durable goods and product obsolescence the issue of product obsolescence is addressed by examining the optimal sales strategy of a monopolist firm that may introduce an improved version of its current product consumers expectations of a forthcoming product lowers the price that they are willing to pay for the current product because of its loss in value due to obsolescence the new product is characterized by consumers increased willingness to pay and by its competitive interaction with the old product these characteristics affect the tradeoff that the firm makes between the cost of waiting for new product sales versus the cost of cannibalizing these sales we analyze the effect of these characteristics of the new product on the firm s optimal sales strategy we consider the various policy measures available to the firm including limiting initial sales in order to lower cannibalization of the new product buying back the earlier version of the product in order to generate greater demand for the new product and announcements of future product introductions we find that for modest levels of product improvement the firm s optimal policy is to phase out sales of the old product while for large improvements a buy back policy is more profitable lastly we find that the firm is better off if it informs consumers whether a new product is forthcoming

an empirical analysis of self employment in the u k the paper formulates a self employment paid employment choice problem that draws upon knight s notion that the individual responds to the risk adjusted relative earnings opportunities in each sector based on a development of such choice theoretic considerations an econometric model is developed with the purpose of empirically examining the determinants of self employment the model features simultaneous determination of employment status and earnings which allows for self selectivity the model is estimated using a sample of 4762 individuals from the general household survey for 1978 the estimation of the earnings equation enables a calculation of the self employment paid employment earnings differential and the estimated probit equation for self employment paid employment status facilitates the prediction of the probability of self employment the paper finds that there is positive selection bias in the observed earnings of employees that the probability of self employment depends positively on the earnings difference between the two sectors and that education and age are significant determinants of self employment

why did semiconductor price indexes fall so fast in the 1990s a decomposition i introduction by any measure price deflators for semiconductors fell at a staggering pace over much of the last decade as shown in the top part of table 1 fisher price indexes for integrated circuits ics a broad class of semiconductor devices that includes logic and memory chips fell an average of 36 per year from 1993 to 1999 as shown in the bottom part those price declines were generated primarily by sharp declines in the price index for microprocessors mpus the logic chips that serve as the central processing unit in personal computers pcs the price deflator for ics fell even faster in the second half of the decade pushed down by faster declines in the mpu price index jorgenson 2001 noted the acceleration and hypothesized that the development and deployment of semiconductors could have been a key driver in the economy wide resurgence in economic growth that began in the mid 1990s empirical work based on macroeconomic growth models supported his hypothesis by showing that the semiconductor industry accounted for nearly three fourths of the acceleration in multifactor productivity that occurred over the 1990s see for example gordon 2001 jorgenson 2001 jorgenson and stiroh 2000 mckinsey global institute 2001 oliner and sichel 2000 triplett 1999 these sharp declines are typically attributed to the rapid rate of product innovation that characterizes this sector a recent example may be found in triplett 2004 informal measures of quality change as in aizcorbe et al 2003 suggest that product innovation is the primary driver behind the price declines typically seen for these devices indeed the industry is credited with one of the fastest rates of product innovation and technical change within manufacturing as chipmakers generate wave after wave of ever more powerful chips for prices not much higher than those of existing chips at the same time that the quality of mpus is increasing manufacturers are also getting better at producing them and the attendant reductions in the manufacturing cost per chip could also have contributed to the observed declines in the price index as is well known the semiconductor production process is subject to important learning economies along several dimensions see for example gruber 1994 hatch and mowery 1998 most of the empirical literature on learning by doing in the semiconductor industry has focused on memory chips a homogenous commodity good sold in fairly competitive markets for mpus intel s dominance of the market has generated large margins so that cost savings from learning by doing may not necessarily be passed along to consumers in the form of lower prices the presence of large margins in and of itself has potential implications for price measurement although quality increases and reductions in cost per chip are associated with increases in productivity changes in margins are not over the 1990s intel s margins shrank as increased competition from its rivals and weaker than expected demand for pcs in 1995 and beyond put downward pressure on prices this decline in intel s margins could have potentially distorted standard price indexes because those indexes implicitly assume perfect competition 1 so for example falling margins could lead one to incorrectly interpret the resulting price decline as a productivity improvement 2 although it is unlikely that intel s margins fell sufficiently fast to explain much of the absolute price declines over the decade those declines may nonetheless have had a nontrivial effect on the acceleration that began in 1995 to better understand the trend and inflection point in semiconductor prices this article decomposes movements in the constant quality price index into changes in the index associated with productivity growth and those associated with margins a further decomposition of the productivity related component into quality change owing to rapid rates of product innovation versus changes in cost per chip perhaps related to learning by doing is also done

