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The Effects of Entry in Oligopoly with Bargained Wages

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  • Naylor, Robin

    (Department of Economics, University of Warwick)

  • Soegaard, Christian

    (Department of Economics, University of Warwick)

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 bilateral 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 product or labour market effect dominates depends both on the extent of union bargaining power and on the nature of union preferences. An incumbent monopolist will have an incentive to accommodate entry if the labour market effect dominates. We also show that this incentive is stronger if the incumbent anticipates that, post entry, it will be able to act as a Stackelberg leader. Key words: Oligopoly ; wage bargaining ; profits and entry JEL classification: D43 ; J50 ; L13

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1044.

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Date of creation: 2014
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Handle: RePEc:wrk:warwec:1044

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  1. Seade, Jesus, 1980. "The stability of cournot revisited," Journal of Economic Theory, Elsevier, vol. 23(1), pages 15-27, August.
  2. Arijit Mukherjee & Udo Broll & Soma Mukherjee, 2009. "The welfare effects of entry: the role of the input market," Journal of Economics, Springer, vol. 98(3), pages 189-201, December.
  3. Dowrick, Steve, 1989. "Union-Oligopoly Bargaining," Economic Journal, Royal Economic Society, vol. 99(398), pages 1123-42, December.
  4. Ruffin, R J, 1971. "Cournot Oligopoly and Competitive Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 38(116), pages 493-502, October.
  5. Okuguchi, Koji, 1973. "Quasi-Competitiveness and Cournot Oligopoly," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 145-48, January.
  6. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
  7. Matsushima, Noriaki & Mizuno, Tomomichi, 2012. "Profit-enhancing competitive pressure in vertically related industries," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 142-152.
  8. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, vol. 48(2), pages 479-89, March.
  9. Matsushima, Noriaki, 2006. "Industry profits and free entry in input markets," Economics Letters, Elsevier, vol. 93(3), pages 329-336, December.
  10. Naylor, Robin, 1999. "Union Wage Strategies and International Trade," Economic Journal, Royal Economic Society, vol. 109(452), pages 102-25, January.
  11. Bughin, Jacques, 1999. "The strategic choice of union-oligopoly bargaining agenda," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 1029-1040, October.
  12. Naylor, Robin A., 2002. "Industry profits and competition under bilateral oligopoly," Economics Letters, Elsevier, vol. 77(2), pages 169-175, October.
  13. Rajeev K. Tyagi, 1999. "On the Effects of Downstream Entry," Management Science, INFORMS, vol. 45(1), pages 59-73, January.
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