Abstract
In a union-oligopoly static framework we study the role of unions regarding the possibility and the effects of endogenous cartel formation. Given that firms independently adjust their own quantities, we show that, if the unions preferences for wages relative to employment are sufficiently high and firms products are close enough substitutes, then collusion among firms may emerge in equilibrium, and that – in contrast to conventional wisdom – cartel formation proves to be a welfare-improving market arrangement. Quite remarkably, the latter gain in social welfare materializes at the cost of union rents, despite the union s presence being that which effectively sustains collusion.
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