investment and capacity choice under uncertain demand this paper extends the real options literature by discussing an investment problem where a firm has to determine optimal investment timing and optimal capacity choice at the same time under conditions of irreversible investment expenditures and uncertainty in future demand after the project is installed with a certain maximum capacity this capacity is fixed as an upper boundary to the output and cannot be adjusted later on it turns out that in the framework of this once and for all decision uncertainty in future demand leads to an increase in optimal installed capacity but on the other hand it causes investment to be delayed to an extent that even small uncertainty makes waiting and accumulation of further information the optimal decision for large ranges of demand limiting the capacity which may be installed weakens this extreme effect of uncertainty

managing demand and sales dynamics in new product diffusion under supply constraint the bass diffusion model is a well known parametric approach to estimating new product demand trajectory over time this paper generalizes the bass model by allowing for a supply constraint in the presence of a supply constraint potential customers who are not able to obtain the new product join the waiting queue generating backorders and potentially reversing their adoption decision resulting in lost sales consequently they do not generate the positive word of mouth that is typically assumed in the bass model leading to significant changes in the new product diffusion dynamics we study how a firm should manage its supply processes in a new product diffusion environment with backorders and lost sales we consider a make to stock production environment and use optimal control theory to establish that it is never optimal to delay demand fulfillment this result is interesting because immediate fulfillment may accelerate the diffusion process and thereby result in a greater loss of customers in the future using this result we derive closed form expressions for the resulting demand and sales dynamics over the product life cycle we then use these expressions to investigate how the firm should determine the size of its capacity and the time to market its new product we show that delaying a product launch to build up an initial inventory may be optimal and can be used as a substitute for capacity also the optimal time to market and capacity increase with the coefficients of innovation and imitation in the adoption population we compare our optimal capacity and time to market policies with those resulting from exogeneous demand forecasts in order to quantify the value of endogenizing demand

is entrepreneurship a route out of deprivation frankish j s roberts r g coad a and storey d j is entrepreneurship a route out of deprivation regional studies this paper investigates whether entrepreneurship constitutes a route out of deprivation for those living in deprived areas the measure of income wealth used is based on an analysis of improvements in an individual s residential address the data consist of information on over 800 000 individuals and come from the customer records of a major uk bank comparing business owners with non owners the results suggest that the benefits of business ownership are found across the wealth distribution hence entrepreneurship can be a route out of deprivation

an innovative approach for strategic capacity portfolio planning under uncertainties abstract this research studies multi generation capacity portfolio planning problems under various uncertainty factors these uncertainty factors include price uncertainties demand fluctuation and uncertain product life cycle the objective of this research is to develop an efficient algorithm that generates capacity portfolio policies robust to aforementioned uncertainties we model this capacity portfolio planning problem using markov decision processes mdp in this mdp model we consider two generation of manufacturing technology the new generation capacity serves as a flexible resource that can be used to downward fulfill the deficiency of old generation capacity the objective of this mdp model is to maximize the expected profit under uncertainties an efficient algorithm is proposed to solve the problem and provide an optimal capacity expansion policy for both types of capacity moreover we show that the optimal capacity expansion policy can be characterized by a monotone structure we verify our results by detail simulation study

interactions between investment timing and management effort under asymmetric information costs and benefits of privatized firms abstract in this paper we examine the interactions between investment timing and management effort in the presence of asymmetric information between the owner and the manager where the manager has an informational advantage we find that investment timing is later under asymmetric information than under full information implying a decrease in the value of equity option however in order to minimize any distortion under underinvestment management effort is greater under asymmetric information than under full information we show that there are trade offs in the efficiencies of investment timing and management effort under asymmetric information these results fit well with the findings of past empirical studies concerning the costs and benefits of privatized firms

