Bertrand competition, employment rationing and collusion through centralized negotiations

Abstract

This paper studies the role of employment rationing in a unionized oligopolistic industry. Firms bargain collectively with an industry-wide union, and then compete in preces. Negotiations may be conducted over a bonus scheme which specifies the bonus that each employee receives if firm/industy profits exceed a certain target (or if industry employment does not exceed acertain level). After firmes have chosen prices, they request workers from the union to realize their production plans. The number that each firm actuallly receives depends on the union´s rationing scheme. Firms, by a suitable choice of a bonus scheme, can ensure a collusive outcome in equillibrium. Indeed, firms have ho incentive to deviate from the monopolu price knowing that they would be optimally rationed by the union.