Union-Oligopoly Bargaining and Vertical Differentiation: Do Unions Affect Quality? Dynamic Analysis

This paper studies oligopolistic markets with differentiated products, with endogenous union structures and quality improvement-R&D investments. In the context of a dynamic game-theoretic analysis we investigate the conditions under which firm-level unions may strategically collude, or not, and the impact of their decisions upon the firms� incentives to individually spend on R&D investments. We show that, under sufficiently high (low) discount rate and substitutability among the firms' products, an industry-wide union emerges (separate firm-level unions sustain) in the equilibrium, where product quality along with the level of R&D investments are relatively low (high). Moreover, we consider the instance where a benevolent policy maker undertakes the costs of firm-specific R&D investments and finances these costs by indirect taxation. We conclude that in such cases, higher surpluses emerge for the market participants in the equilibrium.