EconAir

INTRODUCTION For background, see prior post on The Limits of Negotiation . ECONOMIC NEGOTIATIONS Basic game theory works best in economic negotiations.    The players have the same assumptions (act rationally, make money), enter into the negotiations voluntarily and negotiate which positive payoff matrix they will agree on.   Economists usually assume that people are playing a positive sum (win – win) game.   That is, how to divide up the monetary or utility gains. Game theory indicates there is a better chance at cooperation or reaching good faith agreements if the players know they will be playing the game repeatedly or if both players see an advantage to a long-term agreement. Economic rationality implies that an agent will not agree to an outcome if the individual will be worse off than not negotiating.   The alternatives are not to negotiate or find another party with whom to reach a positive or better agreement.   A competitive economy, however im

INTRODUCTION Much of the political news is about negotiations.   American politicians, in both domestic and foreign disputes, don’t seem to know much about negotiation strategy.   Maybe a little applied game theory would help. IS NEGOTIATION POSSIBLE?   The first question is whether or not negotiation is possible or just a waste of time and effort. Negotiations will be fruitless if at least one party believes there are no possible outcomes that are better than not negotiating.   Compromise is impossible.   Fanatics, true believers, proponents of “Victory at any cost” or “Give me victory or give me death” or parties who believe their opponents are evil are not likely to negotiate. Sometimes leaders act to limit their options or those of their followers.   The famous historical example is when Cortes burned his boats that brought him and his men to Mexico.   Returning to Cuba was no longer an option.   Cortes forced his men to make the “credible” commitment to conq

INTRODUCTION This blog was prompted by an article in the Sunday New York Times   Business Section of April 14 titled, “Sometimes We Want Prices to Fool Us.”   The article is about the J. C. Penny’s merchandising disaster. HAGGLING In 2012, J. C. Penney’s sales dropped 25% compared to 2011.   Over two years ago, Penny’s brought in Ron Johnson from Apple Stores to turn the company around.   Mr. Johnson eliminated sales and coupons and promised shoppers “everyday low prices,” Walmart’s slogan.   This saved huge amount of money on inventory and advertising costs and smoothed out cash flow.   Great strategy.   Penny is near bankruptcy.   Ron Johnson has been fired and sales supplements are reappearing in my newspaper. Simple economic theory assumes one equilibrium price.   Each potential consumer compares his/her expected “pleasure” from buying the product to the cost (price) of the product, and then decides whether or not to buy it.   This says nothing about the psy

Introduction The United States has been the world’s only superpower since the collapse of the Soviet Union in 1991.   In some ways it is more difficult to manage foreign policy without concentrating on one big rival. The United States is vastly stronger in military strength than any possible coalition of enemy forces.   But since 9/11 we are feeling less secure despite huge military and domestic security expenditures.   Our military and national security expenditures of around $1.1 trillion are greater than the military expenditures of next ten countries combined (and most are allies).   This is a consequence of a professional military, a result of eliminating conscription after the Vietnam War, and the highly technical (capital intensive) nature of American military forces and strategy.   There is almost no national debate on U.S. military interventions in other countries.   One reason is that most Americans have no direct involvement; they see the professional m

Americans love their suburbs.   Suburban living almost defines the American way of life.   Privacy, both homes and backyards.   Space.   Peace and quiet, except for power mowers and leaf blowers.   Compare this with the high cost of space, peace and quiet in cities. Suburbs are a refuge from the stress of live and work in America.   They are places where nothing happens.   Little or no violent crime.   No class conflict.   Family oriented.   Acceptable schools at a lower cost than private schools in cities.   Lots of space for playing fields and organized sports for kids.   I sometimes think this is the main activity in suburbs. When Americans retire, they move to “senior citizen” suburban developments that are often even more isolated and further removed from urban life than the suburbs they came from. But what about the excitement of a city?   For example, the live cultural events.   There is an improving substitute – electronic entertainment.   I can watch al

Baldwin Locomotive Baldwin, the largest producer of steam locomotives in the                 nineteenth century, faced problems typical of a dominant company in a bilateral oligopolistic industry.   Almost everything that               happened at Baldwin was conditioned by a highly cyclical, almost   unpredictable competitive environment.   A high level of business       risk followed from sudden, large fluctuations in demand. This         meant that Baldwin often had excess capacity with substantial         fixed investment, leading to a strategy based on economies of scope and not economies of scale.   Baldwin also depended on a skilled       labor force with firm-specific knowledge and experience that was    exposed to sudden and massive layoffs followed by the company’s   attempts to rehire the same workers.   It is hard to imagine a more    challenging competitive environment.                                                      Baldwin was a large and dominant firm, a