INTERNATIONAL NEGOTIATIONS (INT660)

INTERNATIONAL NEGOTIATIONS (INT660)

OIL PRICING EXERCISE – CASE EVALUATION

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Cevdet KIZIL

(Graduate MBA)

Southern New Hampshire University

International Negotiations (INT660) – Prof. Aysun Ficici

October 26, 2004

Manchester, New Hampshire

OIL PRICING EXERCISE – CASE EVALUATION

        The Oil Pricing Exercise case was about two less developed countries called Alba and Batia which were selling oil to a highly developed country, Capita.

        Before the case’s application in the class, I identified some of the most important points underlined by the case. For instance, it said that each country could expect to retain about half of the Capitan oil market as long as they both sold at the same price. Another important factor was that, if one sold at a lower price than the other, it would expand the market share and increase its profits at the expense of the other. According to the case, the main goal was to maximize my country’s profits on oil sales to Capita. Furthermore, it was stated that the monthly profit for my country on oil sales to Capita would depend on the price we set and the price set by the other country (Batia). Finally, the price range was between $10 and $30 per barrel. In my opinion, understanding the key points indicated by the case was the first major requirement for success.

        Just before the implementation of the case in class, I was assigned to the board of Alba country. Additionally, I had a special task as being the representative of Alba board.

        When our group met for the first time, I understood that some of my friends were not clear enough about the case. Concerning the members who were clear, everyone had a different strategy about what to do. For instance, Caesar told that we had to set the price for $30 so that both of the countries could earn the highest profit possible ($11 vs $11). However, I said that this was a wrong strategy because if our opponent country (Batia) sold for $20 or $10 per barrel, our profit would decrease significantly to $2 and Batia’s profit could even reach to $15 or $18 per barrel. However, our group members were still not sure if this was the right strategy and the imbalance of powers inside the group continued. But I already knew that the other group would set the price $10 to minimize the risk and to secure their initial profit, so I insisted to set our price for $10 inside the group. As a result, my group agreed and we set the price for $10, and just as I guessed, the other group also set their price for $10. Thus, the game started with equal profits. In the next round (2nd round), my group said we had to try a different strategy and set the price for $20. I was strictly against this new strategy, because I knew that the other group would again set their price $10. Unfortunately, I had to agree this strategy since the majority of my group chose this one. Again, just as I guessed, the other group set their price $10 and decreased our profit to $3 while increasing theirs to $15. On the opposite side, if we had set $10, the profits would be shared $5 - $5. As a result of this first defeat, my group asked me how I always knew the other group’s strategy and price. So, I explained the rules of this game to my group members in detail this time so that everybody could understand completely. Perhaps, I was wrong since I hadn’t explained it so detailed in the previous rounds. After that point, a strong form of trust and understanding was established inside our group and all of my group’s members believed me for the decisions and accuracy of the strategy. So, in the third round, we set the price $10 again and at least didn’t let our profits to depreciate further. After the third round, I had a meeting with the Batia’s representative. Before the meeting, I told my group that I would tell Lili (the Batia’s representative) to set the price $30 - $30 for reaching to a maximum profit for both of the companies, but we would secretly set our price $10 again to maximize our profits. My group members thought this was a devilish idea, but they accepted it since it was our lonely chance to increase Alba’s profits again. During the meeting with Lili, I implemented this strategy and she and their group fell into this trap. They set the price $20 while we set $10. So we increased our profits by $30 while they could only increase by $6. So, we passed them at this point and in the following rounds, I told my group that we had to set the price always $10 to protect our advantage, they agreed. Both countries always set the price $10 in the other rounds but we achieved a higher profit than Batia at the end. On the other hand, the other meetings after the first were unnecessary, because the trust was completely broken between the groups. Lili didn’t believe me anymore in the following meetings. So, the relationship and communication between the groups, and the decision making inside my group (Alba Board) covered these developments.

        For the evaluation of my own team, I think we did a good job, because especially after the second round, we had a full consensus on decisions and formed a mutual trust. Importantly, our final profit was higher than Batia.

        Then, to summarize my group’s goal and strategy, indeed it was a very simple one which was based on maximizing the profit and minimizing the risk.

        Next, if I should mention how our strategy changed over in time, our group didn’t have a real strategy until the beginning of the third round. Because everyone had a different idea and strategy first, and our group members couldn’t trust each other. It was after the second round where we were left with a disadvantage because of setting the price $20 against their $10. After that step, our group chose to set the price for $10 as a general strategy. This strategy didn’t change in time, because we had to protect our lead.

Finally, it was the Capita country which actually won the game. Because they always bought the oil at the lowest price possible because none of the countries, Alba and Batia could trust each other. In reality, both Alba and Batia lost this game.

ESPAÑOL:

El caso del Ejercicio de Fijación de Petróleo fue sobre dos países menos desarrollados llamados Alba y Batia que estaban vendiendo petróleo a un país altamente desarrollado, Capita.

Antes de la solicitud del caso en la clase, identifiqué algunos de los puntos más importantes subrayados por el caso. Por ejemplo, dijo que cada país podría esperar conservar alrededor de la mitad del mercado petrolero de Capitán, siempre y cuando ambos vendieran al mismo precio. Otro factor importante fue que, si se vendía a un precio más bajo que el otro, expandiría la cuota de mercado y aumentaría sus ganancias a expensas de la otra. Según el caso, el objetivo principal era maximizar las ganancias de mi país en las ventas de petróleo a Capita. Además, se afirmó que el beneficio mensual para mi país en ventas de petróleo a Capita dependería del precio que fijamos y del precio establecido por el otro país (Batia). Finalmente, el rango de precios estaba entre $ 10 y $ 30 por barril. En mi opinión, entender los puntos clave indicados por el caso fue el primer requisito principal para el éxito.

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