nm0785: on this i've printed it off in a machine which was a clever machine 
'cause it 'cause it's given you the [0.8] the home page address on this [0.3] 
thing as well [0.6] okay so [0.3] what i advise you to do [0.3] is [0.4] to [0.
5] go [0.2] to the home page for this course to find it either straight from 
this address or just the department's home page [0.3] my home page there's a 
link in there to this M-S-C [0.9] labour market economics home page [0.3] okay 
[0.5] so [0.5] let me [0.5] so i thought this would be a non-paper course it's 
just all going to be an electronic course [0.3] and then i thought well you 
can't not give handouts [0.4] and when [0.4] when people come round 
universities doing teaching quality assessments [0.4] all they do is they er 
they don't look at films like this [0.4] they er [0.3] all they do [0.2] is 
they er [1.0] they go to filing cabinets and they flick through filing cabinets 
and they want to see lots of handouts [0.2] okay so i've had to do a handout 
nm0785: now to some extent [0.5] because i've just downloaded it all you know 
you n-, you now need not go and look at the home 
page 'cause you've got it all here [0.5] but what i'm going to be tr-, what i'm 
going to be doing as i go through the course is [0.3] sometimes i'll be saying 
[0.2] i'm not going to cover this in the lectures [0.5] it's and it might not 
be fully explained in the in the download of it because i've updated the home 
page [0.3] so periodically i will be adding things to the and and updating the 
home page [0.2] when i do that i will try and put within the home page [0.3] er 
a recent edition blinking [0.2] er icon [0.3] that s-, that [0.2] that warns 
you that there is something new that you might want to look at [0.2] so it 
might be something that you want to keep up to date with to some extent [0.4] 
and indeed [0.2] this relates [0.6] what i've just given you now [0.2] relates 
to this first topic [0.2] i'll say a few words in a minute about the course 
outline i'm going to go through in these five weeks [0.5] but this relates just 
to this topic [0.7] er [0.9] over Christmas i spent a good fortnight of my time 
putting all this together on the home page which is a slightly tedious 
business [0.5] er [0.3] i haven't yet got round to putting all the material in 
for topic two [0.6] but i will be doing that hopefully before next week [0.9] 
er [0.7] and for topics three four and five [0.3] it m-, [0.6] er as my time 
becomes more and more precious through term rather than through [0.2] Christmas 
and New Year et cetera [0.4] my ability to deliver on my promise to have 
everything on the home page [0.3] might become less and less credible [0.6] so 
er by [0.3] topics three four and five finishing off the course [0.3] it might 
simply say [0.4] here's a link to a few of the things [0.3] er but it's n-, 
might not be as complete as this but i intend it th-, i intend that it should 
be [1.7] okay [0.2] so that's all by way of [0.2] of introduction [0.6] er [1.
7] so let me turn now m-, to more somewhat more substantive matters albeit 
still by way of some introduction [0.9] if you turn [0.3] d-, in this handout 
to the third page of it [0.9] that gives you the course outline [1.5] and [1.2] 
i've indicated here that we're going to be having five lecture topics [0.3] now 
they might not correspond exactly [0.5] because of my inability to time 
things perfectly [0.6] to [0.3] each of our five meetings [0.2] in fact some of 
these topics in-, inherently are bigger than others [0.3] so for example [0.4] 
this lecture one material that i'm going to [0.3] to motivate in a few minutes 
[0.4] er is going to certainly run into next week [0.7] and i'd suspect that it 
will probably run into the fu-, first full hour of next week [0.8] trade and 
wages will then occupy the second part and maybe just kick into week three [0.
4] and as we go through the topics become [0.3] a bit smaller [0.5] so we'll 
catch up with ourselves hopefully and cover all this material [0.6] the first 
four topics [0.3] are all pretty much integrated around the central theme [0.6] 
and the theme is [0.7] what determines wages in labour markets [0.5] especially 
labour markets where there was imperfect competition [0.3] both on the labour 
market side in terms of the presence of trade unions or other forms of 
bargaining by workers [0.4] and also imperfect competition on the product 
market side [1.0] now that's a s-, a theme which has [0.5] still [0.2] has 
relatively 
little attention in the literature [0.9] i i'll say a few more words about that 
in a minute [0.8] so that's that's the main theme in a sense [0.3] within that 
theme we say [0.3] well this imperfect competition in the product market [0.4] 
has an international [0.4] competition element as well [0.2] so product markets 
are typically [0.3] internationally [0.4] competed increasingly through 
globalization regionalizing [0.4] of econ-, of of product markets [0.4] er [0.
3] and through int-, in a European context through the increasing ec-, economic 
integration that we're seeing [0.3] in a global sense but al-, but er 
specifically not least after the er the Euro was introduced [0.4] in a i-, in a 
European context [0.4] and i want to address questions to do with [0.3] how 
that [0.6] international context of product markets [0.2] especially that 
increasing integration of product markets in the international context [0.3] 
how that impacts on [0.3] labour markets [0.4] er wage determination in 
particular [0.5] and of course the endogeneity of that [0.3] how those [0.3] 
labour market institutions and labour 
market processes [0.3] themselves [0.2] shape the kind of influences that we'll 
expect to see from economic integration [1.3] so much of that focus will be on 
a in a in a U-K European context [0.4] but bearing in mind that there are 
analogies for f-, for North American labour markets [0.4] er which we'll also 
be bearing in mind [1.1] another aspect of that trade and wages literature of 
course is that that we we know that in the U-K [0.4] and in the North America 
there have been tremendous growth in wage inequalities [0.4] in in in the 
nineties perhaps starting earlier than that [0.4] which in the wider European 
context [0.2] has not seen [0.4] the same impact [0.4] er on wage inequality 
but there have been other impacts in terms of unemployment in the way that 
labour markets have adjusted [0.5] and we want to address that question of [0.
