Unions in oligopolistic, vertically connected industries

A model of two unionized, vertically connected oligopolistic industries is analyzed. Economic performance, measured by consumer prices, depends on the institutional setting of wage bargaining. Two externalities may occur, namely an integration and a competition externality, which have contrary effects. With decentralized bargaining no externalities can be internalized resulting in low consumer prices. With bargaining at the industry level only the competition externality is internalized resulting in high prices. With centralized bargaining both externalities can be internalized resulting again in low prices. With at least two firms in each industry, the decentralized setting performs best. Performance improves with an increase in the competition of the product markets.