On Product Differentiation and Profits in Unionized Duopolies

This work aims to investigate if the conventional wisdom, that a decrease in the degree of product differentiation always reduces firms’ profits, remains true in a differentiated duopoly model with decentralized, or firm-specific, monopoly unions. It is shown that, provided that unions are sufficiently wage-oriented, that is, they sufficiently prefer wages to employment, the conventional result can actually be reversed under both Cournot and Bertrand competition, implying that incentives for firms towards less differentiation may arise. Moreover, the range of product differentiation values, for which the “reversal result” applies, is larger when firms compete in quantities than in prices.