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Ask a question about: Prisoners Dilemma
Respond to the question: Oil production Refining does it foll?

09/17/2003 06:57 PM by staylor; oil production/refining PD (again)
Oil producers want to sell oil for as much as they can (sell high – SH), refiners want to purchase the oil for as little as they can (buy low – BL). If the oil producer’s payoff or utility function is u1 and the refiner’s utility functions are captured by u2, then we could set up the following ordinal preference for the oil producer:

u1(SH,BH) > u1(SH,BL) > u1(SL,BH) > u1(SL,BL)

Similarly, for the refiner:

u2(BL,SL) > u2(BL,SH) > u2(BH,SL) > u2(BH,SH)

The first terms and the last terms make perfect sense – producers want to sell high with the refiners buying high, u1(SH,BH). They don’t want to sell low with the refiners buying low, u1(SL,BL)…

I want to ask if it make sense to cast this buyer/seller deal in PD terms. I run into a logic problem, howerver, with the “intermediate” utility functions like u2(BL,SH), i.e., when will a refiner buy low with an oil producer selling high? Could I construct a u2 by dealing with effective prices? That is, suppose the refiner is running inefficiently for whatever reason and lowers his crack spread, thereby effectively raising the price of oil? If true, could I then construct a PD payoff table?
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