Productivity shocks in a union-duopoly model

We consider an industry where firms are asymmetric in terms of productivity. Wages and employment are determined at the firm-level and are the result of sequential bargaining between unions and firms, with wages being negotiated first. We characterise the equilibrium and compare the outcomes in the two firms (wages, employment and surplus of all economic agents). A productivity shock affecting the most efficient firm is socially desirable, by increasing the surplus of consumers, workers and firms. The same may not be true when the productivity shock affects the least efficient firm. In this case, the consumers’ gain may not be enough to outweigh the losses in aggregate worker surplus and in the industry profit.