Quality differentiation is a well-known strategy that firms use to increase their market power. Indeed, there is a vast literature on vertical differentiation studying firms’ incentives to differentiate in terms of quality. We thus wonder how imperfections in the labour market affect firms’ quality competition and, in turn, the average quality, as well as consumer welfare in the market. We gather the following results. Product differentiation affects competition between firms in the product market as well as between unions in the wage setting. In particular, while the wage set to produce the high quality good is always increasing in its quality level, the wage set to produce the low quality good is non-monotone in its quality: as the low quality increases, initially, its sales increase because of a stealing effect from the rival high quality firm and, by increasing employment and reducing wage elasticity of labour demand, this leads to higher wages. When low quality becomes sufficiently close to the high quality, however, the effect of tough competition in product market also translates to the wage setting process, which makes the wage of the low-quality firm decreasing in its quality. The effects of quality differentiation on wages, in turn, affects quality competition. In particular, although wages, ceteris paribus, are increasing in the quality of the high-quality firm, the latter chooses to improve its quality as much as possible. Regarding the choice of the low quality, instead, the presence of firm-specific unions makes the overall effect of increasing quality on the price-wage margin stronger than in a perfectly competitive (non-unionized) labour market leading the low-quality firm to increase its quality level. As a result, average quality in the market is greater than with perfectly competitive labour markets.
When imperfections in labour market meet imperfections in product market. A model with firm-specific monopoly unions and vertical product differentiation
NICOLA MECCHERI;CECILIA VERGARI
2024-01-01
Abstract
Quality differentiation is a well-known strategy that firms use to increase their market power. Indeed, there is a vast literature on vertical differentiation studying firms’ incentives to differentiate in terms of quality. We thus wonder how imperfections in the labour market affect firms’ quality competition and, in turn, the average quality, as well as consumer welfare in the market. We gather the following results. Product differentiation affects competition between firms in the product market as well as between unions in the wage setting. In particular, while the wage set to produce the high quality good is always increasing in its quality level, the wage set to produce the low quality good is non-monotone in its quality: as the low quality increases, initially, its sales increase because of a stealing effect from the rival high quality firm and, by increasing employment and reducing wage elasticity of labour demand, this leads to higher wages. When low quality becomes sufficiently close to the high quality, however, the effect of tough competition in product market also translates to the wage setting process, which makes the wage of the low-quality firm decreasing in its quality. The effects of quality differentiation on wages, in turn, affects quality competition. In particular, although wages, ceteris paribus, are increasing in the quality of the high-quality firm, the latter chooses to improve its quality as much as possible. Regarding the choice of the low quality, instead, the presence of firm-specific unions makes the overall effect of increasing quality on the price-wage margin stronger than in a perfectly competitive (non-unionized) labour market leading the low-quality firm to increase its quality level. As a result, average quality in the market is greater than with perfectly competitive labour markets.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
