Abstract
Trade unions are often argued to cause allocative inefficiencies and to lower welfare. We analyze whether this evaluation is also justified in a Cournot‐oligopoly with free but costly entry. If input markets are competitive and output per firm declines with the number of firms (business stealing), there is excessive entry into such oligopoly. If trade unions raise wages above the competitive level, output and profits per firm decline, which could deter entry and thus improve welfare. We find that an increase in the union’s bargaining power raises welfare if the (inverse) demand curve is (sufficiently) concave. We also show that collective bargaining loosens the linkage between business stealing and excessive entry.
Highlights
In many OECD and European Union member states, wages and working conditions for an overwhelming fraction of the workforce are determined by collective bargaining
Considering an increase in market entry costs k, we find that the number of competitors in a world without collective bargaining would fall and that α1crit and α0crit decline, showing that a welfare-enhancing effect of trade unions will become less likely if entry costs rise
We analyze a model with oligopolistic competition and costly market entry, where excessive entry can arise if output per firm declines with the number of competitors, i.e. if there is a business stealing effect
Summary
In many OECD and European Union member states, wages and working conditions for an overwhelming fraction of the workforce are determined by collective bargaining (cf. Visser, 2016). Mankiw and Whinston (1986) and Suzumura and Kiyono (1987) show that market entry is excessive in an oligopolistic market with firms producing a homogeneous good and facing entry costs if the so-called business stealing effect prevails, i.e. output per firm declines with the number of firms The rationale for this excess entry theorem is that entrants do not take into account the fall in the payoff of incumbent firms and, do not internalize an externality.. The intuition for this welfare-enhancing role of trade unions is as follows: Union bargaining raises wages This reduces profits and tends to lower the number of firms. It can be argued that policies which allow the number of firms to fall, e.g. by raising the costs of market entry or by making mergers more feasible, can be detrimental to welfare if there is no business stealing and wages are negotiated collectively.
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