3] to what extent have these changes in the labour market outcomes [0.2] wage 
inequality and unemployment [0.4] to what extent [0.5] do those reflect [0.3] 
the changing nature of trade that we're seeing in product markets or that they 
have 
other causes [0.4] and that will be our [0.2] our second topic [1.6] the third 
[0.4] a-, and we'll be mostly focusing now on things to do with empirical 
evidence [0.9] in the third topic [0.4] i'm going to say [0.5] er [0.2] let's 
look at some recent models [0.2] of [0.8] the economic theory of trade unions 
in the context of international competition [0.2] but in which we also look 
explicitly at international trade in the theoretical models [0.9] er [1.5] 
lecture four [0.5] then still has that same theme of thinking about [0.5] er [0.
5] er wages and institutions like unions and and like imperfect competition [0.
5] and more explicitly says well [0.4] are these things of unions are these 
institutions are they exogenously determined do we just say some labour markets 
are unionized [0.2] let's think about the impact of that [0.4] or shouldn't we 
have [0.4] more of a r-, of a role in saying well what determines whether we'll 
[0.2] observe [0.5] different kinds of bargaining arrangements in different 
labour markets [0.3] so we look there at union formation [0.7] er [0.2] in a eu-
, in a U-K context [0.7] we ought to look at the 
question of [0.3] well [0.4] this formation of unions [0.9] this issue of 
whether unions are present or not [0.3] isn't only to do with [0.4] a supply 
side response by workers wanting to form unions [0.2] but it might also depend 
on the attitudes of firms [0.3] in whether they're prepared to accommodate 
unions [0.7] and and in the U-K context that means looking at the issue of 
recognition [0.4] the issue of whether firms [0.2] recognize [0.3] unions for 
the purposes of bargaining with them [0.3] in the determination of wages and or 
other conditions [0.8] that's very relevant as we as w-, at the moment because 
[0.6] the new Labour government [0.3] is proposing big changes in the way in 
which [0.7] unions [0.2] er [0.3] can [0.4] obtain recognition [0.8] for the 
purposes of bargaining [1.0] er [0.8] in the U-, in the U-S for a long time 
there's been a long literature now [0.4] on the fact that [0.3] workers [0.9] 
in the f-, er through organizing elections [0.6] can er [0.3] can have a legal 
right to have recognition by their by their employers [0.6] in the U-K there 
haven't been there hasn't been that kind of legislative 
environment and that's what's being introduced [0.3] so we'll look at the 
context for that in terms of [0.3] the li-, er any literature on recognition [0.
6] and a related issue to that is [0.3] what determines why individual members 
might want to join unions [0.8] er [0.6] to the extent that unions are a public 
good [0.5] or or a collective good [0.9] then there's a there's a dilemma for 
[0.2] for [0.2] economic theory to explain why unions form [0.5] let let me 
make that a bit more concrete [1.2] suppose we're we we are a workforce [0.3] 
the the eight or nine people of us in this room are a workforce [0.5] er [0.3] 
then we can all agree that jointly we might want to get together [0.4] and form 
some [0.2] some kind of bargaining unit let's call it a union might not always 
be formalized through channels like unions [1.6] in the belief that [0.2] if 
all of us in this workforce [0.5] are are a m-, are a part of this group [0.4] 
then our collective bargaining power is greater than our individual bargaining 
powers depending upon the nature of the work we do [0.2] perhaps [0.7] but if 
that is 
the case [0.5] then [0.2] we can hope that by exerting that kind of bargaining 
power we can raise our wage [0.5] if we're able to do that typically [0.2] in 
labour markets [0.3] any wage increase that we're able to bargain [0.2] is then 
bai-, paid to all the members of that workforce [0.7] not only to those people 
who have got themselves together [0.2] er and and obtained through bargaining 
that wage [1.1] so that generates a free rider problem for each and every one 
of us each one of us thinks well i'll let the other guys get together [0.3] and 
spend their evenings and and their resources on forming this union [0.2] and 
maybe also risking [0.5] the wrath of employers depending on the attitude of of 
firms to unions [1.1] and if they're successful in raising the wage [0.4] i 
will then have a higher wage as well without incurring the costs [0.4] so 
there's [0.4] especially when there's a large workforce [0.5] not when there's 
a small group like this perhaps but especially when there's a large workforce 
[0.3] that kind of [0.3] free rider incentive [0.5] that kind of [0.3] 
prisoner's dilemma problem [0.5] can undermine [0.4] the generation of [0.5] u-,
er of unions of bargaining groups [0.4] and so we'll be looking at questions 
[0.2] to the ex-, [0.2] er about have y-, have [1.2] economists in the 
literature [0.5] adequately explained that kind of thing [0.8] and that's 
particularly important in a context in which [0.3] union membership [0.3] in 
economies like the U-K and in Europe generally [0.5] er [0.2] have observed [0.
3] such [0.3] dramatic changes [0.3] in the in the kind of levels of membership 
[0.9] U-K [0.4] is not necessarily representative throughout Europe but in the 
U-K [0.8] in nineteen-seventy-nine something like fifty-five per cent of all 
workers were members of trade unions [0.6] anyone know for the figure for 
nineteen-ninety [0.2] where are we now nineteen-ninety-nine [1.1] roughly [1.2] 
sm0786: thirty [0.5] 
nm0785: yeah it's possibly even less than thirty per cent around twenty-five 
twenty-seven per cent [0.3] that's a dramatic change [0.4] that's happened in a 
number of European countries it's not happening in all European countries [0.3] 
indeed there's a literature on the 
diversity [0.2] and the causes of the diversity [0.2] in union membership [0.2] 
across European countries [0.4] and not only the diversity in the level but the 
diversity in the pattern of change [0.6] and that's something that we'll 
address in in topic four [1.7] that then [0.2] finishes the theme [0.2] of [0.
