This paper discusses why OPEC operates in the Prisoner’s Dilemma. According to Nalebuff & Dixit (2008), the prisoner’s dilemma is a major component of the game theory. The game depicts two prisoners caught in a game in the absence of trust and perfect information. They have three options concerning their crime. Option one dictates that they cooperate and receive equal penalties. Option two dictates that either works with Detectives hoping that their partner fails thus enjoy a reduced sentence. The last option dictates that both refuses to work and hopes that their partner acts likewise (Nalebuff & Dixit, 2008).
Now OPEC is an organization that manages the interests of oil-producing nations around the world. Mankiw (2014) asserts that members of this group are always under a form of prisoner’s dilemma thus prone to making wrong decisions. The dilemma facing investors is often wondering the current nature of market rationality. They also have to make decisions on potential actions in anticipation of irrational actions (Mankiw, 2014).
The reasonable primary action of OPEC would be to control demand and supply for optimal pricing. However, note that every OPEC member is often guarding their personal interests. Mind also that there is a growing influence of non-oil producing countries and non-OPEC members in the market. Increased oil prices following a rise in demand over supply would reflect greater economic growth. On the contrary, decreased oil prices following reduced demand would be undesirable for future growth. No single country in this pool would trust that its peers do the right action to keep prices at significant Highs. Therefore, the best possible effect would be no action (Mankiw, 2014).
In conclusion, the prisoners dilemma teaches that OPEC cannot trust its member countries to do the right and logical thing. The essence of this game would be that the market’s outcome depends upon the choices of all players who do not trust each other. Therefore, this dilemma shows how in the absence of perfect information between two countries under OPEC can become harmful while capitalizing on personal interests.
Bibliography
Mankiw, N., 2014. Principles of Economics. Boston, MA: Cengage Learning.
Nalebuff, B. & Dixit, A., 2008. The Concise Encyclopedia of Economics: The Prisoners’ Dilemma. [Online] Available at: http://www.econlib.org/library/Enc/PrisonersDilemma.html[Accessed 9 July 2015].
