Pipelines are a crucial part of the oil industry. Pipelines transport oil from the production sites to wherever there is demand for oil. They charge the oil producers a price per barrel they transport through their pipelines. Texas has been the center of production for much of the history of the oil industry in the US. As a result, there are a number of pipeline firms in the area and the industry is essentially an oligopoly (a handful of companies with significant market power). Outsiders to the pipeline industry are often surprised by how low the rates the pipeline companies charge are. In the attached Excel table are the payoffs (profits) of two companies: Cowboy pipelines and Big Bend pipelines.

1) If Cowboy were to charge $3.00, what is the best price for Big Bend to charge?

a.$1.50

b.$2.00

c. $2.50

d. $3.00

e.$3.50

2) If Big Bend were to charge $1.50, what is the best price for Cowboy to charge?

a.$2.00

b.$2.50

c. $3.00

d. $3.50

e.$4.00

3) Based on the payoff matrix provided in the Excel file, what do you predict the equilibrium price charged by Cowboy pipelines and Big Bend pipelines?

a.Cowboy: $4.00

Big Bend: $3.50

b.Cowboy: $2.50

Big Bend: $2.00

c. Cowboy: $3.00

Big Bend: $2.50

d. Cowboy: $2.00

Big Bend: $1.50

e.Cowboy: $3.50

Big Bend: $3.00

4) If Cowboy and Big Bend could get together and cooperate (i.e., collude) on setting prices together, what prices should each set that would result in thehighestprofit for thembothat thesame time?

a.Cowboy: $3.00

Big Bend: $3.00

b.Cowboy: $4.00

Big Bend: $3.50

c. Cowboy: $3.50

Big Bend: $2.00

d. Cowboy: $3.00

Big Bend: $3.50

e.Cowboy: $3.50

Big Bend: $3.50

478 982 567 3048 4521 $4.00 302 1239 1204 1104 1402 503 1034 657 4049 5482 $3.50 674 1566 1545 2013 4859 794 1142 4329 6789 5813 Cowboy pieplines ( price in $ per barrel) $3.00 785 3901 1698 3080 2014 903 1204 780 647 501 $2.50 1959 4890 1981 4201 3291 1009 874 628 459 194 $2.00 684 989 1780 1689 2304 $1.50 $2.00 $2.50 $3.00 $3.50 Big Bend Pipelines (price in $ per barrel)