The Yrjö Jahnsson working paper series In Industrial Economics

 

Recent Submissions

  • Ringbom, Staffan; Shy, Oz (Hanken School of Economics, 2002)
    We investigate economic and strategic incentives of service providers to engage in advance booking while allowing for a full-refund for those customers who cancel or do not show up at the time when the good or the service is provided. We show that from social welfare and industry profit point of views, the fullrefund booking strategy dominates the no-refund booking strategy. We also show that the full-refund booking strategy yields lower profit and social welfare than a market segmentation where different consumers buy tickets with different refundability options. None of the strategies are Pareto dominating any other.
  • Hyytinen, Ari; Toivanen, Otto (Hanken School of Economics, 2002-09-17)
    This paper provides evidence that capital market imperfections hold back innovation and growth, and that public policy can complement capital markets. We deliver the evidence by studying the effects of government funding on the behavior of SMEs in Finland. By adapting the methodology recently proposed by Rajan and Zingales (1998) to firm-level data, we show that government funding disproportionately helps firms from industries that are dependent on external finance. We demonstrate that the result is economically significant and robust to a variety of tests.
  • Ivaldi, Marc; Verboven, Frank (Hanken School of Economics, 2002-09-18)
    This paper starts from a recent case to study how merger analysis in Europe may potentially be improved through simulation analysis. Starting from the geographic market definition in the Merger Decision, we formulate and estimate an oligopoly model with differentiated products. The model is simulated to account for the changed multiproduct ownership structure after the merger. We show how our first two tests, a potential and an actual market power test, produce useful information, complementary to the traditional dominance principle adopted in the European Union. We also show how simulation analysis can provide useful additional information that goes beyond the traditional dominance principle. This is illustrated through two examples. First, we analyze the effects of efficiencies through cost savings. Second, we compare alternative merger sequences and emphasize the importance of evaluating the regional versus pan-European nature of a merger. These results contribute to the debate on the revision of current merger principles as they shed light on ways to improve actual practices.
  • Takalo, Tuomas; Toivanen, Otto (Hanken School of Economics, 2004-01-08)
    We study an adverse selection model where all agents are endowed with initial wealth, are nonetheless capital constrained, and choose to invest as entrepreneurs or financiers, or not to invest. We show that entrepreneurship and financial markets can arise in many cases where opening the markets to outside investors (i.e., financial market liberalization) would lead to them being eliminated. We find that without outside investors i) there exist Pareto-efficient and inefficient equilibria; ii) adverse selection has severer consequences in poorer economies; iii) increasing initial wealth may lead from a Paretoefficient to an inefficient equilibrium; iv) increasing the proportion of agents with positive NPV projects leads from an inefficient to an efficient equilibrium; v) agents with negative (positive) NPV projects only earn rents in (non)-wealth constrained economies; and vi) removing the storage technology destroys the only Pareto-efficient equilibrium in non-wealth constrained economies. Our model allows us to analyze various policies concerning financial market integration and liberalization, financial stability, the need for sophisticated financial institutions, development aid, and the promotion of entrepreneurship.
  • Laffont, Jean-Jacques; Marcus, Scott; Rey, Patrick; Tirole, Jean (Hanken School of Economics, 2002-08-08)
    The paper develops a framework for Internet backbone competition. In the absence of direct payments between websites and consumers, the access charge allocates communication costs between websites and consumers and affects the volume of traffic. The paper analyzes the impact of the access charge on competitive strategies in an unregulated retail environment. In a remarkably broad range of environments, operators set prices for their customers as if their customers' traffic were entirely off-net. The paper then compares the socially optimal access charge with the privately desirable one. Finally, when websites charge micropayments, or when websites sell goods and services, the impact of the access charge on welfare is reduced; in particular, the access charge is neutral in a range of cicumstances.
