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Non-rigid wages and merger profitability reversal under convex costs and centralised unionisation

  • Luciano Fanti
  • Nicola Meccheri

Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex costs) and centralised unionisation. Firstly, it is highlighted that a wage “non-rigidity” result applies: the post-merger wage is higher than in the pre-merger equilibrium. Secondly, it is shown that a “reversal result” in relation to merger profitability actually realises when the union is sufficiently oriented towards wages. Moreover, the higher the reservation wage, the degree of product differentiation and the union’s relative bargaining power, the higher the probability that merger reduces profits.

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File URL: http://www.ec.unipi.it/documents/Ricerca/papers/2013-167.pdf
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Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2013/167.

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Date of creation: 16 Jul 2013
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Handle: RePEc:pie:dsedps:2013/167
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  1. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
  2. Luciano Fanti & Nicola Meccheri, 2012. "Labour decreasing returns, industry-wide union and Cournot-Bertrand profit ranking. A note," Economics Bulletin, AccessEcon, vol. 32(1), pages 894-904.
  3. Jagadeesh Gokhale & Erica L. Groshen & David Neumark, 1993. "Do Hostile Takeovers Reduce Extramarginal Wage Payments?," NBER Working Papers 4346, National Bureau of Economic Research, Inc.
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  8. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
  9. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
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  12. Naylor, Robin, 1997. "Union Wage Strategies and International Trade," The Warwick Economics Research Paper Series (TWERPS) 480, University of Warwick, Department of Economics.
  13. Dowrick, Steve, 1989. "Union-Oligopoly Bargaining," Economic Journal, Royal Economic Society, vol. 99(398), pages 1123-42, December.
  14. Haucap, Justus & Wey, Christian, 2003. "Unionization Structures and Innovation Incentives," CEPR Discussion Papers 4079, C.E.P.R. Discussion Papers.
  15. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  16. Kurt R. Brekke, 2004. "Competition or Coordination in Hospital Markets with Unionised Labour," International Journal of Health Care Finance and Economics, Springer, vol. 4(1), pages 65-89, 03.
  17. Luciano Fanti & Nicola Meccheri, 2011. "The Cournot-Bertrand profit differential in a differentiated duopoly with unions and labour decreasing returns," Economics Bulletin, AccessEcon, vol. 31(1), pages 233-244.
  18. Dowrick, Steve & Spencer, Barbara J, 1994. "Union Attitudes to Labor-Saving Innovation: When Are Unions Luddites?," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 316-44, April.
  19. Dhillon, Amrita & Petrakis, Emmanuel, 2002. "A generalised wage rigidity result," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 285-311, March.
  20. John S. Heywood & Matthew Mcginty, 2007. "Convex Costs And The Merger Paradox Revisited," Economic Inquiry, Western Economic Association International, vol. 45(2), pages 342-349, 04.
  21. 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.
  22. 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.
  23. Belman, Dale L, 1988. "Concentration, Unionism, and Labor Earnings: A Sample Selection Approach," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 391-97, August.
  24. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  25. Pencavel, John, 1985. " Wages and Employment under Trade Unionism: Microeconomic Models and Macroeconomic Applications," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 197-225.
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