Profits and competition under alternative technologies in a unionized duopoly with product differentiation

Abstract

This paper aims at investigating if the conventional wisdom (i.e. an increase of competition linked to a decrease in the degree of product differentiation always reduces firms׳ profits) can be reversed in a unionized duopoly model. We show that a decrease in the degree of product differentiation may affect wages, hence profits, differently, depending on both the firms׳ production technology and the mode of competition in the product market. Specifically, under constant returns to labour, the “reversal result” can apply under both Cournot and Bertrand competition, but it is more likely when firms compete in quantities. By contrast, under decreasing returns, profits can increase with competition but only if firms compete in prices.