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Raising Wages to Deter Entry under Unionization

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Author Info

  • Shingo Ishiguro

    (Graduate School of Economics, Osaka University, Japan)

  • Laixun Zhao

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper investigates the strategic effects of new entry into product markets in a unionized oligopoly where entry and wage negotiations are sequential. When both a domestic incumbent and a foreign entrant hire unionized workers, the incumbent has incentives to raise the wage, because a higher wage strengthens the bargaining position of the union relative to the entrant at subsequent negotiations when entry occurs. Such a high wage offer may then discourage the potential entrant to enter the market. We also extend the model to allow the foreign entrant to supply the good to the domestic market either by foreign direct investment (FDI) or exports. Under FDI the entrant must negotiate with the domestic union over wages, while under exports it needs not. We show that surprisingly the incumbent can obtain higher profits when the entrant has both options of FDI and export than when it has only the former option.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp155.pdf
File Function: First version, 2004
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 155.

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Length: 31 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:kob:dpaper:155

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Related research

Keywords: Foreign Direct Investment; Unionized Oligopoly; Wage Contracts; Entry Deterrence;

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References

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  1. Haucap, Justus & Pauly, Uwe & Wey, Christian, 2001. "Collective wage setting when wages are generally binding An antitrust perspective," International Review of Law and Economics, Elsevier, vol. 21(3), pages 287-307, September.
  2. Mezzetti, C. & Dinopoulos, E., 1989. "Domestic Unionization And Import Competition," Papers 337, California Davis - Institute of Governmental Affairs.
  3. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  4. Mathias Dewatripont, 1988. "The Impact of Trade Unions on Incentives to Deter Entry," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 191-199, Summer.
  5. Dewatripont, Mathias, 1987. "Entry deterrence under trade unions," European Economic Review, Elsevier, vol. 31(1-2), pages 149-156.
  6. Naylor, Robin, 2002. "The Effects Of Entry In Bilateral Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 638, University of Warwick, Department of Economics.
  7. Gollier, Christian, 1991. "Wage Differentials, the Insider-Outsider Dilemma, and Entry-Deterrence," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 391-408, July.
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