A Theory of Brinkmanship, Conflicts, and Commitments

Many conflicts and negotiations can be viewed as dynamic gamesin which parties have no commitment power. In our model, a potentialaggressor demands concessions from a weaker party by threateningwar. The absence of commitment makes a continuous stream oftransfers a more effective appeasement strategy than a lump-sumtransfer. As long as both sides have constant marginal utilityof consumption, it is possible to construct a self-enforcingpeace agreement even if transfers shift the balance of power.When marginal utility of consumption is decreasing, a self-enforcingpeace agreement may not be feasible. The bargaining power ofthe potential aggressor increases dramatically if she is ableto make probabilistic threats, for example, by taking an observableaction that leads to war with a positive probability. This "brinkmanshipstrategy" allows a blackmailer to extract a positive streamof payments from the victim, even if carrying out the threatis harmful to both parties. Our results are applicable to environmentsranging from diplomacy to negotiations within or among firmsand are aimed to bring together "parallel" investigations inthe nature of commitment in economics and political science.     

A micro-based non-inflationary rate of capacity utilisation as a measure of inflationary pressure: evidence for Austria

We derive a non-inflationary rate of capacity utilisation (NIRCU)—as recently proposed by Köberl and Lein (Can J Econ 44:673–694, 2011)—based on a large Austrian firm-level panel dataset ranging from 1996 to 2011. By conditioning the current capacity utilisation of firms on their current and planned price adjustments, a micro-level NIRCU is defined as the level of capacity utilisation at which there is no need for the firm to adjust its prices. In contrast to other measures of inflationary pressure, this measure (1) is timely available without revisions and (2) does not imply any need for rather arbitrary methods or concepts such as statistical filtering or potential output. In accordance with the results in Köberl and Lein (Can J Econ 44:673–694, 2011), we find that the NIRCU performs well as a driving variable of Austrian inflation in various Phillips Curve estimations. Compared to other inflation driving variables, such as real unit labor cost, the output gap and the unemployment gap, it delivers reasonable parameter estimates which are in line with existing Phillips Curve estimations in the literature.     

Can the HM-test be brought to an end?

A significant change seen in the new regulatory framework for communications markets regards issues of market delineation. Relevant markets according to the new regulatory framework should be defined in accordance with competition law methodology/principles, most notably the so-called Hypothetical Monopolist Test (HM-test). Our discussion points to the conceptual and practical difficulties associated with evaluating the effects of a 5–10% price increase on the costs and therefore on the profitability of a hypothetical monopolist. Applying our analysis to fixed retail voice telephony markets we show that, in the presence of scale economies, final results crucially depend on assumptions about the cost function, in particular the relation of variable to fixed costs and the resulting (competitive) margin. The latter, in turn, will depend on the time horizon that is deemed to be relevant for market delineation purposes. Overall quantitative techniques applied to carry out the HM-test rigorously on empirical grounds are highly sensible to those assumptions a priori even if one assumes that (empirical) estimates of elasticities can be derived reasonably.*The views expressed are those of the authors and do not represent those of RTR or TKK.     

Emerging needs of social innovators and social innovation ecosystems

International Entrepreneurship and Management Journal - Social innovations (SIs) contribute to solving or at least mitigating many of the most pressing grand challenges. Similar to profit-oriented...