Unions and Collective Bargaining

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Topic 4 Part I
Unions and Collective Bargaining
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Topic Outline

• Bargaining Models under Complete Information
  Applied to Collective Bargaining
• Nashs 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

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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

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Game Theory Tools

• Non-Cooperative Game Theory
• Examines the process of individual decision
  making in strategic settings

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Equilibrium Concepts

• Nash-Bargaining Cooperative Solution
• Subgame Perfect Nash Equilibrium Concept

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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

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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

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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

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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

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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)

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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

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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

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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 Nashs cooperative solution

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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, Stahls bargaining
  model, and Rubinsteins bargaining model