9] of wages bargaining [0.2] institutions imperfect competition [0.5] er [0.4] 
and in er and in some ways it it finishes the course [0.2] and it might occupy 
all five of our meetings [0.6] er [0.4] but i'm [0.3] wanting to have [0.2] 
time to cover lecture five [0.5] which if i find that our time is squeezed out 
by the other [0.2] material [0.3] becoming larger than than we in-, intend now 
[0.4] i'll offer as a on a purely voluntary basis an additional lecture [0.6] 
where i cover two other [0.2] aspects [0.5] er which are [0.3] very relevant to 
current policies [1.3] the first of those [0.3] is [0.2] what i call here [0.3] 
er [0.5] the analysis of monopsony [1.1] er [0.5] now the analysis of monopsony 
has A a very long tradition [0.7] er and B a more recent tradition in terms of 
models of dynamic monopsony [0.2] but i'm not concerned with either of those [0.
3] 
i'm concerned with [0.3] the issue of explaining [0.3] not [0.4] levels of 
employment and wages but [0.3] the number of hours that people work [0.9] at 
the moment [0.6] in [0.3] the European Union [0.3] and impacting perhaps [0.2] 
exclusively on the U-K [0.4] you [0.3] may well be aware that [0.5] there is an 
E-U directive on maximum hours legislation [0.7] which proposes [0.4] a maximum 
of forty-eight hours per week [0.4] er [0.3] as a as a required contractual 
maximum by firms on workers [0.3] firms and workers will be entitled [0.4] to 
negotiate [0.4] voluntarily and jointly [0.3] hours in excess of forty-eight 
hours but firms will not be legally allowed [0.2] to require workers [0.2] 
without that kind of [0.5] bargaining or voluntary contracting [0.4] er it will 
they will not be require [0.2] able to require workers to work [0.3] for more 
than forty-eight hours per week [0.6] now in many European countries that's 
irrelevant [0.3] 'cause no one works that [0.2] or very very few workers [0.4] 
work that number of hours per week [0.8] but the U-K is an outlier [0.5] at 
least in Europe [0.4] for having a very large number of workers [0.2] who are 
working very long 
hours [0.6] and so i'm going to be concerned with [0.4] addressing the question 
of [0.4] why might workers be working very long hours [0.2] and what might be 
the impacts of [0.3] br-, introducing legislation on that [0.3] and the context 
for examing that er examining those kind of issues will be [0.3] er [0.3] a 
comparison or a contrast of competitive models of labour markets with 
monopsonic models of labour markets [0.2] in that context [0.7] and [0.9] and 
er underlining the emph-, [0.2] the importance of that kind of issue [0.6] in 
terms of that regulation of of [0.3] eur-, of labour markets within Europe and 
impacting perhaps exclusively on the U-K [0.3] at a time when other labour 
markets in Europe [0.3] are bringing in national legislation [0.4] to bring in 
maximum hours much less than that more like forty thirty-eight or even thirty-
seven hours [0.5] in the case of France [0.3] Italy and Germany [0.5] all 
through different methods [0.2] some [0.3] by being imposed by government some 
by being [0.3] er voluntarily [0.3] er negotiated through union and firm kind 
of arrangements [1.2] er [0.3] but at the same time as 
that's happening in the U-K [0.3] we also know that the new Labour government 
is bringing in minimum wage legislation which is another kind of regulation on 
the labour market [0.3] i'm interested in [0.3] the combination of those two 
forces [0.4] on [0.3] on labour market outcomes in terms of wages hours worked 
and employment [1.0] okay [0.3] so that's one of the [0.5] er two issues i want 
to cover in lecture five [0.7] and the second issue i want to look at [0.3] is 
more to do with [0.4] er [0.4] er it's a r-, er a rather narrowly U-K focus [0.
4] and it's geared around some work that i'm doing with Jeremy Smith in the 
department [0.4] er in which we're looking at [0.4] evidence on U-K students [0.
