The OPEC auctions are curious in a certain way. While they are conducted a standard English auctions, they differ in that no one goes home without a prize (i.e. a country). Thus, even the loser of these auctions wins something. How does this change bidding?
We know from the IAWLP that the best strategy in a private values Vickey/English setting is simply to bid up to your value. But for a variety of reasons, our OPEC setting is not this setting at all. For one thing, values aren't really private--your estimate of the value of the auction is actually useful information for others seeking to determine the value. For another, this is not a one-off auction. Losing a given auction implies that there are a number of other countries up for auction. Finally. There are only finitely many opportunities, so we can apply LFRB to anticipate how things might proceed. All of this makes the usual strategy of bidding "truthfully" whatever that means, a dead letter.
Let's start at the end, our usual game theory zen strategy. If there is only one auction left and only two bidders, how should you bid? Clearly, wat matters is not how much you value the UAE, but rather how much more you value it than Nigeria. This, of course, will depend on what you gleaned from earlier winning auction bids and bidders. The higher is the expected price over the course of the game, the larger the value of the gap between the production capacity of the UAE v Nigeria. At the same time, to achieve this level of production might require some curtailment of production on UAE v Nigeria that lessens this gap. None of this invalidates the usual strategy of bidding up to the point where you are indifferent between winning and losing, though it does affect where this indifference value lies.
So who wins this auction? Obviously, whoever thinks the UAE is worth more--whatever team is more confident that the price will be high and that the UAE can maintain high production while
maintaining this high price will get the item. Otherwise, it will be a toss up--the value will be the same to both players.
Now let's work our way back. The closer to the beginning of the auctions, the more moving parts on play. Early bidders need to worry about both the vagaries of valuations relative to the "numeraire" item, Nigeria, and in the face if ever declining future competition. Both of these factors make these earlier bids more risky. But there is another wild card in the mix--leadership. Unlike beanie babies or even oil tracts, the items for bid here have values that are determined enormously by leadership activities. If you win Saudi, will you be able to convince others to refrain from producing and hence benefit? How much production will you yourself have to curtail to make these agreements work? In short, value is socially constructed by the winning bidder. In that sense, such auctions are neither private not publicly valued, rather the value of each country is interdependent--the winner of each country potentially determines the value of all.
In that respect, valuing a country in OPEC has, as its closest analog, valuing a company in a takeover. While the acquired company has a set of assets and ip which might be utilized, exactly how it is utilized and whether this is effective has everything to do with the acquirer. For example, the company Digg was bought by Yahoo some years ago. Digg was a very cool company at the forefront of crowd sourcing content and well ahead of its competitors. The synergies with Yahoo, a content curation company above all else, were obvious and important. The market raved over this acquisition. But Yahoo treated Digg like it did all its other properties. Rather than integrating its technology to make for better curation, as the market anticipated, Digg was left to fend for itself as an independent revenue generating property, something it was never especially good at. As a result, it languished.
While I mention Digg to make a point, it is far from an isolated incidence. When valuing acquisitions, leadership in putting this asset to good use is central to this valuation Saudi in the hands of a poor leader is not a good bet at almost any (reasonable) price. In the hands of a master strategist, it is a bargain at almost any price. The game theory lesson (and it is a tough one to put into practice until you're near the top of the company) is that leadership plays a huge role in dictating the value of an acquisition, no matter what the cash flow or valuation multiple says.