BP and ExxonMobil are engaged in negotiations regarding a new exploration. Simultaneously BP can choose to play Tough (T) or soft (S), while ExxonMobil can opt for Intransigent (I) or Acquiesce (A). The payoffs are as follows. If the choices are T and I, the payoffs are (5, 1) to BP and ExxonMobil, respectively. If the choices are S and I the payoffs are (6, 2) for BP and ExxonMobil, respectively. If the actions of the firms are T and A, the payoffs are (3, 3), and if the actions are S and A, then the payoffs are (4, 4). Which of the following statements are true? BP has a dominant strategy play S. The Nash equilibrium is (S, A) ExxonMobil has a dominant strategy to play A. The dominant strategy equilibrium is (S, A) These negotiations resemble a prisoners’ dilemma.

BP and ExxonMobil are engaged in negotiations regarding a new exploration. Simultaneously BP can choose to play Tough (T) or soft (S), while ExxonMobil can opt for Intransigent (I) or Acquiesce (A). The payoffs are as follows. If the choices are T and I, the payoffs are (5, 1) to BP and ExxonMobil, respectively. If the choices are S and I the payoffs are (6, 2) for BP and ExxonMobil, respectively. If the actions of the firms are T and A, the payoffs are (3, 3), and if the actions are S and A, then the payoffs are (4, 4). Which of the following statements are true? BP has a dominant strategy play S. The Nash equilibrium is (S, A) ExxonMobil has a dominant strategy to play A. The dominant strategy equilibrium is (S, A) These negotiations resemble a prisoners’ dilemma.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter16: Bargaining

Section: Chapter Questions

Problem 3MC

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There are two oil producers, Saudi Arabia and Iran (these are countries which we are treating as players in this example). The market price will be $60/barrel if the total volume of sales is 9 million barrels daily, $50 if the total volume of sales is 11 million barrels daily, and $35 if the total volume of sales is 13 million barrels daily. Saudi Arabia has two strategies; either produce 8 million barrels daily or 6 million. Iran has two strategies; either produce 3 million barrels daily or 5 million. Assume for simplicity that marginal cost of production is zero for both countries. Here is the normal form representation of this game (where Saudi Arabia and Iran are players, they can choose strategies over what quantity to produce and they face payoffs in terms of profits).  Note that the following paragraph is simply an explanation of this representation of the game. If you are already comfortable with the structure, feel free to skip to the questions below the horizontal line…
There are two oil producers, Saudi Arabia and Iran (these are countries which we are treating as players in this example). The market price will be $60/barrel if the total volume of sales is 9 million barrels daily, $50 if the total volume of sales is 11 million barrels daily, and $35 if the total volume of sales is 13 million barrels daily. Saudi Arabia has two strategies; either produce 8 million barrels daily or 6 million. Iran has two strategies; either produce 3 million barrels daily or 5 million. Assume for simplicity that marginal cost of production is zero for both countries. Here is the normal form representation of this game (where Saudi Arabia and Iran are players, they can choose strategies over what quantity to produce and they face payoffs in terms of profits).  Note that the following paragraph is simply an explanation of this representation of the game. If you are already comfortable with the structure, feel free to skip to the questions below the horizontal line…
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