klaus kultti

Equilibrium price and advertisement distributions

Journal of Mathematical Economics, Dec 1, 2021

This is a PDF file of an article that has undergone enhancements after acceptance, such as the ad... more This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

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Secrecy versus patenting

The RAND Journal of Economics, Mar 1, 2007

We develop a general equilibrium search model of innovation. The innovators invest in R&D, and th... more We develop a general equilibrium search model of innovation. The innovators invest in R&D, and the likelihood of coming up with an economically feasible innovation increases with the investment. There is a possibility of multiple simultaneous innovations, and this is significant as the market behaviour is modelled according to the standard Bertrand competition. The innovators can keep their innovations secret but this is not perfect as there are always some spillovers. To each innovation corresponds a demand curve, and we determine the welfare of the economy under two regimes. In the first there are no intellectual property rights, and in the second there is patent law which grants a monopoly to one of the innovators. The patent law is constrained by the innovators' option to keep the innovation secret. We determine the optimal patent law, its effect to the R&D investments, and the social welfare. The optimal patent law may provide more or less protection than secrecy, and in many cases it provides less which means that its main function is spreading information rather than rewarding from costs of the innovative activity. Patenting can be a dominant strategy even when it provides less protection than secrecy.

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Sequential innovation and incentive to innovate: a comment on Bessen and Maskin

Herding with Costly Information

International Game Theory Review, Mar 1, 2006

We consider a standard sequential decision to adopt/buy a good in a herding environment. The setu... more We consider a standard sequential decision to adopt/buy a good in a herding environment. The setup is same as in . Contrary to the basic herding case we introduce a cost that the agents have to pay for the information about their predecessors' actions. All agents receive informative signals as in the standard herding models but do not view the actions taken by their predecessors unless they pay the observation costs. In this set up the …rst and the second agents rely on their own signals when they make the decision to buy/adopt the good. Only the third agent is willing to buy the information on all of the preceding agents' actions. All agents following the third agent buy information on only one agent's action and decide to adopt/buy the good after updating their beliefs. What follows is that the two …rst agents' actions determine whether the rest of the agents will buy/adopt the good or not when information about the predecessors' actions is cheap enough. If the cost of the information about the predecessors' actions is very expensive then all the agents will act according to their own signals. If observing is free one gets the standard results. Finally we compare welfare between the cases where information about the preceding agents' actions has costs and the case where information about the actions is freely available. ¤ We thank the participants at FPPE's Microeconomics and Industrial Organization Workshop for useful comments and suggestions and the seminar audience of IMGTA XV at Urbino for their clarifying suggestions. Additionally Miettinen wants to thank Teemu Lyytikäinen for useful discussions.

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Incomplete contracting in an R&D project: the Micronas case

R & D Management, 2000

Systematic empirical evidence on the consequences of incomplete contracts is meagre, because cont... more Systematic empirical evidence on the consequences of incomplete contracts is meagre, because contracts are often classified as business secrets, and are accordingly difficult to obtain for research purposes. In this study we employ the extensive information from the life of a Finnish research joint venture, Micronas, during 1980-1992 to cast light on this issue. Of particular interest is the principal-agent relationship between the owners and the management of the research joint venture. Our investigation confirms the strong message of the incomplete contract theory. Hold-up problems are pervasive in R&D projects, and the allocation of power and ownership is important to the success of the projects.

Patents hinder collusion

RePEc: Research Papers in Economics, 2007

We argue that a patent institution makes collusion among innovators more difficult. Our argument ... more We argue that a patent institution makes collusion among innovators more difficult. Our argument is based on two properties of the patent system. First, a patent not only protects against infringement but also against retaliation by former collusion members. Second, a deviator has an equal chance with former collusion members to get a patent on new innovations. We show that if a patent system reduces spillovers, it renders collusion impossible. Moreover, it is possible to design a patent system that simultaneously increases knowledge spillovers and eliminates collusion.

