Two oil firms - Petrobras and the Anglo-Egyptian Oil Company - are oligopolists

Question

Two oil firms - Petrobras and the Anglo-Egyptian Oil Company - are oligopolists who form a cartel. If they both abide by the cartel's arrangements, they'll earn an extra $2 million in economic profit per year. If they both cheat, they'll earn no extra economic profit. If one firm cheats, it will earn $4 million in economic profit, and the other will lose $3 million. Their payoffs are summarized in the table below. What is Anglo-Egyptian's dominant strategy? What is Petrobras' dominant strategy? What is the game's Nash Equilibrium? What implications does it have for the health of the cartel?

Explanation / Answer

Two oil firms - Petrobras and the Anglo-Egyptian Oil Company - are oligopolists

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