The present paper is a further step in our research, on welfare improving cartel formation in oligopoly, which suggests that if in a Cournot duopoly, union members are not sufficiently risk-averse and firm products are sufficiently close substitutes, then collusion among firms may emerge in the static equilibrium and this may improve social welfare. Remarkably, the gain in social welfare materializes at the cost of union rents despite the union’s presence being that which effectively sustains collusion.
In the present paper, in the context of a unionized duopoly model with differentiated goods and decentralized Right-to-Manage bargaining, we endogenize the firms’ mode of competition, as well their perspective for cartel formation. That is, firms may compete or collude by simultaneously and independently adjusting their own quantities (Cournot Competition) or their own prices (Bertrand Competition). We further argue that either of these decisions corresponds to a long-run commitment on the part of each firm, since a higher or lower capacity, hence, sunk cost, is implied in order to efficiently produce a lower or higher level of output for any given unit cost. The latter is in turn determined in the labour market, where each firm separately engages into wage contracting with its own workers’ union, each firm retaining its discretion over employment/output.
Union members are endowed with a (symmetric) rate of risk aversion, whilst union power over the firm-specific wage bargain is assumed to be unity (“monopoly unions”). In this context we subsequently postulate a static game with the following sequence of events: At the first stage, firms simultaneously and independently decide to compete in quantities or prices. At the second stage, firms simultaneously and independently decide to proceed to collusive or competitive play. At the third stage, unions and firms enter into negotiations about wages (w-bargaining). At the fourth stage, firms simultaneously and independently adjust their own quantities or set their own prices in order to maximize their own profits or the cartel’s ones, depending on their decision at previous stages