4] and addressing questions like [0.5] er does your does A your degree 
performance but m-, perhaps more importantly for our focus on this course [0.4] 
do your earnings after graduation [0.6] vary very much [0.3] with the following 
kinds of characteristics [0.2] firstly [0.3] which university you went to [0.3] 
so is there a big premium on going to some universities and not others [0.5] 
secondly [0.2] the subject you've taken [0.8] 
is there a big premium for economics versus business studies or whatever [0.8] 
er [0.5] and thirdly perhaps more interestingly [0.3] to what extent [0.2] do 
your does your labour market outcome [0.4] depend upon your personal 
characteristics [0.6] er [0.4] age and gender being [0.2] er marital status 
being one set [0.3] but others being [0.6] er [0.4] your [0.2] schooling 
schooling information [0.3] prior to university so [0.5] does it depend on what 
kind of school you went to [0.7] and are there big differences for example 
between [0.3] private schools and state schools in your labour market outcomes 
even for those people who graduate [0.6] does it also depend upon the degree 
class you obtain [0.7] er [0.3] and does it depend upon demographic 
characteristics or social background characteristics [0.4] such as the [0.4] 
occupational background of the [0.3] f-, [0.2] of the parental background from 
which you [0.2] you come [0.6] so that's one set of issues [0.2] related to 
that [0.5] issue [0.5] is [0.4] er [0.4] how can we explain different 
performances in the labour market across different universities [0.2] if we 
observe a big premium for 
going to Oxbridge rather than to other universities [0.4] is that [0.3] because 
of some kind of signalling in the labour market some kind of discrimination 
maybe in the labour market [0.4] or is it to do with [0.4] er [0.2] different 
characteristics of those universities which can be explained [0.3] which aren't 
some kind of residual [0.3] to be attributed perhaps to discrimination [0.8] 
okay [0.3] so those are the things to do to do in lecture five [1.1] okay [0.5] 
so i've spent quite a bit of time motivating lectures two to four to five and 
had er s-, said very little about lecture one so now now let's get [0.3] down 
to the [0.4] business of looking at the material for lecture one [1.8] so [0.9] 
this [0.4] material [3.1] for lecture one and hopefully this is going to be a 
sufficiently large font size [4.1] o-, our our heading our title is [0.2] wages 
bargaining and product market competition [0.7] with namex [0.2] in the first 
part of er [0.6] the academic year in this on this course in part one [0.4] 
you have spent [0.4] er [0.2] one part of your course [0.3] looking at wages 
and bargaining [0.7] so i don't intend to replicate that kind of thing [0.3] my 
focus will be more on [0.3] saying well let's [0.5] extend that analysis of 
wages and bargaining [0.3] to a context in which [0.5] product markets are not 
necessarily perfectly competitive [0.3] nor necessarily monopolistic [1.1] say 
a bit more about why i'm going to do that in a moment [1.3] this [0.6] m-, m-, 
material on lecture one is going to be split into two [0.5] one-A looks at the 
theoretical motivation [0.3] for wh-, why we might be interested in this [0.3] 
theoretical issues [0.4] and then part [0.2] one-B [0.3] we'll look at the 
empirical evidence on these kinds of issues that we're going to be motivating 
[0.9] in this [0.6] hour [0.5] i'm going to be [0.5] focusing exclusively on 
theoretical motivation [0.3] sometime in the second hour i'll get round to 
empirical evidence [0.3] is there a problem in terms of [0.5] 
sm0787: yes 
nm0785: visibility or the handout 
sf0788: no 
sm0787: no it's er [0.3] 
sf0788: it's different 
sm0787: 
it's a different [0.3] it's a bit different 
nm0785: it's a bit [0.2] a little different from this [1.0] is that right [1.7] 
er 
sf0789: it is different 
nm0785: i don't think it is we're doing lecture one product market influences 
sm0790: 
nm0785: er on wages [0.2] okay [0.5] 
sm0790: oh okay 
nm0785: different way of saying the same thing sure [0.2] okay [0.4] and then 
we're looking at the theoretical motivation [0.2] sure [2.1] er [1.5] a general 
point [0.7] we're a small group this must be interactive [0.4] so do raise 
issues and that's why i was looking for the facial expressions okay i'm very 
keen to have this interactive and respon-, [0.8] okay [0.4] so [0.8] raise an 
eyebrow at your peril 'cause i will ask you to say what the question is 
[laughter] [0.3] 
om0791: may i raise a point 
nm0785: yeah of course 
om0791: er sorry is this weeks six to ten there is that 
nm0785: yep [0.3] er [0.3] that's weeks to s-, er six to ten of this course 
om0791: ah [0.3] 
nm0785: er [0.6] the students have already taken weeks 
one to five [0.2] 
om0791: ah right 
nm0785: of the course sorry it doesn't relate to term time it's [laughter] it's 
a good point it it's 
om0791: no 
nm0785: potentially very confusing [0.5] er [1.2] okay [1.1] er so [0.3] in 
this issue of theoretical motivation [0.5] er [0.6] i'm going i'm ar-, i'm 
arguing that [0.2] that there are two questions which are going to concern us 
for this part of the course [0.8] and one question is [0.9] what generates 
rents [0.4] if we're looking at what determines wages [0.6] and we're saying 
we're not just going to [0.3] assume that wages are [0.2] given by competitive 
levels [1.0] but they might differ from competitive levels [0.5] then we ha-, 
have to explain [0.4] why there might be rents [0.3] which enable workers to 
have [0.3] wages [0.5] in excess of [0.4] competitive levels [0.6] so the 
question i-, i-, w-, wh-, a question which is very important is [0.2] what 
generates rents [0.7] with namex in in the previous [0.3] weeks of this course 
[0.3] you'll have spent quite a bit of time looking at issues to do with rent 
sharing 'cause that's 
something which namex's done a lot of work on [0.5] and [0.4] and one of his 
assumptions is that there are rents [0.5] and then [0.7] a-, and he m-, and he 
[0.2] demonstrates using a lot of evidence [0.4] er about the existence of 
these rents and the and speculates what are the determinants of those rents [0.
6] so he's looked a lot at rent sharing [0.6] i'm [0.7] going to be [0.3] 
initially asking the question well what does what generates those rents [0.3] 
but primarily for us then to address the question [0.3] of [0.7] assuming those 
rents exist [0.3] under what conditions are workers best able to capture a 
share of those rents [0.4] 'cause you can imagine situations in which firms are 
generating huge rents because of monopoly power [0.7] but that same monopoly 
power [1.7] or [0.4] reasons [0.2] associated with that monopoly power [0.3] 
might give those firms a great bargaining power over workers and prevent those 
workers from ex-, ec-, [0.2] from generating [0.8] er a share of those rents [0.
2] from capturing a share 
of those rents [0.4] okay indeed it might be the case that firms which are very 
powerful in their product markets [0.3] also exert enormous m-, [0.4] labour 
market power [0.3] and com-, [0.2] and er which enable them to pay wages below 
competitive levels [1.5] so [0.5] it it doesn't follow that just because rents 
exist workers are going to be [0.2] capturing a share of them [0.5] so we'll be 
er addressing the question of what ena-, under what conditions are workers best 
able to capture a share [0.3] of any such rents [0.3] which firms are are are 
are are are re-, are receiving [1.4] so what are the re-, sources of rents on 
the first [0.2] of those two questions what are the sources [0.4] of any such 
rents [1.6] the most [0.2] obvious starting point is to say that [0.7] 
imperfect competition in the product market can generate rents [2.4] two [0.6] 
forms of [0.2] product market imperfect competition would be monopoly and 
duopoly [0.9] models [1.2] of unions the economic theory of the trade union [1.