capacity decisions for high tech products with obsolescence abstract modern high tech products experience rapid obsolescence capacity investments must be recouped during the brief product lifecycle during which prices fall continuously we employ a multiplicative demand model that incorporates price declines due to both market heterogeneity and product obsolescence and study a monopolistic firm s capacity decision we investigate profit concavity and characterize the structure of the optimal capacity solution moreover for products with negligible variable costs we identify two distinct strategies for capacity choice demarcated by an obsolescence rate threshold that relates both to market factors and capacity costs finally we empirically test the demand model by analyzing shipping and pricing data from the pc microprocessor market

an economic theory of planned obsolescence planned obsolescence is the production of goods with uneconomically short useful lives so that customers will have to make repeat purchases however rational customers will pay for only the present value of the future services of a product therefore profit maximization seemingly implies producing any given flow of services as cheaply as possible with production involving efficient useful lives this paper shows why this analysis is incomplete and therefore incorrect monopolists are shown to desire uneconomically short useful lives for their goods oligopolists have the monopolist s incentive for short lives as well as a second incentive that may either increase or decrease their chosen durability however oligopolists can generally gain by colluding to reduce durability and increase rentals relative to sales some evidence is presented that appears to be generally consistent with the predictions of the theory

housing assets and consumer spending a regional analysis carruth a and henley a 1993 housing assets and consumer spending a regional analysis reg studies 27 611 621 this paper is concerned with the relationship between the housing market and consumer spending for the eleven standard regions of the uk pooled regional cross sectional and annual time series data are used to appraise the effect of housing assets on regional consumer spending in the 1980s a fixed effects estimator imposing common slope coefficients across the regions is employed and this assumption is tested using the sure estimator estimates of a dhsy specification of the consumption function and a model augmented with housing assets are compared the fixed effects models perform quite well indicating that the growth in regional housing equity has had a positive impact on regional consumer spending the sure results indicate that the assumption of common regional responses of consumer spending to the explanatory variables is not valid and that the housing wealth effect is strongest in

the rise in self employment amongst u k males this paper uses time series data to attempt to identify the factors responsible for the rise in self employment amongst uk males focusing in particular on the period of rapid growth which was experienced during the 1980s the empirical results suggest that the most significant long run influence on the growth of self employment has been the rise in the real value of personal sector liquid wealth though rising levels of gdp and to a lesser extent increases in the real value of housing wealth have also made a significant contribution there is tentative support for the notion that mrs thatcher may have succeeded in ushering in an entrepreneurial renaissance within the uk economy though the evidence for this is rather crude there is no evidence for the view that recession push effects have been significant in accounting for the rise in self employment

simultaneous capacity and production management of short life cycle produce to stock goods under stochastic demand this paper derives the optimal simultaneous capacity and production plan for a shortlife cycle produce to stock good under stochastic demand capacity can be reduced as well as added at exogenously set unit prices in both cases studied with and without carryover of unsold units a target interval policy is optimal there is a usually different target interval for each period such that capacity should be changed as little as possible to bring the level available into that interval our contribution in the case of no carry over is a detailed characterization of the target intervals assuming demands increase stochastically at the beginning of the life cycle and decrease thereafter in the case of carry over we establish the general result and show that capacity and inventory are economic substitutes the target intervals decrease in the initial stock level and the optimal unconstrained base stock level decreases in the capacity level in both cases optimal service rates are not necessarily constant over time a numerical example illustrates the results

planned obsolescence and the r d decision by investing in rd i e the r d choice that maximizes current profitability does not maximize overall profitability the result is that if output is sold rather than rented then in its r d decision the monopolist has an incentive to practice a type of planned obsolescence that lowers its own profitability

regional unemployment self employment and family background this paper analyses the role of regional unemployment on self employment the paper argues that family background separates individuals with respect to the effect of unemployment the empirical analysis is based on data on a sample of finnish residents aged 0 14 years in 1970 whose subsequent employment is examined the results show that high unemployment in a region pushes individuals from self employed families into self employment while it has the opposite effect on individuals from wage earner families the push effect seems to work only among those individuals who already have entrepreneurial skills through their family background

