Daniel Englander
A Most Dangerous Game May 7, 2008 at 6:01 AM
The concept of the Prisoner’s Dilemma is pretty familiar to anyone who’s taken an introductory economics course in college. Briefly explained, two co-conspirators are arrested and interrogated in different cells. The police, who have incomplete information about the crime, tell each conspirator their night will end in one of three ways: (1) each conspirator can confess, and they both receive moderate sentences; (2) each conspirator can remain silent, and they both receive extremely light sentences; or, (3) one conspirator can confess while the other remains silent, sending the confessor back to the streets while the silent conspirator receives a harsh sentence. Silence and confession are proxies for cooperation and defection. While both conspirators benefit more from cooperating, separated and self-interested, each tries to maximize their own gain at the expense of the other. As such, both defect - hoping the other remains silent - and receive moderate sentences.
This outcome is suboptimal. The possibility of a different outcome emerges in an iterated version of this game. Tit-for-tat, a strategy developed by Anatol Rapoport, is premised on four essential conditions: a player (1) cooperates from the start, (2) defects if the other player defects, (3) cooperates in the next period, and (4) has a reasonable expectation the game will continue. The fourth essential condition means the player believes his or her long-term payoff from being nice, retaliatory, and forgiving will be great enough to offset the payoff loss from cooperating initially. While this strategy works for an infinitely iterated game, it fails at the introduction of a defined endpoint. If one or both players knows the next period, or the one after that, or even the one after that, is the final period, each will defect consistently and with reckless abandon.
Now, consider the failure of the tit-for-tat strategy with the introduction of a defined end point in terms of the behavior of oil companies. Each oil company takes part in a repeated, multi-player Prisoner’s Dilemma. Action choices - the decision to cooperate or defect - are comprised of investment decisions and commodity pricing. If the game were infinitely repeated and constrained, that is, if the supply of oil were infinite in the presence of the current climate disaster, demand from the public and private sector for renewable energy sources would compel the oil companies to diversify. A tit-for-tat strategy, where diversification is cooperation and oil production ramp-up is defection, would prevail. Each oil company would initially pursue a strategy of energy diversification but, because oil is cheap and available, a defection could be punished by increasing supply and undercutting prices.
Declining oil reserves, constrained supply markets, and rising commodity prices clearly signal a defined endpoint. In other words, oil is running out and all the major producers know it. As such, it makes sense that the major oil companies are largely foregoing the development of renewable energy projects, i.e. cooperating, in favor of increasingly expensive, high-risk projects such as those in Alberta, the Arctic Circle, and, in the near future, Brazil. Now, let’s step back for a second and play a little game. Think about the names of the major oil companies and try associating those companies with different renewable energy projects or R&D operations. Okay, think a little bit harder. You’ve got Shell and the *cough* London Array, Chevron and WaveBob, the ConocoPhillips-Tyson biodiesel joint venture, BP Solar and the BP-GM hydrogen project, etc. Who’s missing?
Exxon Mobil, the world’s largest non-state owned oil company, has a pathetically nonexistent renewable energy record. However, given what we know about defection in the presence of a defined endpoint, Exxon Mobil’s strategic decision makes sense. Though the long-term payoff from cooperation is higher than repeated defection, a self-interested player will always try to maximize its payoff in the immediate round if it has some knowledge about the game’s ultimate period. The other companies have little choice but to defect as well, lest they miss an opportunity to discover another oil field and maximize their share of the increasingly constrained supply market. Shell’s recent decision to abandon the London Array in favor of pursuing development of Alberta’s tar sands is a good example of abandoning the tit-for-tat strategy in favor of a defection cycle. Some game theorist’s refer to this as the “death spiral.”
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