1] almost exclusively [0.2] focuses [0.4] on monopoly [0.9] okay [0.4] you will 
have looked at a number of [0.4] of 
models [0.6] where [1.1] you s-, you say that [0.7] there's a union [0.4] 
downward sloping labour demand curve [1.7] wages employment [0.3] and maybe 
unions have got s-, er in a monopoly in a model [0.7] unions are trying to [2.
0] er [0.3] aim at [0.5] this utility maximizing point [0.4] with a wage in 
excess of [0.6] some competitive wage [0.9] and so they're extracting some 
rents in the form of wages being higher than they otherwise would be [0.3] and 
those rents are pretty much assumed to come from [0.2] monopoly power [0.6] by 
firms [0.4] or [0.5] if not from that [0.3] from a second [0.3] source [0.4] of 
p-, of rents [0.4] and this is arguably even more common in the literature [1.
3] this this source being [0.3] the diminishing marginal [0.5] product of 
labour [0.5] okay so i-, [0.2] in models like that [1.0] you've [0.7] the 
argument goes that the firm's profits [0.7] are equal to price [0.2] which is 
[1.8] parametric exogenously given [0.8] at some competitive price level [1.4] 
times output [1.4] output being some function of labour inputs [0.4] minus [0.
8] costs [0.2] 
themselves some function of wages and so often the argument goes that [0.3] the 
price is parametric price is exogenously given at some competitive price level 
[0.6] and then [0.8] what's enabling workers to have [0.3] wages above a 
competitive level [0.3] is that [1.7] the production function exhimits exhibits 
diminishing marginal product of labour [5.0] and [0.4] that then is used [0.3] 
to er [0.2] to generate the result that wages [0.6] set by unions or bargained 
between unions and firms [0.3] might be greater than the competitive level [0.
6] now [0.5] if you think about that model [0.4] it's not [0.4] very satisfying 
from an empirical point of view [0.5] because [0.3] if the [0.3] product market 
is [0.3] competitive [0.7] then we're going to assume pretty much that at least 
[0.9] even in the medium term but certainly in the long run [0.3] firms are not 
going to be able to persist in paying [0.3] wages above competitive levels [0.
6] okay [0.4] so a much more satisfactory it seems to me [0.9] motivation for 
the existence of rents being used to share [0.3] is the existence of [0.3] 
imperfect competition in the product market [2.2] and [0.3] monopoly is an 
extreme version of that which the literature [0.4] has [0.2] taken on board and 
has focused on when it's not [0.4] adopted this kind of approach [0.6] but of 
course we know that monopoly is [0.5] a rather extreme form of market 
competition perhaps no more likely than perfect competition [0.8] and [0.3] it 
strikes me that oligopoly [1.0] er i have in-, indicated here two firm 
oligopoly but perhaps m-, i should s-, more generally say oligopoly [0.4] is a 
more likely context to explain the existence of rents being as we capture them 
[0.4] so what i'm going to be wanting to do quite early on in [0.2] i-, in this 
hour [0.4] is look [0.3] at [0.3] extending the traditional model of union- [0.
2] firm bargaining [0.3] to a context where there's oligopoly [0.6] and [0.4] 
and a reason for doing that is because that forces us [0.4] to look to think 
more seriously and more formally about interaction between labour markets and 
product markets [0.3] which these kind of models ignore [0.7] because [1.1] if 
[0.4] we're dealing either with perfect competition where price is 
parametric [0.3] or with monopoly [0.2] unless we're thinking about entry 
deterrents [0.3] then there there's no strategic behaviour going on in the 
product market [0.6] and perfect competition [0.5] there's no strategic 
behaviour because you are a such a small part of the big product market you 
needn't think about the impact of your behaviour [0.2] on other firms [0.6] and 
if you're a monopolist [0.2] there are no other firms so again there's no 
strategic behaviour [0.5] so those two traditional approaches [2.1] free us 
from the requirement to [0.7] or more critically don't [0.9] encourage us to 
think [0.3] more formally about [0.2] the importance [0.2] what will be in the 
real world the important interactions between [0.8] labour markets and product 
market outcomes in terms of strategic behaviour [0.5] let me give you a more 
concrete example on all of that [0.4] if we are a workforce [0.5] if we are a 
unionized workforce [0.2] and we are [0.2] determining what wage to set [0.3] 
do we merely think in terms of the wage and employment combinations [0.6] in 
some [0.2] way [0.3] abstracted from [0.6] the the 
wider world outside us or do we recognize that the higher is our wage [1.2] the 
less [0.2] potentially at least [1.0] the the the er [0.2] potentially at least 
[0.4] the higher is our wage [0.4] the less competitive will be the product 
market position of our firm in its [0.5] product market [0.2] decision making 
[0.5] so we [0.6] perhaps ought to be aware as a union of the dangers of 
setting a high wage [0.9] er in terms of the impact that that will have on the 
product market competition [0.5] er competitiveness [0.5] of the firm that 
we're bargaining with [0.7] er [0.9] and so there are strategic behaviours that 
we should consider and that's what we'll analyse in a few moments [0.7] er [0.