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The role of comparing in financial markets with hidden information

RePEc: Research Papers in Economics, 2006

This paper studies how comparing can be used to provide information in financial markets in the p... more This paper studies how comparing can be used to provide information in financial markets in the presence of a hidden characteristics problem. Although an investor cannot precisely estimate the future returns of an entrepreneur's projects, the investor can mitigate the asymmetric information problem by ranking different entrepreneurs and financing only the very best ones. Information asymmetry can be eliminated with certainty if the number of compared projects is sufficiently large. Because comparing favours centralised information gathering, it creates a novel rationale for the establishment of a financial intermediary.

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Incomplete Contracting in a research Joint Venture: The Micronas Case

In 1980 three Finnish companies established a research joint venture as a separate firm in order ... more In 1980 three Finnish companies established a research joint venture as a separate firm in order to develop semiconductors. This enterprise terminated in 1992 when the firm was sold. We study the RJV from the point of view of incomplete contacts, focusing on hold-up problems. Of particular interest is the contact governing the initial transfer of technology from foreign sources.

Incomplete contracting in a research joint venture

In 1980 three Finnish companies established a research joint venture as a separate firm in order ... more In 1980 three Finnish companies established a research joint venture as a separate firm in order to develop semiconductors. This enterprise terminated in 1992 when the firm was sold. We study the RJV from the point of view of incomplete contacts, focusing on hold-up problems. Of particular interest is the contact governing the initial transfer of technology from foreign sources.

High Price Signals High Quality

Social Science Research Network, 2013

We examine pricing in markets where products may be of heterogeneous quality and buyers have hete... more We examine pricing in markets where products may be of heterogeneous quality and buyers have heterogeneous preferences. The sellers cannot credibly communicate the quality they offer, and consequently price acts as a signal of quality. We determine the equilibria of the model both when the quality is exogenously given, and when the sellers can choose what quality to produce. We single out the unique symmetric equilibrium that satisfies the intuitive criterion. Compared to the bench mark case where quality is observable the price of high-quality goods is higher when quality is not observable but must be inferred from the price.

Why Are Branded Goods So Expensive?

SSRN Electronic Journal

Hold-ups and Asymmetric Information in a Technology Transfer: the Micronas Case

The Journal of Technology Transfer, 2002

In 1980 three Finnish companies established a research joint venture as a separate firm in order ... more In 1980 three Finnish companies established a research joint venture as a separate firm in order to develop semiconductors. We study the initial stages of the project focusing on the two evident sources of difficulty associated with an international technology transfer. One is a hold-up problem and the other asymmetric information on the quality of the technology. We develop two simple models that capture some features of the contract governing the technology transfer, and conclude that both problems were present, but hold-up problems were considered a more serious threat.

About the Firms' Tendency to Cluster

I study an economy with sellers and buyers. The sellers are capacity constrained and face stochas... more I study an economy with sellers and buyers. The sellers are capacity constrained and face stochastic demand. They have a choice of locating geographically close to each other, i.e., clustering or locating separately. In the former case the buyers can visit any of them while in the latter case the buyers can visit only one of them. The sellers post prices which are observed by the buyers who base their decision to contact sellers on the prices. I explicitly derive the equilibrium prices or price strategies in the clustered and in the non-clustered market for an arbitrary distribution of demand. I show that the clustered market often yields higher profits than the non-clustered. Finally, I derive the equilibrium market structure. JEL Classification: D40, D43, L10, L11, C78

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Intermediation in a Directed Search Model

SSRN Electronic Journal, 2018

We study the ability of competitive coordination service platforms (such as auction sites and rea... more We study the ability of competitive coordination service platforms (such as auction sites and real estate agents) to facilitate trade in a directed search model where buyers have unit demands and each seller only has one good to sell. The sellers' capacity constraint leads to a coordination problem as in a symmetric equilibrium without intermediation some sellers receive multiple buyers while some are left without any customers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. We find that roughly 20 percent of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are roughly 25 percent lower than in the economy without intermediation.

