I n t h I s c h a p t e r y o u w I l L

Game theory
is the study of how people behave in strategic situations. By
“strategic” we mean a situation in which each person, when deciding what actions
to take, must consider how others might respond to that action. Because the num-
ber of firms in an oligopolistic market is small, each firm must act strategically.
Each firm knows that its profit depends not only on how much it produces but
also on how much the other firms produce. In making its production decision,
each firm in an oligopoly should consider how its decision might affect the pro-
duction decisions of all the other firms.
Game theory is not necessary for understanding competitive or monopoly
markets. In a competitive market, each firm is so small compared to the market
that strategic interactions with other firms are not important. In a monopolized
market, strategic interactions are absent because the market has only one firm. But,
as we will see, game theory is quite useful for understanding the behavior of
oligopolies.
OPEC 
FAILED TO KEEP OIL PRICES HIGH
during most of the 1990s, but this
started to change in 1999.
A n O i l O u t s i d e r R e v i v e s a C a r t e l
B
Y
A
GIS
S
ALPUKAS
The price of crude oil has doubled since
early last year. Higher prices for gaso-
line, heating oil, and other products are
hitting every consumer’s pocketbook.
Is OPEC flexing its muscle again?
Not exactly. There’s a new cartel in town,
and after a shaky start two years ago, its
members have achieved—for now, at
least—the unity necessary to hold to
their production quotas. And that means
higher prices.
In a sense, this cartel is simply the
11 members of the Organization of Pe-
troleum Exporting Countries plus two—
Mexico and Norway. But the world’s
oil-producing and exporting nations are
wielding power this time around mainly
because of a shove not from the Middle
East but rather from Mexico—and espe-
cially from its persistent energy minister,
Luis K. Tellez. . . . Already, the price of
crude oil has more than doubled, to
$23.45 a barrel from $11 early this year.
Not that the coalition is home free.
Prices hit $24 a barrel last month, but
slipped back when traders thought they
saw hints of cracks in the cartel’s soli-
darity. After all, if one country breaks
ranks, the cartel’s tenuous grip on the
world market could crumble.
For the moment, though, there
seems little easing in the cartel’s united
front or in rising oil prices.
S
OURCE
:
The New York Times,
Money & Business
Section, October 24, 1999, p. 1.
I N T H E N E W S
The Oil Cartel
Makes a Comeback
g a m e t h e o r y
the study of how people behave in
strategic situations

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O L I G O P O LY
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A particularly important “game” is called the