Firm profits and the number of firms under unionised oligopoly

Robin Naylor ()

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: We show that a firm's profits under Cournot oligopoly can be increasing in the number of firms in the industry if wages are determined by (decentralised) bargaining in unionised oligopoly. The intuition for the result is that increased product market competition following an increase in the number of firms is mirrored by increased labour market rivalry which induces (profit-enhancing) wage moderation. Whether the price or wage effect dominates depends on the extent of union bargaining power and the nature of union preferences. If bargaining is centralized then there is no wage moderation effect and wages are the same independent of the number of firms, as in the standard model with exogenous factor costs. A corollary of the results derived is that if the upstream agents are firms rather than labour unions, then profits are always decreasing in the number of firms, as in the standard Cournot model.

Date: 2001
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