THE 1985-86 OIL PRICE COLLAPSE AND AFTERWARDS: WHAT DOES GAME THEORY ADD?

This paper focuses on the strategies used by OPEC to generate cartel profits over the period 1983-90. The evidence supports the hypothesis that OPEC adopted a swing producer strategy from 1983 to 1985. But when Saudi Arabia's profits fell below the level of Coumot profits in the summer of 1985, it abandoned the role of swing producer, driving prices to the Cournot level. Subsequently, Saudi Arabia appears to have adopted a tit-for-tat strategy designed to punish excessive cheating by other OPEC members. Based on these findings, the strengths and limitations of game theory are assessed.