Here is an example to understand the indifference curve better. Peter has 1 unit of food and 12 units of clothing. Now, we ask Peter how many units of clothing is he willing to give up in exchange for an additional unit of food so that his level of satisfaction remains unchanged.
indifference curve analysis economics pdf download
The Brexit negotiation space can be analyzed from rational and behavioral perspectives. Interactive decision-making can follow a game theory path with negotiators assumed to be rational players anticipating strategies and the outcome of their choices, or a behavioral one with uncertainties dominating their decision-making. International negotiations fall under the economics of international business with players exhibiting different forms of rationality (Casson & Wadeson, 2000), i.e., rational, bounded rational, or meta-rational. Raiffa, Richardson, and Metcalfe (2002) see the negotiation process through four lenses: asymmetrically descriptive (psychological), symmetrically prescriptive (game theoretical), asymmetrically descriptive and prescriptive (negotiation analytical), and externally descriptive and prescriptive (conflict resolution via mediators). In summary, rational and behavioral models of decision-making have a place in the negotiation analysis of international business and political negotiations. We apply bargaining theory to the Brexit case and consider zones of feasible and potential agreements.
We start with trade integration as x, and immigration integration as y. The indifference curves of the UK and the EU show a similar perspective in terms of negotiation space. In terms of trade integration, x, the EU accounts for 40% of UK trade (xEU) compared to 10% of trade to the UK from the EU (xUK). However, according to European Statistics (European Union, 2017), the export of UK goods to other EU member states grew from 100 billion euros in 2003 to 230 billion euros in 2015, highlighting the need for a trade agreement. When it comes to immigration integration, yEU shows the 2.9 million EU citizens (0.6% of EU population) living and working in the UK, and yUK shows the 1.2 million UK citizens (1.9% of UK population) living and working in the EU.
Nash bargaining suggests that the UK and EU will end up dividing the gains from renegotiation. The UK would prefer to end at the south-west border of the space (on the EU indifference curve) and the EU at the north-east border (on the UK indifference curve). Starting from those positions, they eventually end up somewhere in the middle, depending on the degree of symmetry in their bargaining strength. To explain the outcome, we can use a rational approach or a behavioral one.
The economics literature is rich in bargaining models, (Nash, 1950; Kalai & Smorodinski, 1975; Rubinstein, 1982; Mas-Collel,Winston & Green, 1995; Muthoo, 1999). We use the indifference curve analysis presented above to throw light on the Brexit negotiations. We present a stylized representation of an alternating-offers bargaining game where players attempt to reach an agreement by making offers and counter-offers. This is reflective of most real-life negotiations where bargaining imposes costs on both players.
Figure 3 sets out the utilities of the players, with the Pareto frontier divided into the region of feasible and potential agreements. We use indifference curves and the bargaining outcome of Figure 2 and positions the payoffs of the players in the Pareto frontier. Our analysis shows clearly that the region for trade agreements lies between the impasse points of both players but also beyond the reservation values.
The UK and EU have such markedly opposed aims and objectives that there could easily be major conflicts. The indifference curves for trade and immigration integration for both suggest that the negotiation space has not yet been grasped. The suggestion by the EU to start with a separate exit negotiation to then be followed by future relationship negotiations was a wise tactic and a rational approach given the asymmetries between the negotiators.
The curve of each party which shows equal utility for the two commodities traded. Along the indifference curve, any combination of the two commodities yields equal satisfaction. In the case of exit negotiations, each point on an indifference curve gives equal satisfaction for any combination of trade and immigration
The space in the Edgeworth box, where both parties have the possibility to negotiate a deal due to the joint set of exchange possibilities marked by the shape of the indifference curves between R and W 2ff7e9595c
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