Trade Liberalization and Union Wages in a Differentiated Bertrand Duopoly

Abstract

In a framework of a unionized international Bertrand duopoly with differentiated products, this article analyzes national labor market interdependencies and the consequences of trade liberalization for union wages. The analysis suggests that national wages are likely to be strategic complements (substitutes) if products are ordinary substitutes (complements). Under the assumption of linear demand, it is shown that bilateral trade liberalization always leads to higher union set wages and union utilities, regardless of the nature of product rivalry. An analysis of the consequences of unilateral tariff reductions shows that foreign tariff reductions always give rise to higher union wages and utilities, whereas the impact of unilateral domestic tariff reductions depends on the nature of product rivalry.