Question

Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $60 million. For each well that is drilled, the company that drills the well incurs a cost of $4 million. Each company can drill up to two wells. What is the likely outcome (equilibrium) of this game if each company pursues its own self-interest?

Answer 1

The likely outcome of the game if each company pursues its own self-interest would be that both companies will drill one well. The companies have a common pool of oil worth $60 million that is beneath adjacent oil fields. The cost of drilling a well is $4 million. Both companies can drill up to two wells.

The likely outcome (equilibrium) of this game if each company pursues its own self-interest is that both companies will drill one well. There are two companies in this game. Each company has the option of drilling one well or two wells. However, the cost of drilling a well is $4 million, and the companies share a common pool of oil that is worth $60 million. Each company will have to consider the costs and benefits of drilling a well.

If one company drills two wells, they will have to pay $8 million in drilling costs. However, they will also have access to more oil and can potentially earn more money.The other company will have to decide whether to match the first company by drilling two wells or to drill one well. If they drill two wells, they will also have to pay $8 million in drilling costs.

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