Capacity choice and welfare under alternative unionisation structures

This paper studies how unionisation structures that differ in the degree of wage setting centralisation interplay with the strategic choice of production capacity by firms and how this affects product market outcomes. When labour markets are unionised and firms compete in quantities, they typically opt for under-capacity in order to dampen the unions' wage claims. This is in contrast with the convent ional choice of over-capacity that applies when labour markets ar e competitive. Moreover, the level of capacity is generally more effic ient under centralised unionisation than in a decentralised structur e. Relative to more general welfare outcomes, profits are always higher und er decentralised unionisation, but both consumer surplus and overa ll welfare can be higher under a centralised structure, depending on th e unions'preference towards wages or employment. Introducing produ ct differentiation and price competition enlarges the range of situa tions, in which centralised unionisation is welfare-enhancing