Efficient bargaining versus right to manage: A stability analysis in a Cournot duopoly with trade unions

a r t i c l e i n f o The present study considers a unionised (nonlinear) duopoly with two different labour market institutions, i.e. efficient bargaining (EB) and right to manage (RTM), to analyse product market stability under quantity competition with trade unions. We show that when the preference of unions towards wages is small, (i) the parametric stability region under RTM is higher than under EB, and (ii) a rise in the union power in the Nash bargaining played between firms and unions monotonically increases (resp. reduces) the parametric stability region under RTM (resp. EB). In contrast, when the preference of unions becomes larger, an increase in the union's bargaining power acts: (1) as an economic stabiliser when the union power is small; (2) as an economic de-stabiliser when the union power is high. In addition to established results with regard to equilibrium outcomes, our findings shed some light on the effects of how the labour market regulation affects out-of-equilibrium behaviours in a Cournot duopoly. The existence of trade unions represents a hard stylised fact in several developed countries, especially in Europe, and empirical evidence of a positive correlation between high rates of unemployment and trade union behaviours exists in the long term (Layard et al., 2005), even if such a relationship can actually depend on the way unions operate. As is known, wage and employment bargaining can be modelled in different ways: the " efficient bargaining " (EB) model and " right to manage " (RTM) model represent two standard examples. The key feature of the former is that both the wage and employment are chosen according to a bargaining process played by firms and employees' representatives (McDonald and Solow, 1981). In contrast, with the latter approach only the wage is subject to negotiation and firms are free to unilaterally 2 The relative importance of wages and employment in the union's preferences may be different in the sense that trade unions can be either wage-oriented or employment-oriented. Furthermore, firm-specific (decentralised) and industry-wide (centralised) unions can also be distinguished. If unions are decentralised, the wage is bargained by potentially competitive unions at the firm level. If unions are centralised, the wage is bargained at the industry-wide level and all workers are covered by the unionised wage. The EB and RTM models represent the two most popular alternatives of wage-employment outcomes of collective bargaining. The trade union literature …