  • Shy, Oz; Stenbacka, Rune (Hanken School of Economics, 2004-10-13)
    We show that private provision of service hours will be inefficiently low from a social point of view independently of the market structure. We study how asymmetric distributions of ideal service time impact on this market failure. We establish that the time gap between any two opening and closing hours in an oligopoly equilibrium is constant and that this time gap increases if the distribution of ideal service times becomes more uniform. Finally, we establish that longest available service hours are sensitive to price changes but are invariant to changes in the market structure alone.
  • Sault, Joanne; Toivanen, Otto; Waterson, Michael (Hanken School of Economics, 2003)
    In this paper we study whether learning from rivals affects within-market location decisions between competing firms. We show it does, using detailed locational data from two leading hamburger chains in the UK. Using four different tests, we demonstrate that alternative explanations – pre-emption and product differentiation – have less bite than between firm learning.
  • Shy, Oz; Stenbacka, Rune (Hanken School of Economics, 2002-08-06)
    We analyze a retail industry where shops compete in prices and opening hours. We demonstrate that stores with longer opening hours tend to charge higher prices. Then, we calculate the symmetric equilibrium in closing hours and demonstrate a market failure with opening hours shorter than the socially optimal level. Furthermore, we characterize a condition under which labor unions would set high wages that would limit opening hours below the equilibrium level. Thus, opening hours shorter than the equilibrium level would be consistent with an outcome affected by strong labor unions.
  • Alvarez, Luis H. R.; Stenbacka, Rune (Hanken School of Economics, 2004-07-13)
    We design a compound real options model, which determines the timing of takeovers and characterizes the distribution of the associated surplus. We delineate a relationship between the imperfections in the market for corporate control and the takeover incentives. We character- ize a critical bargaining power below which the compound takeover option is never exercised. This critical threshold is a decreasing function of the expected primary takeover gain and the embedded divestment gain and an increasing function of the implementation uncertainty. With implementation uncertainty the relationship between volatility and takeover timing depends on the functional form of the pro¯t °ow.
  • Ringbom, Staffan; Shy, Oz (Hanken School of Economics, 2003-10-15)
    We analyze the incentives of service providers to utilize advance reservation systems allowing for refunds in an imperfectly competitive service industry with price competition. We investigate how the refund option affects equilibrium prices, and characterize the conditions under which the refund option is utilized. In contrast to the monopoly models where a single provider can capture a higher share of consumer surplus by utilizing the refundability option, competition reduces this surplus. Thus under price competition the nonrefundable booking strategy maximizes industry profit.
  • Gehrig, Thomas; Stenbacka, Rune (Hanken School of Economics, 2002-07-01)
    We analyse the institution of information sharing in a model of repeated banking competition. In the presence of switching costs we find that information sharing renders poaching more profitable in future rounds of competition, since the poaching activities can be targeted to creditworthy borrowers. Thus borrower poaching may occur even when it would not be profitable without information sharing. At the same time information sharing reduces relationship benefits, and competition for initial market shares is weakened. Overall we find that information sharing enhances equilibrium profits weakly in general and strictly in the presence of switching cost.
  • Koskela, Erkki; Stenbacka, Rune (Hanken School of Economics, 2004-03-04)
    This paper studies the effect of credit market imperfections, measured by the relative bargaining power of banks, on the agency costs of debt finance. The threshold of obtaining loan finance is shown to be independent of the relative bargaining power of the financier. However, lower relative bargaining power of banks leads to lower lending rates and investment return distributions with lower, but less risky returns. Thus, our analysis does not support the view, presented in a large existing literature, that there would be a trade-off between reduced credit market imperfections and higher agency costs of debt finance.
  • Alvarez, Luis H. R.; Stenbacka, Rune (2003-09-26)
    We apply a real options approach to develop a general characterization of a firm’s optimal organizational mode. We find that the optimal exercise threshold for the establishment of (partial) in-house production is an increasing function of the underlying market uncertainty. However, contrary to common business wisdom, we show that increased market uncertainty induces a higher optimal proportion of in-house production once the investment threshold is reached and once this threshold prescribes partial in-house production.