4] course other f-, [0.5] other forms [0.5] er [0.2] of the generation of rents 
[0.3] would include imperfect competition in the labour market rather than the 
product market [0.8] okay so [0.4] it might [0.8] be for example that firms 
have monopoly power which is generat-, monopsony power which is generating 
rents for them [3.1] and there is an increasing literature on [0.5] monopsony 
power [3.4] or other v-, 
other forms of imperfect competition in the labour market might [0.3] you might 
interpret efficiency wage models and even insider-outsider models in terms of 
[0.3] imperfectly competitive labour markets [0.8] okay [0.5] and see those as 
forms of of rent generation [0.4] but i'm going to pretty much exclusively 
concentrate [0.4] on this issue of oligopoly [0.6] so what i want to do [0.6] 
er within this theoretical motivation [0.5] is look at actually three models [0.
7] of [0.6] union-firm bargaining in a wider context of imperfect competition 
in the product market [0.3] in order for us to get some feel for the kind of 
important issues that are [0.4] that are going on there [1.5] so let's look at 
the three models the first of and i label the models one-one-one [0.3] one-one-
two and one-one-three [0.7] er [0.3] and the first two of these [0.6] are 
closely related to a paper published by Steve Dowrick in the Economic Journal 
[0.5] of nineteen-eighty-nine [5.7] okay so let's think first [0.2] about [0.7] 
er th-, the model one [2.8] and model one [0.4] is [0.3] 
sketched [0.7] on the [0.2] home page [0.4] a copy of which you've got [0.5] er 
if you click on your handouts [0.4] which means in this context [0.4] scanning 
just a few pages [0.5] you'll find something called model one- [0.6] point-one- 
[0.4] point-one [0.9] and i will just er go through the key points of that [0.
4] on the board [1.4] and it will be easier once i discover where the board 
rubber is 
nm0785: so thinking about this first model [1.5] okay we're going to er make a 
number of simplifying assumptions [0.4] the first one [0.3] will be that [0.6] 
product demand is linear [0.6] so you'll [0.5] er [1.0] so we'll write [0.7] 
product demand [1.5] of some linear [0.9] er [1.6] indirect demand function [1.
4] where [1.1] X is market outputs [0.6] of a homogeneous [0.2] commodity [1.0] 
in model two we'll look at [0.4] differentiated commodities and see that that 
[0.2] adds something to our analysis informs our analysis [0.4] but for now 
assume a homogeneous commodity [0.4] X [1.0] er [0.9] is the quantity of that 
[0.5] and that is being supplied by N firms we're dealing initially with an N 
firm [0.3] oligopoly [1.7] so the market output X is the sum of the outputs of 
all the individual firms which we'll [1.1] label [0.4] I [0.3] I going from one 
to N [2.7] we'll assume a constant marginal product of labour [1.1] and we'll 
take that as our numeraire [1.3] in other words marginal product of labour is 
equal to one [0.8] the reason for doing that [0.4] it simplifies things very 
nicely [0.2] we can just [0.4] label outputs [0.2] and employment as the same 
thing it means output is e-, equals employment [1.3] one unit one unit of 
labour generates one unit of output [0.7] we could [0.5] easily [0.6] ec-, 
generate out from that it wouldn't it doesn't change things too much so long as 
we keep the assumption of constant marginal product of labour [1.3] we're going 
to assume a two stage game [0.6] in which [0.2] in stage one [3.7] each union 
[1.9] and firm [1.3] pair [0.9] 'cause we assume that each one of these N firms 
[0.5] is bar-, [0.2] i-, i-, confronts [0.4] a local union [0.7] so we're going 
to have decentralized bargaining between each union and firm [0.6] pair we'll 
call it a union-firm bargaining pair [0.5] so each union-firm [0.8] bargaining 
pair [1.9] sets the wage [1.9] in that [1.8] in that for that pair so [0.2] W-I 
for f-, [0.3] p-, pair I [1.6] as a resul-, as a [0.7] as a [0.2] result of 
bargaining [0.5] bargaining being described [0.4] in the [0.8] in a traditional 
right to manage model [1.1] okay so that there there's bargaining going on over 
the wage [0.2] but the firm is then [0.3] going to be [0.5] at some point it'll 
actually be in stage two [0.3] is going to be setting employment [0.4] 
autonomously [0.3] in other words the union has no influence over employment [0.
9] in this model [1.9] when each union-firm pair sets [0.4] its wage W-I [0.3] 
it [0.3] it [1.1] takes as given in a kind of Cournot way [0.4] Cournot-Nash 
way [0.2] it takes as given [0.3] any wage set [0.4] in any other union-firm 
bargaining pair [0.6] so it doesn't [1.2] take on board in a kind i-, in er [1.
2] in any kind of Stackelberg way [0.5] the er [0.2] the choice being made by 
others the impact of its choice on others [0.4] okay [1.4] in [0.5] in er [0.8] 
we we can exten-, we can easily extend that in fact i might as i'm doing this 
extend that [1.4] er [1.6] okay so let's let me write that down in that way [0.
5] if each firm is spending [0.3] let's let's [1.0] say [0.2] that more 
generally [0.4] actually [0.7] the Cournot-Nash [0.4] assumption of course is a 
w-, a specific form where you assume that [0.6] your action [0.2] doesn't 
affect the actions of others [0.3] you take the actions of others as given [0.
