Unions in oligopolistic, vertically connected industries

A model of two unionized, vertically connected oligopolistic industries is analyzed. Economic performance, measured by consumer prices, depends on the institutional setting of wage bargaining. Two externalities may occur, nam ely an integration and a competition externality, which have opposite effec ts. With decentralized bargaining no externalities can be internalized resu lting in low consumer prices. With bargaining at the industry level only th e competition externality is internalized resulting in high prices. With ce ntralized bargaining both externalities can be internalized resulting again in low prices. With at least two firms in each industry, the decentralized setting performs best. Performance improves with an increase in the compet ition of the product markets. (C) 2001 Elsevier Science B.V. All rights res erved.