rewards coming to some people, without producing more than compensating rewards to others then something wrong.
In neoclassical economic, the round individual faces a specific system of institutions including property rights, money and highly competitive markets. These are among the ‘circumstances’ that the person takes into account in maximising rewards.
Survival Behaviour
With aid of game theory, we noticed that the way and manner the cartels came together to endure the period of 1986 slump after the oil market boom. Countries and oil producing companies resorted to price fixing and other cooperative strategies to help stabilise and eliminate the damage of the price fluctuations.
Conclusion
Game theory was intended to confront just this problem; to provide a theory of economic and strategic behaviour when people interact directly, rather than ‘through the market’. In neoclassical theory, to choose rationally is to maximise rewards in given circumstances. Therefore we may think of rational economic choices as the ‘solution’ to a problem of mathematic. In game theory, the case is more complex, since the outcome depends not only on my own strategies and the ‘market conditions’ but also directly on the strategies chosen by others, but we may still think of the rational choices of strategies as a mathematical problem. Maximising the rewards of a group of interacting decisions makers and so we again speak of the rational outcome as the solution to the game.
