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Capacity Choice and Welfare under Alternative Unionisation Structures

Author

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  • Luciano Fanti

    (Department of Economics and Management, University of Pisa, Italy)

  • Nicola Meccheri

    (Department of Economics and Management, University of Pisa, Italy)

Abstract

This paper studies how unionisation structures that differ in the degree of wage setting centralisation interplay with the strategic choice of production capacity by firms and how this affects product market outcomes. When labour markets are unionised and firms compete in quantities, they typically opt for under-capacity in order to dampen the unions' wage claims. This is in contrast with the conventional choice of over-capacity that applies when labour markets are competitive. Moreover, the level of capacity is generally more efficient under centralised unionisation than in a decentralised structure. Relative to more general welfare outcomes, profits are always higher under decentralised unionisation, but both consumer surplus and overall welfare can be higher under a centralised structure, depending on the unions' preference towards wages or employment. Introducing product differentiation and price competition enlarges the range of situations, in which centralised unionisation is welfare-enhancing.

Suggested Citation

  • Luciano Fanti & Nicola Meccheri, 2014. "Capacity Choice and Welfare under Alternative Unionisation Structures," Working Paper series 12_14, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:12_14
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    References listed on IDEAS

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    More about this item

    Keywords

    unionised duopoly; unions' structure; capacity choice; welfare;
    All these keywords.

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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