Armin Schmutzler

Auctions vs Negotiations in Public Procurement: Which Works Better?

Armin Schmutzler et al. — Wed, 23 Nov 2011 03:13:24 PST

Public agencies rely on two key modes to procure goods and services: auctions and direct negotiations. The relative advantages of these two modes are still imperfectly understood. This paper therefore studies public procurement of regional passenger railway services in Germany, where regional agencies can use auctions and negotiations to procure regional passenger rail services. This offers the unique opportunity to assess the two procurement modes within the same institutional and legal framework. We first characterize the decisions of the agency in a simple reduced form framework of negotiations and auctions. This analysis suggests accounting for the endogeneity of the choice of procurement mode by estimating the mode of procurement, quantity and price simultaneously. We then test this framework using information on lines that were auctioned and lines that were directly negotiated with the former monopolist. Results indicate (i) endogeneity of procurement choice can be fully characterized by observed line characteristics;(ii) frequency of service is 16 percent higher on lines that were auctioned compared to lines that were negotiated, and (iii) the procurement price is 25 percent lower on auctioned lines than on those with direct negotiations. Taken together, these results indicate a significant efficiency enhancing effect of auctions.

Local Transportation Policy and the Environment

Armin Schmutzler — Mon, 06 Dec 2010 00:10:00 PST

The paper introduces a simple framework for analyzing the environmental effects of local transportation policies, and it reviews some evidence. In several cases, subsidies for local public transportion have led to substantial reductions in road transportation and have thereby reduced externalities. Some but not all estimates suggest positive overall welfare effects of such policies. In the rare cases where road pricing has been applied, it has helped to reduce automobile transportation, and it has led to environmental improvements. The experience with specific driving restrictions like "days without cars" and "low emission zones" has been mixed. Local transportation policy can have a useful role to play as a complement to national policy instruments, but neither efficiency nor effectiveness can be taken for granted.

Competition and Innovation: An Experimental Investigation

Armin Schmutzler et al. — Mon, 29 Nov 2010 00:44:17 PST

The paper analyzes the effects of more intense competition on firms' investments in process innovations. More intense competition corresponds to an increase in the number of firms or a switch from Cournot to Bertrand competition. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. An increase in the number of firms from two to four reduces investments, whereas a switch from Cournot to Bertrand increases investments, even though theory predicts a negative effect in the four-player case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented. However, the positive effect of moving from Cournot to Bertrand competition is more pronounced in the former case.

Lobbying and the Power of Multinational Firms

Armin Schmutzler et al. — Fri, 26 Nov 2010 02:52:09 PST

Are national or multinational rms better lobbyists? This paper analyzes the extent of national environmental regulation when policy is determined in a lobbying game between a government and firm. We compare the resulting regulation levels for national and multinational firms. We identify three countervailing forces, the easier-to-shut-down effect, the easier-to-curb-exports effect and the multiple-plant effect. The interplay of these three forces determines whether national or multinational rms produce more, depending on such parameters as the potential environmental damages, transportation costs and the influence of the firm. We also show that welfare levels are higher with multinational firms than with national firms when there is no lobbying, but that lobbying can reverse the welfare ordering.

The relation between competition and investment - Why is it such a mess?

Armin Schmutzler — Fri, 26 Nov 2010 02:46:55 PST

Using a general two-stage framework, this paper gives sufficient conditions for increasing competition to have negative or positive effects on R&D-investment, respectively. Both possibilities arise in plausible situations, even if one uses relatively narrow definitions of increasing competition. The paper also shows that competition is more likely to increase the investments of leaders than those of laggards. When R&D-spillovers are strong, competition is less likely to increase investments. The paper also identifies conditions under which low initial levels of competition make a positive effects of competition on investment more likely. Extending the basic framework, the paper shows that separation of ownership and control, endogenous entry and cumulative investments make positive effects of competition on investment more likely. Imperfect upstream competition weakens the effects of competition on investment.