earnouts in mergers and acquisitions a game theoretic option pricing approach abstract this paper presents a valuation approach for merger and acquisition m a deals employing contingent earnouts it is argued that these transactions have option like features and the paper uses a game theoretic option approach to model the value of such claims more specifically the paper examines the impact of uncertainty on the optimal timing of m a using earnouts and it also investigates the impact of uncertainty on the terms of the earnout optimal earnout and initial payment combinations are endogenously derived from the model and testable hypotheses are developed the theoretical contribution of this paper is a dynamic decision making model of the invest to learn option generated upon investment in an acquisition the paper also offers practical implications for the design of acquisitions employing earnouts

coordinating supply chains with competition capacity allocation in semiconductor manufacturing abstract this paper motivated by the experiences of a major us based semiconductor manufacturer presents an integrated model of incentive problems arising in forecasting and capacity allocation our model involves multiple product managers and multiple manufacturing managers who forecast the means of their respective demand and capacity distributions a central coordinator is responsible for allocating capacities to product lines when these distributions are unknown to the central coordinator and capacity is scarce the managers misrepresent their forecasts a product manager inflates his forecast to gain a greater allocation of the capacity a manufacturing manager deflates his forecast to cover for the uncertainties in production we propose a game theoretic model and design a mechanism a bonus scheme for all managers and an allocation rule to allocate realized capacity to the product managers that elicits truthful reporting by all managers the results herein show that the structure of the truth eliciting bonus schemes is rather simple with easily calculable parameters we also show that large classes of allocation rules including the current allocation practice of the firm are manipulable a bonus is often required for elicitation of truthful information we synthesize the implications of our results for the practitioners

real options and preemption under incomplete information abstract this paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions the optimal investment strategy may lie anywhere between the zero npv trigger level and the optimal strategy of a monopolist depending on the distribution of competitors costs and the implied fear of preemption our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps and positive skewness

the predicted earnings differential and immigrant self employment in sweden this paper investigates the influence of the predicted earnings differential between self employment and wage employment on self employment propensities among immigrants in sweden immigrants from non european countries have essentially lower earnings from self employment and wage employment than immigrants from european countries it is found that the difference between an immigrant s predicted earnings in self and wage employment has a strong influence on an immigrant s self employment decision a one unit increase in the log differential between self employment and wage employment earnings increase the self employment rate among immigrants by about 5 percentage points suggesting that discriminatory wages in the wage employment sector may push immigrants towards self employment

the impacts of uncertainties in a real options model under incomplete information abstract this paper examines the impact with respect to the uncertainty of the underlying state variable profit uncertainty on the real options model in a situation of incomplete information profit uncertainty has not incorporated into the real options model under incomplete information in that the underlying state variable is not formulated as the stochastic process see e g bernardo a e chowdhry e b 2002 resources real options and corporate strategy journal of financial economics 63 211 234 we extend the model developed by bernardo and chowdhry to formulate the underlying state variable as the stochastic process we conclude that profit uncertainty has the same type of impact on the real options value and its triggers both under complete and incomplete information

optimal portfolio choice under incomplete information models of asset pricing generally assume that the variables which characterize the state of the economy are observable however the distributional properties of asset prices that are relevant for portfolio decisions are in general not observable and therefore must be estimated the estimation of expected returns is a particularly difficult problem and estimation errors are likely to be substantial in this light it is reasonable to examine whether the assumption of observability of expected returns and other relevant state variables causes significant mis specification in equilibrium models of asset prices this paper has three main objectives first to derive optimal estimators for the unobservable expected instantaneous returns using observations of past realized returns second to establish that estimation and portfolio choice can be solved in two separate steps third to analyze the impact of estimation error on investment choices the estimators of expected returns are in general not consistent i e the estimation error does not tend to disappear asymptotically the effects of the estimation error therefore cannot be ignored even if realized returns are observed continuously over an infinite time period

