Strategic Profit-Sharing in a Unionized Differentiated Goods Duopoly

Abstract

We study firms’ incentives to offer profit-sharing schemes in a unionized differentiated goods duopoly in which firms bargain with a sector-wide union or firm-specific unions over the selected remuneration schemes. We show that unions always prefer to form a sector-wide union and conduct coordinated bargaining. Under Cournot competition, ex-ante symmetric firms may choose to offer different remuneration schemes under coordinated bargaining and become ex-post asymmetric. Moreover, universal profit-sharing schemes arise as long as the union’s bargaining power is low enough. In contrast, under Bertrand competition, firms never offer profit-sharing schemes and universal fixed wage schemes is the unique equilibrium. Our welfare analysis indicates that policymakers should institutionalize decentralized bargaining and encourage profit-sharing schemes.