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Do profits always decrease with decreasing product differentiation? A reversal result in a unionized duopoly

Luciano Fanti () and Nicola Meccheri ()

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: This paper aims at investigating if the conventional wisdom, that a decrease in the degree of product differentiation (which implies increasing competition) always reduces firms' profits, remains true in a differentiated duopoly model with decentralized, or firm-specific, monopoly unions. In this context, when product differentiation decreases, an important effect, termed "endogenous" or "union wage effect", adds to the standard competition effect in affecting profits. Moreover, the union wage effect operates against the competition effect and, provided that unions are sufficiently wage-oriented, that is, they sufficiently prefer wages to employment, can actually reverse the conventional result under both Cournot and Bertrand competition. However, this is more likely to occur under competition a la Cournot.

Keywords: unionized duopoli; monopoly unions; product differentiation; profits (search for similar items in EconPapers)
JEL-codes: J43 J50 L13 (search for similar items in EconPapers)
Date: 2011-01-02
New Economics Papers: this item is included in nep-com
Note: ISSN 2039-1854
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