Analyzing the Oil Market Game Using Game Theory

Consider the following scenario involving two major oil-producing countries, Saudi Arabia and Iran, which can choose between high production and low production levels for their oil output. The payoffs for each combination of strategies are given in the table below, with the figures representing profits in billions of euros.

1. Identify the dominant strategy for each country (if it exists).
2. Determine the Nash Equilibrium for this game.
3. Explain the significance of the Nash Equilibrium in the context of this game.
4. Discuss how the concepts of cooperative and competitive strategies are illustrated in this scenario.

Instructions:

• Analyze the payoff matrix to identify the dominant strategy for Saudi Arabia and Iran.
• Use the concept of Nash Equilibrium to determine the outcome where neither country can unilaterally improve their payoff.
• Discuss the implications of this equilibrium for the oil market and the strategic behavior of the countries involved.
• Reflect on the challenges of achieving mutually beneficial outcomes in an oligopolistic market.

Provide a detailed explanation for each step of your analysis, ensuring clarity in your reasoning and understanding of Game Theory principles.