Product Markets and Industry-Specific Training

Armin Schmutzler et al. — Fri, 26 Nov 2010 02:43:04 PST

We develop a product market theory that explains why firms provide their workers with skills that are not only useful in the firm itself, but also for potential future employers. In our model, firms first decide whether to invest in industry-specific training, then make wage offers for each others’ trained employees and finally engage in imperfect product market competition. Equilibria with and without training, and multiple equilibria can emerge. If competition is sufficiently soft, firms will invest in training if others do the same. Thereby, they avoid having to pay high wages for trained workers. Furthermore, we draw welfare conclusions from the analysis, and we use it to explain cross-country differences in training.

Rotten Kids With Bad Intentions

Armin Schmutzler et al. — Fri, 26 Nov 2010 02:12:45 PST

We examine a "Rotten Kid" model (Becker 1974) where a player with social preferences interacts with an egoistic player. We assume that social preferences are intentionbased rather than outcome-based. In a very general multi-stage setting we show that any equilibrium must involve mutually unkind behavior of both players, endogenously generating negative emotions rather than positive altruism. In a large class of two-stage games that includes principal-agent and gift-giving games, this prevents equilibrium from being materially Pareto efficient. Compared to the subgame-perfect equilibrium without social preferences, efficiency is still generally increased. On the other hand, the materialistic player has lower whereas the reciprocal player has higher material payoffs, so that reciprocity does not increase equity: For sufficiently strong reciprocity concerns, the materialistic player ends up with a negligible share of the gains from trade.

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

Armin Schmutzler — Fri, 26 Nov 2010 02:04:30 PST

The relation between the intensity of competition and R&D investmenthas 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.

Is there a U-shaped relation between competition and investment?

Armin Schmutzler et al. — Tue, 29 Sep 2009 07:46:55 PDT

We consider a two-stage game with cost-reducing investments followed by a linear differentiated Cournot duopoly. With competition inversely parameterized by the extent of product differentiation, investment in the subgame-perfect equilibrium is typically minimal for intermediate levels of competition. Laboratory experiments partly confirm the U-shape in a reduced one-stage version of the game. In the two-stage version, there is no evidence for positive effects of moving from intermediate to intense competition.

Self-reinforcing market dominance

Armin Schmutzler et al. — Tue, 29 Sep 2009 07:38:35 PDT

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 marginal 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, mean-preserving spreads of the initial cost dis- tribution have no effects on aggregate investments. 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.

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

Armin Schmutzler et al. — Mon, 27 Oct 2008 02:39:38 PDT

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.

Intimidating Competitors–Endogenous Vertical Integration and Downstream Investment in Succesive Oligopoly

Armin Schmutzler et al. — Mon, 14 May 2007 01:44:37 PDT

This paper examines the interplay of endogenous vertical integration and cost-reducing downstream investment in successive oligopoly. Analyzing a linear Cournot model, we establish the following key results: (i) Vertical integration increases own investment and decreases competitor investment (intimidation effect). (ii) Asymmetric integration is a non-degenerate equilibrium outcome. (iii) Compared to a benchmark model without investment, complete vertical separation is a less likely outcome. We argue that these findings generalize beyond the linear Cournot model under reasonable assumptions.

Small Scale Entry vs. Acquisitions of Small Firms: Is Concentration Self-reinforcing?

Zava Aydemir et al. — Mon, 14 May 2007 01:39:39 PDT

We consider a reduced form model with acquisitions and entry. There are two investors and several small non-investing firms. One investor can acquire a small firm, the other investor decides about market entry. After that all firms play an oligopoly game. We derive conditions under which increasing market concentration arises with myopic firms. We apply the framework to a Cournot model with cost synergies and a Bertrand model where acquisitions extend the product spectrum of a firm.

Exploring the effects of competition for railway markets

Armin Schmutzler et al. — Mon, 14 May 2007 01:28:22 PDT

This paper studies the effects of introducing competition for local passenger railway markets in the German state of Baden-Württemberg. We compare the evolution of the frequency of service on lines that were exposed to competition for the market with lines procured by direct negotiations with the incumbent. Our results suggest that the competitively procured lines enjoyed a stronger growth of the frequency of service than those that were not procured competitively, even after controlling for various line characteristics that might have had an independent influence on the frequency of service. Our results further suggest that the effects of competition may depend strongly on the operator.