  • Alvarez, Luis H. R.; Stenbacka, Rune (Hanken School of Economics, 2002-05-16)
    We apply a real options approach to analytically characterize the option value of adopting an intermediate technology. We design an asymmetric duopoly model to delineate how the opti- mal adoption timing of an intermediate technology depends on the embedded upgrading options available to the ¯rm itself and to its future rival. Focusing on di®usions we develop explicit rep- resentations demonstrating that the threshold of adopting an intermediate technology depends negatively (positively) on the leader's (follower's) upgrading intensity. For geometric Brownian motion we explicitly characterize the iso-incentive curves keeping the leader's incentives of adopt- ing the intermediate technology invariant.
  • Juselius, Mikael (Hanken School of Economics, 2004)
    In this paper, a positive empirical relationship between wages and the capital-labor share is established using Finnish manufacturing data. This relationship is consistent with a modeling approach for the Finnish economy that assumes a CES production function and imperfections in both product and labor markets. The popular Cobb-Douglas production function is inconsistent with the observed relationship. Moreover, the estimations are consistent with an elasticity of substitution above one. The results are further strengthened by a positive relationship between unemployment and the capital-labor share through its effect on the wage rate. The estimations also provide insights into the processes determining the output-labor ratio, capital-labor ratio and investments.
  • Stenbacka, Rune; Gehrig, Thomas (Hanken School of Economics, 2003-07-23)
    We show that the presence of sufficiently significant switching costs, which are increasing in the degree of product differentiation, generates an equilibrium configuration with maximal differentiation within the framework of a Hotelling model with linear transportation costs. The equilibrium with maximal differentiation offers a formalization of the idea that competing firms have noncooperative incentives to establish maximal switching cost barriers. The equilibrium incentives for commitments to high switching costs can be explained with poaching profits, which are increasing in the switching costs. In fact, ex-ante competition for market shares in period 1 is unable to eliminate these poaching profits.
  • Schultz, Christian (Hanken School of Economics, 2002-04)
    This paper investigates the effects on tacit collusion of increased markets transparency on the consumer side of a market in a differentiated Hotelling duopoly. Increasing market transparency increases the benefits to a firm from undercutting the collusive price. It also decreases the punishment profit. The net effect is that collusion becomes harder to sustain. In the limiting homogeneous market, the effect vanishes. Here market transparency does not effect the possibilities for tacit collusion.
  • Liikanen, Jukka; Stoneman, Paul; Toivanen, Otto (2001)
    The tradition in the empirical literature on technology diffusion is to treat the technology as generic. In several technologies, clear generational shifts can be identified. We use data from the mobile phone industry to study the effects of the old generation (1G) on the speed of diffusion of the new generation (2G), and vice versa. The generations share the general network effects, but may exhibit generation specific network externalities. We find that 2G slows down 1G diffusion, and evidence that 1G has a positive effect on 2G diffusion speed. Generation specific results differ significantly from those of a generic model.
  • Kauppi, Heikki; Koskela, Erkki; Stenbacka, Rune (2004-03-04)
    We study the implications of product market competition and investment for price setting, wage bargaining and thereby for equilibrium unemployment in an economy with product and labour market imperfections. We show that intensified product market competition will reduce equilibrium unemployment, whereas the effect of increased capital intensity is more complex. Higher capital intensity will decrease the equilibrium unemployment when the elasticity of substitution between capital and labour is less than one, while the reverse happens when this elasticity is higher than one but smaller than the elasticity of substitution between products. Finally, we demonstrate how labour and product market imperfections, characterized by the wage and price setting mark-ups, affect the optimal capital stock. Our findings raise important questions for future empirical research.
  • Gehrig, Thomas; Stenbacka, Rune (2003)
    We demonstrate how endogenous information acquisition by financiers creates investment cycles when competing financiers undertake their screening decisions in an uncoordinated way, thereby highlighting the role of intertemporal screening externalities induced by screening competition as a structural source of instability. We show that uncoordinated screening behavior of competing financiers may be not only the source of an important financial multiplier, but also an independent source of fluctuations inducing investment cycles. The screening cycle mechanism is robust to generalizations along many dimensions.

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