Union-Oligopoly Bargaining and Vertical Differentiation: Do Unions Affect Quality?

Union-Oligopoly Bargaining and Vertical Differentiation: Do Unions Affect Quality?

This paper investigates unionized oligopolistic markets with differentiated products and quality improvement-R&D investments.

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An approach of labor market analysis, regarding the perfect competitive rule, is the existence of unions as a means to ensure higher wages for its members. The institution of unions is not surprising, given the predominance of them in most advanced industrial economies (especially in northern Europe). There are several papers, theoretical and empirical, that are aimed to interpret the unions’ effects on labor and product markets. The analysis focuses mainly on union structures (centralized / decentralized), their objective function (wages or/and employment) and their strategic environment (monopoly unions, efficient bargain, Nash equilibrium), within a closed or open economy with various institutional arrangements.

The institution of the unions was introduced relatively recently on the agenda of orthodox economics. The present paper focuses on unionized oligopolistic markets with differentiated products and quality improvement-R&D investments. The entire analysis explores the impact of unions’ decisions on their structure i.e. decentralized and centralized wage-setting regimes on market outcomes, chiefly product quality improvement. Notice that both union structures and R&D investments, hence product’ quality, are endogenously determined by market participants.

An approach to incorporate R&D into unionized oligopolies was realized by Emmanuelle Bacchiega (2007). Assuming that product quality depends on highly- skilled workers employed and firms entering into negotiations only with those workers, he concludes that if the bargaining power of those workers is relatively high (low), then firms prefer to produce low (high) quality products and the Social Welfare decreases with the bargaining power of highly-skilled workers. While, Symeonidis (2003) investigates duopolistic markets with differentiated products and R&D investments – quality improvement, and focuses on the comparative analysis of firms’ mode of competition, Bertrand and Cournot. 

Our paper studies unionized oligopolistic markets with differentiated products and firms’ R&D investments on product quality improvement. We endogenize the union structures, i.e. the decentralized and the centralized wage-setting regimes, and investigate the impact of their decision on market outcomes/participant surpluses. We extend our research by developing two alternative market policies, where the role of the social planner is inserted and endogenize the selection of market structure in our model. In the first case, we assume that a benevolent policy maker proceeds to quality improvement-R&D, as a common public good, by undertaking the costs of those investments and providing for free the know-how to the industry. In the second case he finances a percentage of the expenditures of firm-specific R&D investments.

In both cases he finances those costs by indirect taxation on market products. We conclude that union collusive play decreases product quality and output level under each of the proposed market structures (including where the social planner is absent). Additionally, our findings show the market structure in where the R&D – quality improvement is a public good, not only emerges in equilibrium, but also promotes important industry elements s, such as output level, wages and product quality, and all market participant surpluses (and consequently Social Welfare), even if this policy leads to indirect taxation on market products. 

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