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Raising Wages to Deter Entry under Unionization

Author

Listed:
  • Shingo Ishiguro

    (Graduate School of Economics, Osaka University, Japan)

  • Laixun Zhao

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper investigates the strategic effects of new entry into product markets in a unionized oligopoly where entry and wage negotiations are sequential. When both a domestic incumbent and a foreign entrant hire unionized workers, the incumbent has incentives to raise the wage, because a higher wage strengthens the bargaining position of the union relative to the entrant at subsequent negotiations when entry occurs. Such a high wage offer may then discourage the potential entrant to enter the market. We also extend the model to allow the foreign entrant to supply the good to the domestic market either by foreign direct investment (FDI) or exports. Under FDI the entrant must negotiate with the domestic union over wages, while under exports it needs not. We show that surprisingly the incumbent can obtain higher profits when the entrant has both options of FDI and export than when it has only the former option.

Suggested Citation

  • Shingo Ishiguro & Laixun Zhao, 2004. "Raising Wages to Deter Entry under Unionization," Discussion Paper Series 155, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:155
    as

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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp155.pdf
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    References listed on IDEAS

    as
    1. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    2. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    3. Naylor, Robin, 2002. "The Effects Of Entry In Bilateral Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 638, University of Warwick, Department of Economics.
    4. Dewatripont, Mathias, 1987. "Entry deterrence under trade unions," European Economic Review, Elsevier, vol. 31(1-2), pages 149-156.
    5. Mezzetti, Claudio & Dinopoulos, Elias, 1991. "Domestic unionization and import competition," Journal of International Economics, Elsevier, vol. 31(1-2), pages 79-100, August.
    6. Mathias Dewatripont, 1988. "The Impact of Trade Unions on Incentives to Deter Entry," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 191-199, Summer.
    7. Haucap, Justus & Pauly, Uwe & Wey, Christian, 2001. "Collective wage setting when wages are generally binding An antitrust perspective," International Review of Law and Economics, Elsevier, vol. 21(3), pages 287-307, September.
    8. Shingo Ishiguro & Yoshimasa Shirai, 1998. "Entry Deterrence in a Unionized Oligopoly," The Japanese Economic Review, Japanese Economic Association, vol. 49(2), pages 210-221, June.
    9. Naylor, Robin A., 2002. "The effects of entry in bilateral oligopoly," Economic Research Papers 269412, University of Warwick - Department of Economics.
    10. Gollier, Christian, 1991. "Wage Differentials, the Insider-Outsider Dilemma, and Entry-Deterrence," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 391-408, July.
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Marco de Pinto & Laszlo Goerke, 2020. "Welfare‐enhancing Trade Unions in an Oligopoly with Excessive Entry," Manchester School, University of Manchester, vol. 88(1), pages 60-90, January.
    2. Shingo Ishiguro & Laixun Zhao, 2009. "Raising Wages To Deter Entry Into Unionized Markets," The Japanese Economic Review, Japanese Economic Association, vol. 60(4), pages 435-445, December.

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    More about this item

    Keywords

    Foreign Direct Investment; Unionized Oligopoly; Wage Contracts; Entry Deterrence;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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