Union structure and product quality differentiation

This paper analyses how unionization structures shape firms' incentives for product quality differentiation and the resulting welfare outcomes. We develop a vertically differentiated duopoly in which wages are set under decentralized, coordinated, or centralized bargaining. We show that union wage-setting regimes crucially affect firms' quality choices. Under decentralized and coordinated bargaining, product differentiation feeds back into wage determination, whereas under centralized bargaining wages are independent of quality but may induce market monopolization. As a result, more decentralized unionization generally leads to higher average quality and higher welfare. These effects are not monotonic, however, and depend on the union's bargaining power and on the range of feasible quality levels.