Union competition and entry deterrence

Abstract

This paper analyzes the strategic choice of wage level by the union in the incumbent monopoly firm when workforce in potential entrant is unionized. The incumbent union can play a strategic role by choosing wage level to deter or accommodate the entry of new firm according to the payoffs from each strategy. When workforce in potential entrant is separately unionized, incumbent union's wage is non-decreasing with respect to entering union's wage. As technology efficiency of entrant increases, wage response curve shifts to the right and incumbent union's strategic wage level is decreasing. This implies higher productivity of entering firm has effect to deter incumbent union's wage increase and to make entry deterrence more difficult. In addition, entry threat and the resulting entry deterrence wage policy can have positive effect on incumbent firm's profit, and incumbent firm's profit can be higher even after its monopoly position is collapsed. This result is quite remarkable since it requires fundamental reformulation of traditional entry deterrence theory.