9] more generally we could use a conjectural variation approach [0.2] which 
many people don't like and if you don't then just set the l-, conjectural 
variation parameter [0.2] equal to [0.2] zero [0.3] and assume you're dealing 
with a Cournot model [0.7] the con-, a conjectural variation pr-, [0.5] 
approach [0.8] would say that [0.4] when we're setting [0.2] as a union-firm 
pair [0.3] when we're setting our wage [1.7] er [0.5] we allow for the 
possibility that [0.3] the choice of our wage influences the wage choice of the 
other union-firm pairs [0.6] according to some conjecture [0.2] captured by the 
conjectural variation [0.4] if that parameter is zero it means you assume that 
your [0.6] wage doesn't affect the others [0.3] 
and that's like adopting [0.3] a kind of best reply approach a Cournot approach 
[0.7] where you just [0.3] reply to if there's a choice in yours [0.3] not 
taking into account how your wage impacts on the others [0.5] 
sm0792: in the model which this kind of er game result [0.2] just in the 
symmetries [0.5] in in which [0.2] er [1.0] the two [0.8] different [0.2] are 
[0.8] way [0.5] 
nm0785: okay [0.5] what i'm [0.5] going to be assuming [0.4] for these purposes 
[0.4] er [0.3] is that [0.3] all of these union-firm pairs are identical [0.4] 
that's is that the part of the point you're making that we that they're s-, 
that [0.7] so the equilibrium we're going to generate [0.2] will be a symmetric 
equilibrium [1.3] and indeed at one point in the analysis we're going to use 
that [0.5] to simplify the the solution to the problem [0.9] but we're not 
going to be imposing it on the problem from the beginning [0.2] 
sm0792: [0.2] 
nm0785: we [0.2] er er in er it's a good point i'll bear it in mind as i'm 
going through the model to try and explain what i mean by that [0.4] er [0.5] 
so the result will be [0.7] one in which [0.2] er we get symmetry but we can't 
impose right from the beginning [0.3] the knowledge that in a symmetric 
equilibrium [0.2] wage will be the same [1.0] just as when you're looking at [0.
4] er a simple Cournot product market story [0.5] you know that in equilibrium 
[0.3] in under symmetry [0.4] er the the output choices of the two firms will 
be the same [0.6] but you don't impose on the beginning you let that come out 
of an er of an equilibrium solution to the model [0.2] and that's what we'll be 
doing here [1.0] okay [0.7] so we could have a [0.3] a a general convectj-, [0.
2] conjectural variation approach and indeed in model one-one-one that's that's 
what we're going to do [1.1] okay so that's what's that's how the wages are 
being determined [0.8] once the wage has been determined [0.4] we then move 
into stage two [3.0] in which [0.5] with wages [0.5] we could even say with the 
full vector of wages [0.4] 'cause of course this is generating a vector of 
wages [0.3] W-I [0.6] I going through one to N [1.0] the vector of [0.2] of 
wages [1.5] er [1.3] will be determined from [0.4] stage one [1.3] so it's been 
predetermined [1.4] and firms then [1.5] choose [1.5] output [0.5] and of 
course that's 
the same as choosing [0.7] employment [0.3] on this assumption of constant 
marginal product of labour [0.6] especially with our numeraire assumption [3.2] 
firms [0.4] how do firms choose output [0.2] well we're going [0.6] to [0.3] 
adopt [0.2] again the conjectural variation approach [2.0] which just 
generalizes [0.7] the Cournot-Nash approach [0.5] of [0.2] of [0.2] generating 
best reply functions and again if you don't like this idea [0.3] just assume 
that the conjectural variation of it is zero [0.3] er and look at the think 
about generating the Cournot-Nash equilibrium [1.7] 
sm0793: do you mean [0.7] firms will either choose to compete on price or 
nm0785: we're going to assume the competition is on quantity [0.6] okay [0.2] 
so we're not going to be thinking about Bertrand [0.8] and in fact if we did we 
know that we'd just get to the competitive price and so there'd be no price 
mark up and there'd be no wage mark up [0.8] unless we bring in some k-, other 
kinds of constraints to prevent that [0.6] process unravelling in that way [0.
2] 
sm0793: mm [0.3] 
nm0785: yeah [1.2] er [1.4] okay so that i think describes [1.3] 
the the key assumptions [0.5] and what i want us to do now is just to sketch [0.
7] er the method of of solving such a s-, simple model [0.6] er [1.1] and [1.5] 
we've got this two stage game going on of course we know that backward in-, by 
back-, we solve it by backward induction [0.3] we think first about stage one 
[0.8] reason for doing that of course is that [0.4] when unions [0.8] er [0.2] 
sorry let's think about stage two [0.3] i've got i've written these in a 
strange way [0.5] er [0.2] we're going to think first about stage two because 
when unions and firms [0.3] are choosing their wages they need to be doing that 
in the context of knowing what the implication will be [0.7] for the stage two 
decision [0.8] okay [0.2] so we solve first stage two [0.3] which essentially 
means we're generating labour demand functions [0.7] and it's against those 
labour demand functions like these [0.7] that firms and unions are then 
bargaining some [0.4] subgame perfect [0.6] wage [2.5] so that we're getting 
subgame perfect Nash equilibria from this [0.8] okay [0.3] so we first er solve 
stage two [0.3] by backward induction [0.4] that gives 
us the [0.4] er [1.2] the labour demand curves against which [0.3] the st-, the 
er we can analyse the stage one [0.6] gain [0.5] for wage determination [0.6] 
okay so let's [0.3] let's do that [0.6] i'll adopt a primitive method for [0.4] 
cleaning the board 
nm0785: so if we er then think first about stage two [0.3] for employment 
determination [1.3] i'm er [0.3] i'll just go through this now in [0.2] in the 
next [0.5] four to five minutes and then we'll stop and have a break [2.0] okay 
so stage two [2.4] and you can follow this from from the handout if you if you 
prefer [0.9] we're saying let's think about [0.5] the decision bay-, being made 
by an individual firm I [0.8] that firm is going to be [0.4] er tr-, trying to 
maximize profits given by pi-I [1.2] which of course is simply [1.2] price [0.
