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The Oil Pricing Exercise

General Instructions

Alba and Batia are two less developed countries. Each produces oil at a cost of less than $10
per barrel. Their neighboring country, Capita, is a land-locked, highly developed country that
consumes a large amount of oil. Capita must buy all its oil from Alba or Batia unless it wants
to pay an overland transportation charge of $25 per barrel.

Currently, Alba and Batia each are selling oil to Capita at a price of $20 per barrel. So long as
they both sell at the same price, each country can expect to retain about half of the Capitan
oil market. If one sells at a lower price than the other, it will expand the market share and
increase its profits at the expense of the other. However, neither can put the other
permanently out of the oil business by undercutting the other's price on sales to Capita.

You are a member of the Oil Pricing Board of Alba or Batia. Like other members of the Board,
you were appointed by your country's Minister of Commerce and have eight months
remaining in your current term of office. Each month the Board will be asked to set that
month’s price for your country’s oil sales to Capita. Your goal as a Board is to maximize your
country’s profits on oil sales to Capita. Oil revenues are an important part of your country's
Gross National Product. You are entirely indifferent to the oil profits of the other country.

Market research has demonstrated that the monthly profit for your country on oil sales to
Capita will depend on the price you set and on the price set by the other country that sells

Do Not Reproduce
oil to Capita. However, the possibility of overland delivery of oil from other producers
makes it impossible to sell oil to Capita at a price of more than $30 per barrel.

By long-term agreement with Capita, the price that each country charges must be $10, $20,
or $30. Historically, despite occasional short-term demand swings, the Capitan oil market has
been relatively stable, and the normal monthly profit that Alba and Batia each can expect to
make on their oil sales to Capita is indicated in the following chart. The figures inside each
box indicate the profit made during that month. The figure in the lower left of each box
represents Alba’s profit in millions of U.S. dollars. The figure in the upper right of each box
represents Batia’s profits in millions of U.S. dollars.

The Oil Pricing Exercise was created for the Harvard Negotiation Project by Professor Roger Fisher, Director of the Harvard Negotiation
Project and revised by Andrew Clarkson and Bruce Patton. Copies are available from the Teaching Negotiation Resource Center (TNRC),
online at www.pon.org, by email: tnrc@law.harvard.edu, or by telephone at 800-258-4406. This case may not be reproduced, revised or
translated in whole or in part by any means without the written permission of the TNRC coordinator, Program on Negotiation at Harvard
Law School, 501 Pound Hall, Cambridge, MA 02138. Please help to preserve the usefulness of this case by keeping it confidential.
Copyright ©1989, 1994, 1995, 2008, 2014, 2019 by the President and Fellows of Harvard College. All rights reserved. (Rev. 2/19)
The Oil Pricing Exercise: General Instructions

PROFIT SCHEDULE
KEY:
BATIA
Profit

ALBA
Profit

Batia’s Price

$30 $20 $10

11 18 15
$30
11 2 2
Alba’s Price 2 8 15
$20
18 8 3
2 3 5
$10
15 15 5
 Alba and Batia have a history of hostility and recently broke
diplomatic relations. Hence, each Board will have to set its price on
the next month’s sale of oil to Capita without knowing what price
the other is going to charge. In the current volatile political climate
(national elections in each country are only three months away), any
attempt to confer with the other country would certainly result in
your being dismissed from the Oil Pricing Board, and might result in
your prosecution for treason.

*****************************
Profit Record

Month Price Chosen Profit for Month Cuml. Total

Profit
Alba Batia Alba Batia Alba Batia
1

Copyright ©1989, 1994, 1995, 2008, 2014, 2019 by the President and Fellows of Harvard College. All rights reserved. (Rev. 2/19) 3