Prague Economic Papers 2017, 26(2):170-187 | DOI: 10.18267/j.pep.602

(Local) Wage Settings and (International) Entry Deterrence

Domenico Buccella
Department of Economics, Kozminski University, Warsaw, Poland (buccella@kozminski.edu.pl)

The present paper investigates the use of national wage settings as a mechanism to deter entry via foreign direct investment (FDI) in a unionized monopoly industry. A union which sets centralized wages in a multi-unit firm can both decentralize and change the agenda to prevent the market entry of a non-unionized firm. The adoption of the efficient bargaining agenda is especially effective to deter entry because it lowers the fixed-cost threshold the entrant can bear. Moreover, through side-payments, the incumbent and the union can have common interests in modifying the wage setting to reach outcomes that is Pareto-superior to duopoly. However, if the union cedes "too much power" and becomes "too weak", internal conflicts with the incumbent firm may arise.

Keywords: labour unions, oligopoly, market entry
JEL classification: J51, L13, L22

Prepublished online: September 8, 2016; Published: April 1, 2017  Show citation

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Buccella, D. (2017). (Local) Wage Settings and (International) Entry Deterrence. Prague Economic Papers, 26(2), 170-187. doi: 10.18267/j.pep.602
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