OPEC Write up

pdf

School

New York University Stern School of Business *

*We aren’t endorsed by this school

Course

001

Subject

Economics

Date

Feb 20, 2024

Type

pdf

Pages

Uploaded by eluoyy

Eric, Proby, Rahul, Stephani Opec Summary Auction Strategy: Before the auction, our team met up to discuss auction strategy. After a bit of deliberation and running through hypothetical scenarios of how the auction would unfold, we settled on a high risk / high reward strategy -- “Let the other teams relatively overpay for the lucrative countries, and attain Iraq B for the minimum”. We thought this was the best strategy based on plugging in proxy numbers for world price, multiplying by 95% of capacity and subtracting the marginal cost of that quantity, based on numbers provided (We thought 95% would be a reasonable average based on uncertainty surrounding negotiations / agreements, and it would be too aggressive to assume that each country would always produce at max capacity). After running the numbers, we realized that bids of ~3.0b plus for Saudi, 350m Iran and 240-250m for Venezuela would be too great of a cost compared to the average, normalized profit they would make over the course of the simulation. Of course, this also was under the assumption that other teams wouldn’t have the same strategy as us and we would actually be able to get Iraq B for 100m. We decided to play it safe, we would do 2 things in the auction to try to ensure our optimal outcome that we planned out. First, we wanted to try to set upper bounds to what we would pay for the other countries if we thought we could find value, whether the bidding wasn’t high enough or it seemed as though other teams had the same strategy as us. Secondly, we wanted to try to drive up the price of other countries within reason, to put us at a head start, while ensuring that we didn’t accidentally pay for the country.

Auction Reflection / What we would have changed: As the auction started, we instantly realized that our suspicions were right, and teams were more than willing to overpay for Saudi Arabia and Iran. We executed on our strategy of driving the price up above what we thought was a relatively worse value than 100m for Iraq B (almost 4b for SA and over 400m for Iran), and any additional bidding after that was just incremental value that we got if we successfully attained Iraq B. This process continued until there were 2 teams left and both Iraq’s on the table. We knew that since any bid on the 1st Iraq (Iraq A) would mean that Iraq B went for 100m, we wanted to instantly bid 100m on Iraq A, so 1 of 2 things would happen. 1) The other team would wisely let us have it, and get Iraq B themselves for 100M, or 2) They would bid 110m without realizing that they could get the next one for 100m (ended up happening). This meant that the strategy was executed perfectly for us and we wouldn’t change anything. We felt we had by far the best deal in the auction and we were off to a good start in the game. Reflecting on the auction, we believe that our auction predictions were largely correct, as the overpaying for Saudi Arabia and Iran threw these countries to the bottom of the profit rankings except for one exception Quantity Setting Strategy: In our role as Iraq in Market B during the OPEC simulation, we employed a strategic approach that involved navigating various phases of production decision-making. Initially, we capitalized on Iraq's relatively smaller production capacity by choosing to operate at or near its maximum capacity of 3700 units. This decision was rooted in the fact that as the smallest producer in the market, we believed the other countries would be more tolerant of our higher production values because of less harm incurred on them from our quantity increases. We also believed that having precedent from Iraq C always setting their maximum quantity would warp our competitors'

