Union power and product market competition: evidence from the airline industry

In this paper we specify and estimate a structural model which links product market competition and union power. The model has a two-stage setting in which wages are determined through bargaining between management and unions in the first stage, with a price-setting market game to follow in the second stage. Using data for eight European airlines from 1976-1994, we provide evidence on price-cost margins and the measurement of market power in a model of rent sharing. In particular, we find that the welfare effects of rent sharing work mainly through reducing firms’ profits, rather than consumers surplus. As a consequence the static impact of unions is more on equity rather than efficiency.