Strategic union delegation and incentives for merger Ana Mauleon a and Vincent J. Vannetelbosch b, * a FNRS and CEREC, Faculte´s Universitaires Saint-Louis, Brussels, Belgium b FNRS and CORE, Universite´ Catholique de Louvain, 34 Voie du Roman Pays, B-1348 Louvain-la-Neuve, Belgium A unionized duopoly model to analyse how unions affect the incentives for merger is considered. It is found that both firms will merge if and only if unions are weak. However, once surplus-maximizing unions have the option to delegate the wage bargaining to wage-maximizing delegates (such as senior union members), both firms may have incentives to merge even if the union bargaining power is strong. Moreover, the option of strategic delegation may harm both the unions and the firms. I. Introduction Labour market organization plays an important role in determining wage levels and product market struc- ture (see e.g. Horn and Wolinsky, 1988). In this note the option for unions to delegate the wage bargaining is incorporated and how it affects the incentives for merger analysed. Up to now the literature has mainly focused on strategic delegation on behalf of shareholders. Fershtman and Judd (1987) have addressed the issue of strategic managerial delegation in the context of oligopolistic industries with Cournot competition (see also Sklivas, 1987). More recently, Gonza´lez- Maestre and Lo´pez-Cu ~ nat (2001) have considered the interactions between the use of strategic manage- rial delegation and mergers. They have shown that the incentives for merger, under managerial delega- tion, are considerably increased with respect to the setting without delegation. Regarding strategic union delegation, Jones (1989) has shown that a divergence between the objectives of union leaders and union members will naturally arise in a demo- cratic union as part of a rational bargaining strategy. Essentially, the reason is that in many bargaining situations, commitment can be valuable, and the union members can credibly commit to a bargaining stance, which they could not otherwise sustain, by delegating authority to a negotiator whose objectives make this stance an optimal one. More recently, Conlin and Furusawa (2000) have provided an explanation of why senior union members may represent the union in contract negotiations with a monopolist. By strategically delegating contract negotiations to wage-maximizing individuals, the surplus-maximizing union may be better off than if surplus-maximizing individuals negotiate the contract. 1 This note goes further by dealing with the interac- tions between the strategic use of union delegation and the incentives for merger in duopolistic markets. In what follows it is shown that unionization does not always reduce the incentives for merger as advocated in Horn and Wolinsky (1988). Indeed, it is found *Corresponding author. E-mail: vannetelbosch@core.ucl.ac.be 1 Mauleon and Vannetelbosch (2005) have developed a model of wage determination with private information, in which the union has the option to delegate the wage bargaining. They have found that the maximum delay in reaching an agreement (or maximum strike activity) is greater whenever the union chooses wage-maximizing delegates instead of surplus-maximizing delegates and remains finite even when the length of the bargaining period shrinks to zero. Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online # 2006 Taylor & Francis 1 http://www.tandf.co.uk/journals DOI: 10.1080/13504850500392206 Applied Economics Letters, 2006, 13, 1–5