Foreign Direct Investment and R&D offshoring

Hans Gersbach et al. — Fri, 11 May 2007 14:28:42 PDT

We analyze a two-country model of Foreign Direct Investment (FDI). Two firms, each of which is originally situated in only one of the two countries, first decide whether to build a plant in the foreign country. Then, they decide whether to relocate R&D activities. Finally, they engage in product-market competition. Our main points are: first, FDI liberalization causes a relocation of R&D activities if intrafirm communication is suﬃciently well developed, external spillovers are substantial, competition is not too strong and foreign markets are not too small. Second, such a relocation of R&D activities will usually nevertheless increase domestic welfare since it only occurs if intrafirm communication is well developed and therefore knowledge generated and obtained abroad flows back to the domestic country. Third, the potential of R&D oﬀshoring makes FDI itself more likely. Fourth, when countries are asymmetric, the small-country firm is more likely to oﬀshore its R&D activities into the large country than conversely.

A Product-Market Theory of Industry-Specific Training

Hans Gersbach et al. — Fri, 11 May 2007 14:23:25 PDT

We develop a product market theory that explains why firms provide their workers with skills that are sufficiently general to be potentially useful for competitors. We consider a model where firms first decide whether to invest in industry-specific human capital, then make wage offers for each others' trained employees and finally engage in imperfect product market competition. Equilibria with and without training, and multiple equilibria can emerge. If competition is sufficiently soft, firms may invest in non-specific training if others do the same. Thereby, they avoid having to pay high wages in order to attract trained workers.

Does Globalization Create Superstars?

Armin Schmutzler et al. — Fri, 11 May 2007 14:00:10 PDT

To examine the impact of globalization on managerial compensation, we consider a matching model where a number of firms compete both in the product market and in the managerial market. We show that globalization, i.e. the simultaneous integration of product markets and managerial pools, leads to an increase in the heterogeneity of managerial salaries. Typically, while the most able managers obtain a wage increase, less able managers are faced with a reduction in wages. Hence our model can explain the increasing heterogeneity of CEO compensation that has been observed in the last few decades.

Entry in liberalized railway markets: The German experience

Armin Schmutzler et al. — Fri, 11 May 2007 13:47:33 PDT

In Germany, competitive franchising is increasingly being used to procure passenger railway services that were previously provided by a state monopolist. This paper analyzes the 77 tenders that have taken place since the railway reform in 1994. The tenders diﬀer with respect to the size of the franchise network, the required frequency of service, the duration of the contract 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 larger networks are less likely to be won by the competitors. Also, more recent auctions have been won by competitors more frequently than earlier auctions. Other control variables such as the duration of the contract and the adjacency to other lines run by entrants are insignificant.

Investment and Market Dominance

Susan Athey et al. — Tue, 13 Feb 2007 06:44:56 PST

This paper analyzes a model of oligopolistic competition with ongoing investment. Special cases include incremental investment, patent races, learning-by-doing, and network externalities. We investigate circumstances under which a firm with low costs or high quality will extend its initial lead through investments. To this end, we derive a new comparative statics result for general games with strategic substitutes, which yields the desired conditions for our investment game. Finally, we highlight plausible countervailing effects that arise when investments of leaders are less effective than those of laggards, or in dynamic games when firms are sufficiently patient.

Product and Process Flexibility in an Innovative Environment

Armin Schmutzler et al. — Tue, 13 Feb 2007 06:37:06 PST

This article studies several attributes of a firm's long-run decisions about organizational structure, attributes that affect the firm's 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 dimensions of innovation: demand-enhancing (product) and cost-reducing (process). These two types of innovation are complementary in terms of increasing the firm's net revenue in the short run. The complementarities between the firm's short-run decision variables then lead to complementarities between its long-run decisions about product and process flexibility and research capabilities.