Armin Schmutzler

Product and Process Flexibility in an Innovative Environment

This article studies several attributes of a firms long-run decisions about organizational structure, attributes that affect the firms short-run innovative activity. We focus on flexibility, which lowers the future costs of implementing innovations, and research capabilities, which improve the future opportunities for innovation. We consider two dimentsions of innovation: demand-enhancing (product) and cost-reducing (process). These two types of innovation are complementary in terms of increasing the firms net revenue in the short run. The complementarities between the firms short-run decision variables then lead to complementarities between its long-run decisions about product and process flexibility and research capabilities.

External spillovers, internal spillovers and the geography of production and innovation

We consider a three-location duopoly model such that (i) firms choose production and innovation locations before (Bertrand) competition takes place and (ii) there are internal and external knowledge spillovers. We show: (1) agglomerations where firms earn negative profits may exist when there are both external and internal knowledge spillovers; (2) greater external spillovers do not necessarily favor agglomeration; (3) decreasing communication costs tend to favor agglomeration; (4) there are exactly two types of agglomeration equilibria: either both firms innovate in the agglomeration, or there is an innovator and an imitator; and (5) if there is a location where both firms produce, then innovation must take place in this location.

What Does it Take to Sell Environmental Policy? An Empirical Analysis of Referendum Data

We analyze the factors that influence the support for environmental policy proposals. Swiss referendum data show that proposals obtain more yes-votes if they do not restrict consumption possibilities directly, if they are endorsed by business associations, if environmental preferences are strong and economic conditions are favorable at the time of the referendum. Also, there are more pro-environmental votes in cantons with higher population density. On the other hand, yes-votes do not seem to depend on whether a proposal involves a tax or not.

Entry in Liberalized Railway Markets: The German Experience

In Germany, competitive franchising is increasingly being used to procure passenger railway services that were previously provided by a state monopolist. This paper analyzes 77 tenders that differ with respect to network size, service frequency, contract duration and the proximity to other lines that are already run by competitors of DB Regio, a subsidiary of the successor of the former state monopolist. Our analysis shows that competitors are more likely to win small networks and more recent auctions. Other controls such as contract duration and the adjacency to other lines run by entrants are insignificant.

Asymmetric Vertical Integration

We examine vertical backward integration in a reduced-form model of successive oligopolies. Our key findings are: (i) There may be asymmetric equilibria where some firms integrate and others remain separated, even if firms are symmetric initially; (ii) Efficient firms are more likely to integrate vertically. As a result, integrated firms also tend to have a large market share. The driving force behind these findings are demand/mark-up complementarities in the product market. We also identify countervailing forces resulting from strong vertical foreclosure, upstream sales and endogenous acquisition costs.

Environmental Regulations and Managerial Myopia

It has recently been claimed that, contrary totraditional neoclassical theory, suitably chosenenvironmental regulation is often beneficial for theregulated firms because it induces cost-reducinginnovations. I analyze the extent to which thisposition is compatible with microeconomic analysis. Itturns out that even in a framework in whichorganizational inefficiencies might lead tounderinvestment, environmental policy can onlyincrease firm profits if several very specificconditions are met. These conditions concern the typeof policy, the extent of inefficiencies, the costs ofpotential innovation projects and their effect onproductivity and abatement costs.

Is Competition Good for Innovation? A Simple Approach to an Unresolved Question

The relation between the intensity of competition and R&D investment has received a lot of attention, both in the theoretical and in the empirical literature. Nevertheless, no consensus on the sign of the effect of competition on innovation has emerged. This survey of the literature identifies sources of confusion in the theoretical debate. My discussion is mainly based on a unified model that simplifies the comparison of different results. This model is also applied to show which factors work in favor of a positive relation between competition and innovation.

All-Pay Auctions with Negative Prize Externalities: Theory and Experimental Evidence

The paper characterizes the mixed-strategy equilibria in all-pay auctions with endogenous prizes that depend positively on own effort and negatively on the effort of competitors. Such auctions arise naturally in the context of investment games, lobbying games, and promotion tournaments. We also provide an experimental analysis of a special case which captures the strategic situation of a two-stage game with investment preceding homogenous Bertrand competition. We obtain overinvestment both relative to the mixed-strategy equilibrium and the social optimum.

Self-Reinforcing Market Dominance

Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in cost reductions than firms with higher initial costs. We find that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even strengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, aggregate investment is not affected by the initial efficiency distribution. Finally, investment spillovers reduce investment,and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers.

Auctions vs negotiations in public procurement: Which works better?

Public agencies mainly rely on two modes to procure goods and services: auctions and direct negotiations. We study a 1994 policy change in Germany that introduced the possibility to procure rail services in auctions as well as in direct negotiations with the incumbent. We analyze the effect of the procurement mode on service frequency and procurement price. Our analysis relies on self-collected data on the frequency of rail service on about 500 rail lines. We first develop a theoretical framework to study an agency’s decision on the procurement mode. We then use this framework to guide our empirical analysis on rail service, procurement price, and choice of procurement mode. Results indicate that, compared with negotiations, auctions improve service levels and reduce prices. As a result, surplus on auctioned lines increased by about 30%. Interestingly, surplus would also have increased by 16% on negotiated lines had auctions been used. We argue that the predominance of non-competitive modes reflects (actual or perceived) administrative costs of carrying out auctions.