Endogenous timing under price competition and unions

• Author: Luciano Fanti
• Date: 01 December 2016
• Published date: 01 December 2016
• DOI: http://doi.org/10.1111/ijet.12102

doi: 10.1111/ijet.12102

Endogenous timing under price competition and unions

Luciano Fanti∗

We investigate the endogenous order of moves in a duopoly under price competition with a

unionized labor market. We show that the established results are not robust to the presence of

unions. Wefind that when product substitutability is sufficiently high and unions are sufficiently

wage-interested the sub-perfect equilibrium is the simultaneous choice of prices by firms (in

sharp contrast to the received literature) and, moreover, the well-known result that in price

games there is always a preferencefor being a follower no longer holds true under unionization.

Key wor ds endogenous timing, union, Bertrand duopoly

JEL classification L00, L13

Accepted 11 April 2016

1 Introduction

It is a well-established result that the preferences of firms with respect to the role of either leader

or follower are not uniform, but depend on the type of market game played by firms. In particular,

in quantity games a preference for leadership can be established, while in price games a preference

for being a follower has been argued1(Gal-Or 1985; Dowrick 1986; Boyer and Moreaux 1987a,b).2

However, the recent literature has pointed out that a sequential order of moves may give rise to

significantly different results from those obtained in a simultaneous game. Starting from Hamilton

and Slutsky (1990) and Robson (1990), the choice of roles in non-cooperative games, where firms

are required to set both the actual moves or actions and the time at which such actions are to be

implemented, has been investigated in depth; see, for example, van Damme and Hurkens (1999,

2004) for quantity and price games, respectively. Another growing branch of the literature has

recently recognized that unionized labor markets are a typical feature of the oligopolistic context3

and argued for the relevance of the role played by unions on the outcomes of oligopoly (e.g., Horn

and Wolinsky 1988; Dowrick 1989; Lommerud et al. 2005).

∗Department of Economics and Management, University of Pisa, Pisa, Italy.Email: lfanti@ec.unipi.it

1Intuitively, the reason why firms prefer tofollow is that “generally each firm’s profit increases if its rival raises price or

decreases output. If a firm is known to have a positive reaction function, the rival will be deterred from lowering price

or raising output by the threat of retaliation. But this threat is only operative if the firm is expected to act as a follower.

So a firm may sometimes choose to be a follower in preferenceto being a leader if its reaction function has a sufficiently

positive slope to act as an effective deterrentagainst a price-cutting rival” (Dowrick 1986, p. 258).

2The preference for a Stackelberg market outcomemay be also due to other reasons such as cost asymmetries, uncertainty

and capacity constraints (Ono 1982; Albaek 1990; Furth and Kovenock 1992).

3For instance Booth (1995, p. 95) argues that “it appears to be an empirical regularity that imperfections in the labor

market are correlated with imperfections in the product market”.

International Journal of Economic Theory 12 (2016) 401–413 © IAET 401

International Journal of Economic Theory