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Models of Unionized Oligopolies
Inaugural-Dissertation
zur Erlangung des akademischen Grades eines Doktors
der Wirtschafts- und Sozialwissenschaften
(Dr.rer.pol.)
vorgelegt von: Dipl.-Ok.Anna K.G oddeke
aus: Nurn bergErstreferent: Professor Dr.Justus Haucap
Zweitreferent: Professor Dr.Claus Schnabel
letzte Prufung: 17. November 2008Contents
1 Introduction 4
1.1 Building Blocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 The First Models and Results . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 International Unionized Oligopolies . . . . . . . . . . . . . . . . . . . . . . 12
1.3.1 Trade Liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.3.2 Foreign Direct Investments . . . . . . . . . . . . . . . . . . . . . . 24
1.3.3 Di erences in Labor Market Organization . . . . . . . . . . . . . . 37
1.4 Innovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1.4.1 Classical Papers on Unions and Innovations . . . . . . . . . . . . . 39
1.4.2 Imperfect Competition in the Product Market . . . . . . . . . . . 40
1.5 Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
1.6 Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
1.6.1 Di erent Negotiation Strengths . . . . . . . . . . . . . . . . . . . . 59
1.6.2 E cient Bargaining vs. Right{to{Manage . . . . . . . . . . . . . . 61
1.6.3 Firms Prefer to Be Unionized . . . . . . . . . . . . . . . . . . . . . 64
1.6.4 Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
1.6.5 Level of Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . 66
1.7 Minimum Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
1.8 Incomplete Information|Strikes . . . . . . . . . . . . . . . . . . . . . . . 72
1.9 Di erences in the Product Market . . . . . . . . . . . . . . . . . . . . . . 74
1.9.1 Intensity of Competition in the Product Market . . . . . . . . . . 74
11.9.2 Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
1.9.3 Bertrand vs. Cournot competition . . . . . . . . . . . . . . . . . . 79
1.9.4 Mixed Oligopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
1.9.5 Horizontal and Vertical Di erentiation . . . . . . . . . . . . . . . . 83
1.10 Incentive Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
1.11 General Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
1.12 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
2 Strategic Pro t Sharing 90
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
2.2 Decentralized Wage Negotiations (D). . . . . . . . . . . . . . . . . . . . . 95
2.2.1 Basic Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
2.2.2 Decentralized Negotiations in a Classical Wage System (D ) . . . 97cs
2.2.3 Decentralizeds about a Pro t Sharing Scheme ( D ) . 98ps
2.2.4 Classical Wage System vs. Pro t Sharing Scheme . . . . . . . . . . 100
2.2.5 Stability of the Semi{Collusive Agreement (D ) . . . . . . . . . . 103ts
2.2.6 Comparative Statics . . . . . . . . . . . . . . . . . . . . . . . . . . 105
2.3 Centralized Wage Negotiating (C) . . . . . . . . . . . . . . . . . . . . . . 106
2.3.1 Centralized Negotiations in a Classical Wage System (C ) . . . . 107cs
2.3.2 IsaSemi{CollusiveAgreementAdvantageousforFirmsandUnions?108
2.4 Conclusion and Further Remarks . . . . . . . . . . . . . . . . . . . . . . . 113
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
3 Boundedly Rational Agents 125
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
3.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
3.3 Computational Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
3.4 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
3.4.1 One Product Market Loop|One Union Loop . . . . . . . . . . . . 132
3.4.2 Di erent Initial Values . . . . . . . . . . . . . . . . . . . . . . . . . 135
23.4.3 Di erent Step Size . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
3.4.4 Multiple Product Market Runs . . . . . . . . . . . . . . . . . . . . 137
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
4 Craft Unions with Heterogeneous Bargaining Strength 150
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
4.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
4.3 Negotiation Results: Why Do Dierent Negotiation Frameworks Result
in Equal Wages? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
4.4 Comparing the Negotiation Cases . . . . . . . . . . . . . . . . . . . . . . . 165
4.4.1 Quantities and Firm Pro ts . . . . . . . . . . . . . . . . . . . . . . 166
4.4.2 Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
