Differentiated duopoly and horizontal merger profitability under monopoly central union and convex costs

Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex production costs) and centralised unionisation in a differentiated duopoly model. It is pointed out that the wage fixed by a monopoly central union in the post-merger case is higher than in the pre-merger/Cournot equilibrium, opening up the possibility that merger reduces profits. Indeed, it is shown that this “reversal result” actually applies when the central union is sufficiently little interested to wages with respect to employment. Moreover, the lower the degree of substitutability between firms’ products and the higher the workers’ reservation wage, the higher ceteris paribus the probability that profits decrease as a result of the merger.