A Unionized Oligoply with Bounded Rational Agents

Abstract

In this model I show why unions sometimes do not reduce wages, even if it will be profitable for themselves and the economy. The reasons are simple. When I allow unions and firms to be bounded rational agents with limited information, it is individually rational for unions to behave like this. Quantities firms produce approximate the collusive quantity with exogenous cost which would be an equilibrium result in a Cournot-Oligopoly Industrial Organization model. In addition this is a stable result and it is established even if firms only have sparse information about the environment and their decision rule is very simple. Hence, firms are the winners in our setting, compared to IO models. This is true on the condition that firms change quantities more often than wage bargaining takes place.

Keywords: Unionized Oligopoly, Bounded Rational, Agent-based Modeling

JEL Classification: D43, C60, J50