Contributions published at Microeconomics, Industrial Organization, and Environmental Economics (Armin Schmutzler)

We examine how globalization affects firms incentives to train workers. In our model, firms invest in productivity-enhancing worker training before Cournot competition takes place. When two separated product markets become integrated and are thus replaced with a market with greater demand and greater firm number, training by each firm increases provided the two countries are suffciently small. When barriers between large markets are eliminated, training is reduced. Similar results hold when firms in countries with different training systems face globalization of product markets. In particular, apprenticeship systems are threatened by a large-scale integration of product markets. Contrary to product market integration, labor market integration has no effect on training incentives.

We provide a framework for analyzing bilateral mergers when there is two-sided asymmetric information about firms’ types. We show that there is always a "no-merger" equilibrium where firms do not consent to a merger, irrespective of their type. There may also be a "cut-off" equilibrium if the expected merger returns satisfy a suitable single crossing condition, which will hold if a firm’s merger returns are "essentially monotone decreasing" in its type. Applying our analysis to the linear Cournot model, we show how the merger pattern depends on the cost effects of mergers, the extent of uncertainty, and the way profits are split. Specifically, we show how increasing uncertainty about competitor types may foster mergers as firms hope for strong rationalization effects.

We investigate how various institutional settings affect a network provider's incentives to invest in infrastructure quality. Under reasonable assumptions on demand, investment incentives turn out to be smaller under vertical separation than under vertical integration, though we also provide counterexamples. The introduction of downstream competition for the market can sometimes improve incentives. With suitable non-linear access prices investment incentives under separation become identical to those under integration.

We examine cost-reducing investment in vertically-related oligopolies, where firms may be vertically integrated or separated. Analyzing a standard linear Cournot model, we show that: (i) Integrated firms invest more than separated competitors. (ii) Vertical integration increases own investment and decreases competitor investment. (iii) Firms may integrate strategically so as to preempt investments by competitors. Adopting a reduced-form approach, we identify demand/mark-up complementarities in the product market as the driving force for these results. We show that our results generalize naturally beyond the Cournot example, and we discuss policy implications.

We analyze the determinants of environmental policy when two firms engage in two types of lobbying against a restriction on allowed pollution: General lobbying increases the total amount of allowed pollution, which is beneficial for both firms. Private lobbying increases the individual pollution standard of the lobbying firm, but has a negative or zero effect on the allowed emissions of the competitor. We determine the lobbying equilibrium and discuss the resulting emission level. In many cases, a higher effectiveness of private lobbying is detrimental for firms and beneficial for environmental quality, as it induces firms to turn towards excessive amounts of relatively unproductive private lobbying.

We develop a product market theory that explains why firms invest in general training of their workers. We consider a model where firms first decide whether to invest in general 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 suffciently soft and trained workers are substitutes, firms may invest in non-specific training if others do the same, because they would otherwise suffer a competitive disadvantage or need to pay high wages in order to attract trained workers. Government intervention can be socially desirable to turn training into a focal equilibrium.

We present a new approach to endogenizing technological spillovers. Firms choose levels of a cost-reducing innovation from a continuum before they engage in competition for each other's R&D-employees. Successful bids for the competitor's employee then result in higher levels of cost reduction. Finally, firms enter product market competition. We apply the approach to the long-standing debate on the effects of the mode of competition on innovation incentives. We show that incentives to acquire spillovers are stronger and incentives to prevent spillovers are weaker under quantity competition than under price competition. As a result, for a wide range of parameters, price competition gives stronger innovation incentives than quantity competition.

We develop a new approach to endogenizing technological spillovers. We analyze a game in which firms can first invest in cost-reducing R&D, then compete on the human-capital market for their knowledge-bearing employees, and finally enter the product market. If R&D employees change firms, spillovers arise. We show that technological spillovers are most likely when they increase total industry profits. We use this result to show that innovation incentives are usually stronger for endogenous than for exogenous spillovers and that endogenous spillovers may reverse the result that innovation incentives are stronger under quantity competition than under price competition. Finally, we explore the robustness of our results with respect to contractual incompleteness and the number of R&D workers.

We investigate how various institutional settings affect a network provider’s incentives to invest in infrastructure quality. Under reasonable assumptions on demand, investment incentives turn out to be smaller under vertical separation than under vertical integration, though we also provide counter-examples. The introduction of downstream competition for the market can sometimes improve incentives. With suitable non-linear access prices investment incentives under separation become identical to those under integration.

We consider market dynamics in a reduced form model. In the simplest version, there are two investors and several small noninvesting firms. In each period, 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 show that a model with forward-looking firms and with arbitrary numbers of investors yield similar results. We apply the framework to a Cournot model with cost synergies and a Bertrand model where acquisitions extend the product spectrum of a firm.

We analyze 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 applies to 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.

It has recently been claimed that, contrary to traditional neoclassical theory, suitably chosen environmental regulation is often beneficial for the regulated firms because it induces cost-reducing innovations. I analyze the extent to which this position is compatible with microeconomic analysis. It turns out that even in a framework in which organizational inefficiencies might lead to underinvestment, environmental policy can only increase firm profits if several very specific conditions are met. These conditions concern the type of policy, the extent of inefficiencies, the costs of potential innovation projects and their effect on productivity and abatement costs.

We consider a two-stage model of locational choice. Firms decide in which of three locations (or countries) to build plants; they then compete in all three markets. Knowledge spillovers reduce marginal costs in agglomerations; through intra-firm spillovers these cost reductions can be exported to other locations. We show that improvements in the exchange of information within firms make agglomeration more likely, because knowledge obtained in the center can be transmitted to other locations more easily. Decreases in transportation costs tend to destabilize agglomerations, since competition for peripheral locations increases, which decreases the value of knowledge obtained in agglomerations.

This paper studies a network provider's incentives to invest in infrastructure quality. In a simple but general framework, we investigate how various institutional settings affect investment incentives. We show that under reasonable assumptions on demand, investment incentives are smaller under vertical separation than under vertical integration. We consider two strategies for improving investment incentives under vertical separation. First, the introduction of competition for the market can sometimes improve incentives. Second, with non-linear access prices investment incentives under separation become identical to those under integration.

Michael Porter and others have recently argued that suitable environmental regulations are likely to induce cost-reducing innovations. We analyze under which conditions such arguments might be consistent with microeconomic analysis, and under which additional conditions the firms' benefits might exceed the costs. It turns out that this requires fairly specific conditions.

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.

This paper analyzes a model of oligopolistic competition with ongoing investment. It incorporates the following models as special cases: 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 further cost-reducing or quality-improving investments. In many commonly-studied oligopoly games, such investments are strategic substitutes. We derive a new comparative statics result that applies to games with strategic substitutes, and we use the result to derive conditions under which leading firms invest more than lagging firms. We show that the conditions are satisfied in a variety of commonly-studied oligopoly models. We also highlight plausible countervailing effects from two distinct sources. First, leading firms may find it more costly than others to achieve the same increment to their state. This force is particularly salient inmany models of patentn races, where firms make research investments in an attempt to find a new technology that delivers a given level of cost or quality. Second, countervailing effects may arise in dynamic games with more than two firms are sufficiently patient.

Recently, the 'new economic geography' literature has developed as a theory of the emergence of large agglomerations which relies on increasing returns to scale and transportation costs. This literature builds on diverse intellectual traditions. It combines the insights of traditional regional science with those of modern trade theory and thus attempts to provide an integrative approach to interregional and international trade. The paper surveys this literature and discusses its relation to earlier approaches to similar topics.