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Equilibrium Price and Advertisement Distributions

SSRN Electronic Journal, 2019

We consider an economy where many sellers sell identical goods to many buyers. Each seller has a ... more We consider an economy where many sellers sell identical goods to many buyers. Each seller has a unit supply and each buyer has a unit demand. The only possible information flow about prices is through costly advertising. We show that in equilibrium the sellers use mixed strategies in pricing which leads to price and advertisement distributions. With convex advertising costs each seller sends only one advertisement in the market. We also delineate a class of advertising costs which ensures that sellers may send multiple advertisements in equilibrium.

Pricing, Signalling, and Sorting with Frictions

The B.E. Journal of Theoretical Economics, 2019

We analyse signalling and sorting in a market with frictions and private information. Buyers are ... more We analyse signalling and sorting in a market with frictions and private information. Buyers are heterogeneous, the sellers choose what quality to produce and post prices. Buyers do not observe quality, but infer it from prices. In equilibrium high-quality sellers signal quality with a price that is higher than under perfect information. Compared to the outcome under perfect information the higher price has two effects. First, it makes production of high-quality goods more attractive increasing its supply. Second, it makes high-valuation buyers worse-off, directing part of them to low-quality sellers. We determine which effect dominates; whether too many or too few sellers produce high quality. We also show that the prices of both high- and low-quality goods are higher, and the sellers do better and the buyers worse under private information. In addition, we show that an increase in the production cost of high quality may lead to higher profits and prices.

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The role of comparing in financial markets with hidden information

This paper studies how comparing can be used to provide information in financial markets in the p... more This paper studies how comparing can be used to provide information in financial markets in the presence of a hidden characteristics problem. Although an investor cannot precisely estimate the future returns of an entrepreneur’s projects, the investor can mitigate the asymmetric information problem by ranking different entrepreneurs and financing only the very best ones. Information asymmetry can be eliminated with

Download

High Price Signals High Quality

SSRN Electronic Journal, 2013

We examine pricing in markets where products may be of heterogeneous quality and buyers have hete... more We examine pricing in markets where products may be of heterogeneous quality and buyers have heterogeneous preferences. The sellers cannot credibly communicate the quality they offer, and consequently price acts as a signal of quality. We determine the equilibria of the model both when the quality is exogenously given, and when the sellers can choose what quality to produce. We single out the unique symmetric equilibrium that satisfies the intuitive criterion. Compared to the bench mark case where quality is observable the price of high-quality goods is higher when quality is not observable but must be inferred from the price.

Cross-Licensing and Collusive Behaviour

Exchange of patents between firms increasingly influence competition. Such cross-licensing deals ... more Exchange of patents between firms increasingly influence competition. Such cross-licensing deals have traditionally raised antitrust concerns, since they can be used to control market shares and prices, and create entry barriers. We ar- gue that cross-licensing is a device to establish multimarket contact and is likely to raise antitrust concerns only in so far as multimarket contact does. Since cross-li- censing typically occurs between similar firms in similar markets it is, as a first ap- proximation, irrelevant for sustaining tacit collusion. We also point out the im- portance of incorporating the incentive to innovate into the analysis of the subtle relation between intellectual property and competition policies.

Secrecy versus patenting

The RAND Journal of Economics, 2007

We develop a general equilibrium search model of innovation. The innovators invest in R&D, and th... more We develop a general equilibrium search model of innovation. The innovators invest in R&D, and the likelihood of coming up with an economically feasible innovation increases with the investment. There is a possibility of multiple simultaneous innovations, and this is significant as the market behaviour is modelled according to the standard Bertrand competition. The innovators can keep their innovations secret but this is not perfect as there are always some spillovers. To each innovation corresponds a demand curve, and we determine the welfare of the economy under two regimes. In the first there are no intellectual property rights, and in the second there is patent law which grants a monopoly to one of the innovators. The patent law is constrained by the innovators' option to keep the innovation secret. We determine the optimal patent law, its effect to the R&D investments, and the social welfare. The optimal patent law may provide more or less protection than secrecy, and in many cases it provides less which means that its main function is spreading information rather than rewarding from costs of the innovative activity. Patenting can be a dominant strategy even when it provides less protection than secrecy.

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