Cross-ownership and unions in a Cournot duopoly: when profits reduce with horizontal product differentiation

Abstract Motivated by the widespread presence both of decentralised unions and cross-participation at ownership level (for instance in Japan and US), this paper aims at investigating whether the conventional wisdom that a reduction in the degree of product differentiation (which increases competition) always reduces firms’ profits, remains true in a differentiated duopoly extended with both equity participation of one firm in another firm and risk-neutral (or risk-averse) decentralised monopoly unions. We show that such a common wisdom, while it holds when either unions or crossownership separately exist, is reversed for a fairly low degree of product differentiation and large percentage of cross-ownership when both unions and crossownership are in existence: this is because the interaction between the reduced employment due to cross-ownership and the moderation of wage claims due to the menaces for employment, both magnified by increasing product market competition, works to increase profits more than how the latter are reduced by a higher competition.