The codetermined firm in a Cournot duopoly: A stability analysis

a r t i c l e i n f o This paper aims to study the stability issue in a Cournot duopoly with codetermined firms. We show that when both firms codetermine employment together with decentralised employees' representatives, a rise in wages acts as an economic (de)stabiliser when the wage is fairly (high) low, while under profit maximisation a rise in wages always acts as a stabilising device because the parametric stability region mono-tonically increases with the wage in such a case. Moreover, a rise in the union's bargaining power has a de-stabilising effect, except when the wage is low and the firm power is already high. Therefore, under codetermination a change either in the wage or firm power in the Nash bargaining plays an ambiguous role on stability. We also show with numerical simulations that complex dynamics can also occur. A well known stylised fact about labour markets is the existence, especially in some important European countries such as Germany, of codetermination laws, according to which workers in large firms have nearly the same decision rights as capital owners. On the one hand, codetermination rights mainly concern employment, with wages being apart from the field of application of such laws. On the other hand, even if one abstracts from codetermination laws, 2 in several countries it is observed that: (1) a distinction is made, especially in Europe (for instance, Scandinavian countries and Austria) between centralised (e.g., national or economy-wide level) unions that set the wage for an entire industry in a country, and decentralised (e.g., firm or district level) unions that negotiate over employment alone, and (2) decentralised wage setting procedures, which however establish wage contracts of long lasting effectiveness (e.g., the three-year contracts often observed in the US), and local bargaining over employment of higher periodicity do exist. Both make the case of bargaining over employment relevant. An interesting study that has tackled this issue out from a point of view of a static bargaining game in a Cournot duopoly, is Kraft (1998). The author interestingly shows that: (i) bargaining over employment alone is the dominant strategy with respect to profit maximisation if the union power is not too large (which seems to be the case under co-determination laws), 3 and (ii) " codetermination is welfare maximizing ! " (see Kraft, 1998, p. 200). Therefore, given both the empirical relevance of decentralised bargaining on employment alone and …