views of Iraq more so than similarly sized Venezuela. However, as the simulation progressed, we briefly aligned our strategy with that of the broader Market B, slightly reducing our output in accordance with agreements made with fellow member countries. This phase represented a tactical maneuver aimed at exploring the effects of collective production adjustments on the market. Ultimately, after a careful assessment of market dynamics and the demand-price relationship, we returned to a high-production approach, maintaining a consistent output close to our maximum capacity with minor fluctuations. These adjustments were made in response to the evolving market conditions, ensuring that our strategy remained adaptable and focused on optimizing Iraq's economic potential. Quantity Setting Execution / What we would have changed: Our regret was not producing our maximum quantity throughout the entire game. While we slightly reduced our quantities in a show of goodwill, we believe that this was a mistake and we could’ve increased our profit by maximizing quantity. For example, in rounds 3-5, where we decreased our quantity, we lost out on profits. For rounds 3-4, where we produced 3500 instead of 3700, we made profits of (45.03-8)*3500 +(45.32-8)*3500=260(million) for the two rounds. The price decrease from producing 200(thousand) more barrels would be roughly 36 cents, putting our profits if we maximized those 2 rounds at (44.67-8)*3700 + (44.96-8)*3700= 270(million), losing out on 10 million in profits from these 2 rounds. Negotiation and Mid-game Strategy: The only real negotiation occurred at the beginning of the game, when the teams decided upon producing at maximum capacity for the first few rounds and then tapering it down to control the supply. The keystone agent in these negotiations was Saudi Arabia– it’s fairly intuitive as they had the highest production capacity and lowest marginal cost relative to other countries, hence

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

they were the dominant player in the ecosystem and were able to set the tone for negotiations. The Saudi team threatened to produce at maximum capacity if other teams deviated from the previously agreed upon plan to control supply, thus setting a Nash equilibrium that was held stable through the force of profit-maximizing incentives. Overall profit reflection / how our strategy have differed: Ultimately, we believe that we could’ve negotiated more to create different equilibria in the system to better maximize our profits. We believe we slightly underestimated the amount of cooperation that would occur in markets, assuming that higher backstabbing and self interest all around would’ve destroyed the profits of larger countries relatively more than our own, so we were somewhat too cautious during production in the initial half of the game. Tapering down production proved to be a suboptimal strategy as mentioned before, and there does exist the possibility that we could’ve obtained more profits if we produced at maximum capacity the entire time. The ambiguity that this traverses is the unknowability of counterfactual negotiations, but it’s worth noting that negotiating with the other teams to search for other Pareto optimal points could’ve left us at least better off. The proposition of negotiating more looks, ex post facto, like a high upside, minimal downside on, hence we do wish we collaborated more with other teams and set up more contracts that worked in our favor. Ultimately, while our negotiation and quantity setting strategies could’ve been better, the incremental gains that we obtained in our auction strategy did persist and give us the ultimate edge over Iraq A, which we’re happy about.

Related Documents

Fall 2021_ABM 1041_Exam 2_ver 2.pdf

midterm_practice_solution.pdf

IMG_0053.jpeg

Assignment 2 Chapter 17.pdf

DA 662 Exam 2 Forecasting Spring 24'.pdf

Task 1 - Copy.docx

Spring 2024 Principles of Macro Exam 1 Practice Problems.docx

Spring 2024 Principles of Macro Assignment 5 (Demand and Supply).docx

Spring 2024 Principles of Macro Assignment 8 (CPI) .docx

Spring 2024 Principles of Macro Assignment 3 (PPF) .docx

Review Test Submission Final Online – 2023 Spring Term.pdf

SP22 Exam 2.docx

Recommended textbooks for you

Managerial Economics: Applications, Strategies an...

Economics

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:Cengage Learning

Microeconomic Theory

Economics

ISBN:9781337517942

Author:NICHOLSON

Publisher:Cengage

Managerial Economics: A Problem Solving Approach

Economics

ISBN:9781337106665

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

Publisher:Cengage Learning

Microeconomics A Contemporary Intro

Economics

ISBN:9781285635101

Author:MCEACHERN

Publisher:Cengage

Microeconomics: Principles & Policy

Economics

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:Cengage Learning

SEE MORE TEXTBOOKS

Recommended textbooks for you

Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning
Microeconomic Theory
Economics
ISBN:9781337517942
Author:NICHOLSON
Publisher:Cengage
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Microeconomics A Contemporary Intro
Economics
ISBN:9781285635101
Author:MCEACHERN
Publisher:Cengage
Microeconomics: Principles & Policy
Economics
ISBN:9781337794992
Author:William J. Baumol, Alan S. Blinder, John L. Solow
Publisher:Cengage Learning