Codetermination, Price Competition and the Network Industry

Luciano Fanti and Luca Gori ()

German Economic Review, 2019, vol. 20, issue 4, e795-e830

Abstract: This research develops a tractable two‐stage non‐cooperative game with complete information describing the behaviour of price‐setting firms that must choose to be profit maximisers or bargainers under codetermination in a network industry with horizontal product differentiation. The existing theoretical literature has already shown that codetermination might arise as the endogenous market outcome in a strategic competitive quantity‐setting duopoly. In sharp contrast with this result, the present article shows that codetermination does never emerge as a Nash equilibrium in a price‐setting non‐network duopoly. Then, it aims at highlighting the role of network externalities in determining changes of paradigm of the game and letting codetermination become a sub‐game perfect Nash equilibrium when prices are strategic substitutes or strategic complements. This equilibrium may be Pareto efficient. Results allow distinguishing between mandatory codetermination and voluntary codetermination. The article also proposes a model of endogenous codetermination according to which every firm may choose to bargain with its own corresponding union bargaining unit only whether the firm's bargaining strength is exactly the profit‐maximising one. The equilibrium outcomes emerging in this case range from a uniform Nash equilibrium, in which both firms are codetermined, to mixed Nash equilibria, in which only one of them chooses to be codetermined. These results are ‘network depending’ and do not hold in a non‐network duopoly.

Date: 2019
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