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

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

In the context of a dynamic game-theoretic analysis we investigate the conditions under which firm-level unions may strategically collude, or not, and the impact of their decisions upon the firms’ incentives to individually spend on R&D investments.

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There are supporters that claim that there is a negative correlation between them and consequently centralized wage-setting structure is harmful for the industry, as well as that there is positive correlation as R&D investments increase. The opinions vary, as each one is studying the same subject from a different perspective. It is recognized also, that relevant literature lacks dynamic analysis on the above field.

In order to contribute in this area, we propose a dynamic version of a model that we first introduced in our previous work. More specifically, in the context of a dynamic game-theoretic analysis, we consider a union-duopoly model with differentiated products and R&D investments on product quality improvement, in where two technologically identical firms compete by independently adjusting their own quantities. As regards the labor market, there are two firm-level unions with monopoly power over the firm-specific wage bargaining. Unions independently decide about their strategy on w-negotiations with their specific firm, by following a decentralized or centralized wage-setting regime. Our model follows a four-stage game with the following sequence of events: At the 1st stage, unions independently decide to proceed with a centralized or decentralized bargaining strategy. At the 2nd stage, firms determine the optimal level of their R&D investments. At the 3rd stage, unions independently set their firm-specific wages, in order either to maximize their own rents, or to maximize joint rents, depending on their decision about their strategy at the 1st stage of the game. At the 4th stage, firms independently adjust their own production levels, in order to maximize their own profits (Cournot Competition).

We conclude that under sufficiently high (low) discount rate and substitutability among the firms' products, an industry-wide union emerges (separate firm-level unions sustain) in the equilibrium, where product quality along with the level of R&D investments are relatively low (high).

Moreover, we proceed to research further by developing a new market structure, in where the R&D’s product is a common public good. More specifically, we consider that a benevolent policy maker undertakes the costs of firm-specific R&D investments, finances these costs by indirect taxation and provides firms, without cost, the know-how of product quality improvement. Subsequently, we endogenize the selection of a market structure in our model. One of our main results shows the superiority in terms of Social Welfare of the decentralized wage-setting regime between union structures and the nationalization of R&D between market structures. 

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