8] minus [0.5] wage costs [0.2] of that firm I [1.1] times its [0.5] output 
level X-I which of course is also its employment level [2.3] and price we know 
is [0.3] being given by [0.5] this linear demand function [1.1] where market 
output is the sum of the outputs of the individual firms [0.8] so we can [0.5] 
substitute [0.2] these [0.3] two [0.5] equations [0.2] 
into the profit equation [0.7] and from the [0.4] point of view of the handout 
that's giving you equation four [1.0] and when we then [0.4] maximize profits 
with respect [0.2] to the choice of output by [0.3] firm I [0.2] so when we 
look at D-pi-I by D-X-I [1.0] we get equation five [1.1] which is A minus [0.5] 
W-I [0.4] A of course is the reservation price from the product demand [0.8] 
equation so okay so always be thinking about A as the reservation price [0.3] 
intercept on the vertical axis [0.6] in a price quantity diagram [0.8] er [0.6] 
minus the wage that the firm has to pay [2.4] minus B which is the slope [0.3] 
parameter from the market demand equation [0.3] times the following thing [0.3] 
X-I [1.6] times D [1.5] over the sum of X-Is and i'll explain this in a moment 
[5.5] D-X-I [0.7] plus the sigma [0.5] X- [0.5] I I going from one [0.5] to N 
[2.4] and that's the first order condition for product maximizing by the firm 
[0.9] er [0.8] in this way that's equation [0.3] five from the handout [0.9] 
okay you [0.3] it's relatively straight forward to to to to demonstrate 
this for yourselves i'll leave that as an exercise if anyone wants [0.4] any 
guidance on it by all means at any point come and see me [0.3] i have a 
generally a an open door policy for people on this course so come by my office 
any time you like [0.9] er [1.7] then what what this is saying [0.2] is that [0.
6] er if we [0.9] if we rearrange it [0.5] it's [0.2] becomes easier to [0.4] 
to see it er i guess well let's just think about it from this point of view [2.
0] W- [0.5] I of course [0.3] is the firm's [0.3] marginal cost of an extra 
unit of output [0.3] terms of having to employ an extra worker [1.5] and and 
then the rest of the thing is giving us the [0.2] the marginal [0.4] er revenue 
[0.4] to the firm from an extra unit of output [0.8] and that's being made up 
[0.4] not only of the [0.3] price it's going to obtain from any [0.5] increase 
in its own output but it has to bear in mind how a change in its output [0.4] 
affects [0.3] the output of other firms so this is where the conjectural 
variation parameter's going to come in [2.1] and let's let's see that [0.9] 
this thing here [0.4] oops i've missed 
a bracket [0.8] this thing here i'm saying [0.7] [0.5] is [1.7] the er [1.7] 
can be written as one plus lambda [1.8] and let me just say why that is [1.7] 
and it's because [0.7] this change [0.2] in the sum of all the Xs can be broken 
down into the change in firm I's output [0.9] plus [0.3] the change [0.4] in [0.
4] the summed output of all the other firms [1.0] so let's call that the sum of 
the X- [0.2] Js where [0.4] J goes from [0.3] one to N [0.3] but excludes [0.3] 
firm I itself [1.8] all over D-X-I [3.2] and it's clear that [0.5] D-X-I over D-
X-I is one [0.2] that gives us that one here [0.7] and lambda [0.3] which we're 
defining as the conjectural variation parameter [0.4] is telling us [0.3] how 
[0.2] the firm believes at least [0.3] the out-, [0.3] the sum of the output of 
all the other firms will respond [0.6] to a change in firm I's output itself [0.
5] under the Cournot assumption [0.2] lambda is zero of course because you take 
the output of the other firms as given [1.2] okay so lambda is zero is is going 
to give us the 
special [0.4] Cournot-Nash best reply function approach [1.7] okay so that's [1.
0] the first order condition for [0.6] this particular firm [1.2] and of course 
there are N [0.2] such [0.2] first order conditions because there are N firms 
so we get N first order conditions [2.5] when we [1.0] solve those which is 
actually very very straightforward [2.7] okay [0.5] and the easiest way [0.5] 
to solve it is is the following [0.2] when you look at [0.5] this in-, this 
firm I's [0.7] first order condition [0.3] you'll see that [0.4] what we're 
wanting to do is to see how its output [0.3] X [0.7] depends upon [0.5] the 
vector of wages [0.5] okay its output X [0.7] to maximize its profits [0.7] 
we're just going to be two minutes finishing [1.3] its [0.5] its optimal choice 
of X is clearly going to depend upon its own wage as you'd expect [0.2] in in a 
monopoly model of any model that would be true [0.7] but what's happening here 
is that [1.1] X is also going to depend [0.2] X-I is going to depend [0.7] er 
on all the X-Js [0.7] and the X-Js of course will depend on the W-Js [0.5] so 
what we want to do is to solve this [0.7] 
sm0794: sorry [0.2] 
nm0785: just be two more minutes [1.5] what we're going to be doing is [0.2] to 
[1.1] to so-, [0.2] to solve this for the X-I [0.8] ex-, er [0.3] getting rid 
of all the X-Js [0.7] so that X-I can be expressed in terms of [0.5] of [0.2] 
stage one information the wages okay so what we want to do is to solve this 
first order condition [0.4] to have the profit maximizing choice of X-I [0.4] 
expressed [0.6] not in any X-Js not in any stage two outputs but in terms 
purely of the vector of [0.3] stage one information the wage information [0.6] 
and it's easy to do that because [0.4] er [0.7] the sum of all the X-Is just 
comes by summing all of these first order conditions [1.3] and then cancelling 
the sum of the X-Is [0.2] or the at least the X-Js [0.4] to leave us with X-I 
in terms of all the wages [0.6] okay [0.2] i'll leave that as an exercise for 
you to think about but it's actually once you've got it it's a nice little 
trick to do it [0.3] again come and see me if you want [0.2] a bit of guidance 
on that [0.3] and that's where i'll resume af-, after a brief break