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Profit sharing as entry deterrence mechanism

Author

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  • Domenico Buccella

    (Leon Kozminski University)

Abstract

In a right-to-manage framework, this paper analyzes the optimal choice of the pay scheme (profit sharing vs. fixed wage) in a unionized duopoly with potential market entry and decentralized bargaining. The paper shows that, depending on the institutional features, both pay systems can arise as equilibria in Nash strategies. Under duopoly with committed bargaining, the fixed wage is the Nash equilibrium; with flexible bargaining, an agreement between the incumbent firm and its union about profit sharing arises as Nash equilibrium, if the union is not too strong. A monopoly with threat of entry reinforces the selection of profit sharing as a deterrent mechanism.

Suggested Citation

  • Domenico Buccella, 2016. "Profit sharing as entry deterrence mechanism," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 15(1), pages 17-31, April.
    • Handle: RePEc:spr:portec:v:15:y:2016:i:1:d:10.1007_s10258-016-0113-x
    DOI: 10.1007/s10258-016-0113-x
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    References listed on IDEAS

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    Cited by:

    1. Luciano Fanti & Domenico Buccella, 2018. "Social Welfare and Profit-Sharing Rule in a Unionised Duopoly with Profit Tax/Subsidy," Hacienda Pública Española / Review of Public Economics, IEF, vol. 226(3), pages 59-84, September.

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    More about this item

    Keywords

    Union-oligopoly bargaining; Fixed wage; Profit-sharing; Entry deterrence effect;
    All these keywords.

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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