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

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  • Luciano Fanti
  • Nicola Meccheri

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.

Suggested Citation

  • Luciano Fanti & Nicola Meccheri, 2011. "Do profits always decrease with decreasing product differentiation? A reversal result in a unionized duopoly," Discussion Papers 2011/112, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  • Handle: RePEc:pie:dsedps:2011/112
    Note: ISSN 2039-1854
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    File URL: http://www.ec.unipi.it/documents/Ricerca/papers/2011-112.pdf
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    References listed on IDEAS

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    1. Lopez, Monica Correa & Naylor, Robin A., 2004. "The Cournot-Bertrand profit differential: A reversal result in a differentiated duopoly with wage bargaining," European Economic Review, Elsevier, vol. 48(3), pages 681-696, June.
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    Cited by:

    1. Fanti, Luciano, 2013. "Cross-ownership and unions in a Cournot duopoly: When profits reduce with horizontal product differentiation," Japan and the World Economy, Elsevier, vol. 27(C), pages 34-40.

    More about this item

    Keywords

    unionized duopoli; monopoly unions; product differentiation; profits;

    JEL classification:

    • J43 - Labor and Demographic Economics - - Particular Labor Markets - - - Agricultural Labor Markets
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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