Capacity Choice and Welfare under Alternative Unionisation Structures

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.