3. Consider the folltt played one time and one time only. Two countries Iran and

Question

3. Consider the folltt played one time and one time only. Two countries Iran and Saudi Arabia enter into a collusive agreement to fix the output of oil. Each player can either limit output (L) or defect from the cartel (D). Players choose their strategies simultaneously according to the following matrix Iran 600 800 900 700 Saudi Arabia 300 400 1100 1 800 a) Do either of the players have a dominant strategy and if so what are those strategies? b) Solve for any Nash equilibria of the game. c) Is this game a prisoner's dilemma? Explain why or why not.

Explanation / Answer

a) Saudi Arabia has a dominant strategy given by playing defect as the payoffs are greater no matter what Iran does. Thus has we have 1100>900 and 800>700, defect is a dominant strategy for Saudi Arabia. Similarly defect is also a dominant strategy for Iran no matter what Saudi Arabia does as 800>600 and 400>300.

b) There will be one pure strategy Nash equilibrium to this game given by (Defect,Defect) with payoffs of (800,400).

c) This game is not a prisoners dilemma as there is a dominant strategy for both players which is also the Nash equilibrium of the game. In a prisoners dilemma there will always be a collusive outcome which will be Pareto superior, which is not the case here.

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