the effects of sensitization and habituation in durable goods markets abstract we develop a model to study the impact of changes in price sensitivity on the firm as it introduces multiple generations of a durable product where unit costs are a convex function of quality we incorporate the psychological processes of sensitization and habituation into a model of discretionary purchasing of replacement products motivated by past experience when price sensitivity decreases with each purchase sensitization the myopic firm offers a higher quality product at a much higher price with each generation when price sensitivity increases with each purchase habituation the myopic firm engages in price skimming when sensitization is followed by habituation the myopic firm eventually provides higher quality than the market is willing to pay for leading to a steep drop off in sales and profits the actions of the forward looking firm depend on the discount rate a firm with a low discount rate builds its customer base before offering a higher quality and higher priced product in contrast a firm with a high discount rate quickly increases price and quality following the same path to falling profits of the myopic firm these results provide insight into the firm and consumer behaviors underlying the phenomenon of performance oversupply identified in the innovation literature

investment timing asymmetric information and audit structure a real options framework abstract this paper examines investment timing by the manager in a decentralized firm in the presence of asymmetric information in particular we incorporate an audit technology in the agency model developed by grenadier and wang 2005 investment timing agency and information journal of financial economics 75 493 533 the implied investment trigger in the agency problem with auditing is larger than in the full information problem and smaller than in the agency problem without auditing nevertheless the audit technology does not necessarily reduce inefficiency in the total social welfare

flexible service capacity optimal investment and the impact of demand correlation we consider a firm that provides multiple services using both specialized and flexible capacity the problem is formulated as a two stage single period stochastic program the firm invests in capacity before the actual demand is known and optimally assigns capacity to customers when demand is realized sample applications include a car rental company s use of mid sized cars to satisfy unexpectedly high demand for compact cars and an airline s use of business class seats to satisfy economy class demand we obtain an analytical solution for a particular case when services may be upgraded by one class the simple form of the solution allows us to compare the optimal capacities explicitly with a solution that does not anticipate flexibility given that demand follows a multivariate normal distribution we analytically characterize the effects of increasing demand correlation on the optimal solution for the case with two customer classes the effects of demand correlation are intuitive increasing correlation induces a shift from flexible to dedicated capacity when there are three or more classes there are also adjustments to the resources not directly affected by the correlation change as correlation rises these changes follow an alternating pattern for example if the optimal capacity of one resource rises then the optimal capacity of the adjacent resource falls these results make precise conjectures based on numerical experiments that have existed in the literature for some time

co production processes with random yields in the semiconductor industry a wide variety of manufacturing operations can be characterized as co production with substitutable demand that is there are many situations in which the availability of two or more items are related and because of randomness in either supply or demand it can be advantageous to substitute one of these items for another our research was motivated by the semiconductor industry where chips are produced in large batches because of the presence of randomness in the process individual chips in a given batch can perform differently because some customers have stricter specifications than others chips within the same batch can be classified and sold as different products according to their measurable performance we model the production and inventory problem as a stochastic dynamic program in which the objective is to minimize the costs of meeting contractual obligations after developing heuristic methods of solving the problem in practice we validate them against a lower bound on the cost of an optim

self employment in the uk regions the significant regional variations which exist in the rate of self employment among uk males are highlighted and attempts made to explain them using pooled crosssection time series data for the period 1973 93 it is found that in the long run regional rates of self employmentare a function of the real value of net housing wealth and the industry composition of regional gdp however a significant proportion of regional variations in self employment can only be explained by regional fixed effects which reflect fundamental long term influences which make some regions more fertile environments for self employment than others

monopolist pricing with dynamic demand and production cost this paper deals with pricing of a new product over time by a monopolist who maximizes the discounted profit stream the interdependency of cost and demand on cumulative production makes the problem inherently dynamic cost is assumed to be declining with cumulative production learning curve effect while demand is a function of price and cumulative sales representing word of mouth and saturation effects the paper addresses this problem in a general framework that includes several previous results as special cases and provides new insights in other situations while the learning curve and word of mouth effect cause prices to be lower than the price that maximizes immediate revenues the saturation factor has the opposite effect the price path over time is affected by these factors and the interest rate we characterize the price path under several different situations and interpret the results for policy guidelines