Economic and Game Theory
|"Inside every small problem is a large problem struggling to get out."|
Thread and Full Text View
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?