Unions and Collective Bargaining

Topic 4Part I

Topic Outline

• Bargaining Models under Complete Information Applied to Collective Bargaining

• Nash’s Cooperative Solution (Nash, “The Bargaining Problem”, 1950)

• Non-Cooperative Bargaining under Complete Information

• Ultimatum Games

• Finite-Period Games (Stahl, “Bargaining Theory”, 1972)

• Infinite-Period Games (Rubinstein, “Perfect Equilibrium in a Bargaining Model”, 1982)

• Empirical Evidence

Game Theory Tools

• Cooperative Game Theory

• Examines the outcomes of a strategic situation, that depend of a join action of all players

• Incorporating join actions into a strategic situation is a device that allows us to represent agents’ outcomes without explicitly modeling the negotiation process

• It implies that enforceable agreements can be reached

Game Theory Tools

• Non-Cooperative Game Theory

Examines the process of individual decision making in strategic settings

Equilibrium Concepts

• Nash-Bargaining Cooperative Solution

• Subgame Perfect Nash Equilibrium Concept

Unions and Collective Bargaining

• Unions are collective organizations whose primary objective is to improve the well-bring of their members through successful negotiations over wages and other non-wage benefits (such pensions, vacation time, medical expenses and work conditions) with the employers

• These negotiations are called collective bargaining negotiations

Unions and Collective Bargaining

• The outcome of the collective bargaining process specifies wages, non-wages benefits and aspects related to the employment relation such as procedures relating to hiring, promotion, layoffs

Bargaining

• People engage in bargaining throughout their lives: buyers and sellers bargain over prices; worker union and firm manager bargain over wages

• To get a good result from such bargaining, the participants must device good strategies

Bargaining (cont.)

All bargaining situations have 2 common characteristics

• The total payoff the parties to the negotiation are capable of creating and enjoying as a a result of reaching an agreement should be greater that the sum of individual payoffs they could achieve separately

So, the agreement CREATES VALUE (a surplus). Otherwise, the negotiation would be pointless

Bargaining (cont.)

• The negotiation is over HOW TO DIVIDE the surplus (gains from the agreement).

• Each bargainer tries to get more for himself and leave less for the others (incentives for conflict)

Bargaining (cont.)

• There is the danger that if an agreement is not reached, no one will get any surplus at all (incentives for cooperation)

This mutually harmful alternative, and the parties’ desire to avoid it, is what creates the potential for the threats

Theories of Bargaining and Collective Bargaining

• Bargaining theories are concerned with predicting the outcome in any particular bargaining situation and explaining what factors this outcome depend on

• There is no any single widely accepted theory of bargaining. We will examine some important contributions with emphasis on their implications on collective bargaining

Theories of Bargaining and Collective Bargaining (cont.)

• Theories of the bargaining outcome: model the bargaining outcome by specifying a number of properties or axioms which the outcome should obey

We will study the Nash’s cooperative solution

Theories of Bargaining and Collective Bargaining (cont.)

• Theories of the bargaining process: predict not only the outcome but also model the process by which that outcome is reached

• We will study bargaining models under complete information: ultimatum model, Stahl’s bargaining model, and Rubinstein’s bargaining model