Scenario 17-2 Imagine that two oil companies, BQ and Exxoff, own adjacent oil fi

Question

Scenario 17-2 Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million Drilling a well to recover oil costs S million per well If each company drills one well, each will get half of the oil and eam a $67 million profit ($72 million in revenue- $5 million in costs). Assume that having percent of the total wells means that a company will collect X percent of the total revenue efer to Scenario 17-2. Exxoffs dominant strategy would lead to what sort of well-drilling behavior? O a. Exxoff will never drill a second well O b. Exxoff will always drill a second well O c Exxoff will drill a second well only if BQ drills a well d.Exxoffwill drill a second well only ifBQ does not drill a well.

Explanation / Answer

Answer

Option (c) seems correct. Exxoff will drill a second well only if BQ drills a well. It is because when both drill one well each then their profits are $ 67 mn. But when Exxoff drill a second well, then his share will be 67% of revenue and therefore his profit will become $86 mn. So if Exxoff drills a well and then BQ drills one, then it will pay off (more profits) to build another one to Exxoff.

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