Question

• Read the mini case titled “Higher pay for national union presidents” on page 187 of Labor Relations (13th ed.).
• In 500 words or more, answer the question posed at the end of the mini case.

Higher Pay for National Union Presidents

Many people believe that “You get what you pay for” is an entirely valid statement and that on this basis one major reason for labor’s inability to organize more effectively as well as succeed in its political action can be traced to the relatively low incomes of national union presidents in the early twenty-first century. Granted, these people say, you never know what you don’t have, and it is impossible to pinpoint exactly what labor has lost in this regard. But, they argue, the huge imbalances nowadays between the very low six-figure salaries of most top national union leaders and the seven-and eight-figure compensations of many corporate CEOs in the United States have undoubtedly deterred good men and women from pursuing careers as labor leaders even forgetting other negatives such as union politics and the growing complexities of the union president’s job.

Therefore, at least one expert in this area has asserted, a more realistic salary scale—based on the actual membership of each union—should be established by the AFL-CIO for its member internationals, and individually by the internationals that have broken away from the AFL-CIO in independent action, at the rate of $1 for each union member, to be recalculated annually. Leaders of the four largest unions—the Service Employees, AFSCME, Teamsters, and Food and Commercial Workers—would in 2008 by this formula have received respectively: $1,900,000; $1,500,000; $1,400,000; and $1,300,000; and the heads of several other internationals (the Teachers, Automobile Workers, Laborers, Electrical Workers, Machinists, and Steelworkers) would have gotten between $640,000 and $850,000. The presidents of another nine unions would (also in 2008) have been paid more than $200,000, in five of these cases more than $300,000.

What do you think of this proposal? (Sloane 187)

Answer 1

Notice that d P

d qi = d P

d Q < 0. Consider the case of oligopoly and suppose that price is equal

to monopoly price. Monopoly price is such that the (4) holds exactly. The only di®erence

between (3) and (4)is that the latter has Q instead of qi. Since Q>qi, it follows that, for p

equal to monopoly price, the left-hand side of (3) is positive. Finally, if it is positive, each

¯rm has an incentive to increas output, which results in a lower price.

By a similar argument we can also show that price under Cournot competition is greater

than marginal cost.

7.7¤¤ Consider a duopoly for a homogenous product with demand Q = 10¡P=2.

Each ¯rm's cost function is given by C = 10 + q(q + 1). Determine the values of the

Cournot equilibrium.

Solution: Duopolist i's pro¯t is given by ¼i = qip(Q) ¡ C(qi) = qi[20 ¡ 2(qi + qj )] ¡ 10 ¡

qi(qi + 1). The ¯rst order condition for pro¯t maximization is given by:

20 ¡ 2(qi + qj ) ¡ 2qi ¡ 2qi ¡ 1=0: (5)

The problem of duopolist j is symmetric, therefore we have qi = qj = 2:375 and p = 10:5.

8.1 Explain why collusive pricing is di±cult in one-period competition and easier

when ¯rms interact over a number of periods.

Solution: In one-period competition each ¯rm has a strong incentive to deviate from

the pre-agreed collusive price, since the gains from deviating are higher than the losses. In

terms of the example in Section 8.1, had the duopolists interacted in only one period, the

gain would be given by one half of monopoly pro¯ts, while the loss from deviating would be

0. We would then be led to the usual Nash-Bertarand equilibrium when both ¯rms price at

marginal cost.

If, however, ¯rms interact over a number of periods, history, in the form of past pricing

behavior, becomes important. Deviation from the collusive price in one period can be met

by punishment (deviation) in future periods. Hence, the original defector must weigh shortterm gains against long-term losses, made possible exactly by multi-period interaction.

8.2 After several years of severe price competition that damaged Boeing's and

Airbus' pro¯ts, the two companies have recently pledged that they will not sink into

another price war. However, in June 1999, Boeing made an unusual o®er to sell 100

small aircraft to a leasing corporation at special discount prices. (Although customers