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 $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue.
-Refer to Scenario 17-2. If BQ and Exxoff are able to successfully collude to maximize their joint profits, BQ will

Question

Quizplus · Accepted Answer

If BQ and Exxoff collude, they will want to maximize their joint profits. The best option for them is to each drill one well, which will result in each company earning $67 million in profit. If one company were to drill more wells than the other, they would earn a larger percentage of the total revenue but also incur more costs, which would decrease their overall profit. Therefore, both companies drilling one well each is the best choice for them to collude and maximize their joint profits.

Scenario 17-2. Imagine That Two Oil Companies, BQ and Exxoff, Own Adjacent