4.4.3 Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
4.4.4 Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
5 Outlook 187
5.1 Heterogeneous Types of Workers . . . . . . . . . . . . . . . . . . . . . . . 187
5.2 Reservation Wages|Unemployment Benets . . . . . . . . . . . . . . . . 189
5.3 State Aid|Public Intervention . . . . . . . . . . . . . . . . . . . . . . . . 189
5.4 Product Market Impact on Union Organization . . . . . . . . . . . . . . . 190
5.5 Product Market Organization . . . . . . . . . . . . . . . . . . . . . . . . . 191
5.6 New Institutional Economics . . . . . . . . . . . . . . . . . . . . . . . . . 192
5.7 Insider{Outsider Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
5.8 Missing Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
5.9 Negotiation Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
5.10 Industry{Wide Multi{Employer Wage Agreement . . . . . . . . . . . . . . 197
5.11 Di erent Types of Innovations. . . . . . . . . . . . . . . . . . . . . . . . . 199
3Chapter 1
Introduction
The interrelationship between product and labor markets has long been neglected in
both the labor market literature as well as in industrial economics. Until the 1980s, the
theoreticlabormarketliteratureeitherassumedthattheproductmarketismonopolistic
or that it is perfectly competitive. Excellent surveys of this literature are Oswald (1985)
and Ulph and Ulph (1990). The results of this literature were, however not entirely
satisfactory. Ulph and Ulph conclude: \(...) imperfections in the labor markets go
hand in hand with those in the product market (...). Some models exist along these
lines (...)|but much still remains to be done." Since the end of the 1980s, a number of
papers were published which take imperfections in the product market, more precisely
oligopolies, into account. Thereby, they do not abstract from interesting interactions
between rms and unions that a ect the outcome of collective bargaining. This group
of models are referred to as unionized oligopoly models. These models assume that in
an labor market unions are active and possess market power. In a rst stage, unions
have to agree on wages with rms, which themselves compete which each other in an
oligopolisticdownstreamproductmarketinasecondstage. Intheseunionizedoligopoly
models, unions have to take more e ects into account than in the previous literature:
If a union demands higher wages from a rm, it weakens the competitive position of
that rm in the product market. As a consequence, the rm may lose market share and
then reduce its employment. As long as the aim of unions is to maximize wage and
4employment, they have to pay attention to the trade{o between higher wages and a
weakened competitive position during wage negotiations.
This survey summarizes the unionized oligopoly literature. I present the common
features of these models. Afterwards, I discuss papers dealing with dierent topics such
as innovations, international trade, and di erent types of negotiations. The assignment
of the di erent papers to di erent topics is rather subjective. A large number of papers
can be categorized to di erent topics. My objective is to group papers mostly related.
1.1 Building Blocks
Unionized oligopoly models have several features in common. To obtain a better under-
standing of this group of models, I sum up the main building blocks:
Oligopoly in the Product Market A common feature is the limited number of
rms. Normally,2to n rmscompeteindi erentfashions. Usually,Cournotcompetition
is assumed, but Bertrand or Conjectural Variation models can also be found. Some
models work with general demand functions, but for simplicity linear demand functions
are common. Products can be homogeneous or heterogeneous as well as substitutes or
complements.
Level of Organization Unions as well as employers’ associations organize them-
selves on di erent levels. This is reected in the models. The level of organization of
unionsaswellasemployersassociations’variesfromnationalorganizationattheoneend
to rm speci c (i.e., vertical coordination) at the other. While usually workers are as-
sumedtobesubstitutableagainsteachother, somearticlesalsoconsidercomplementary
workers in craft unions|such as pilots and ight attendants. Here, cooperation takes
place on the professional line (i.e., horizontal cooperation). The level of organization is
endogenized in some unionized oligopoly models.
5

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