Bargaining: Separately or Together?

This paper explores conditions under which economic agents will want to bargain collectively instead of individually with a common third party -- when, for example, two firms (or unions), who are bargaining with the same outside party, will want to merge and bargain as one. I use an N-person sequential bargaining model of a production economy to analyze this question. Previous work has shown that agents prefer to bargain collectively if they are substitutes for each other in production. This result, however, depends on an exogenously fixed bargaining procedure. I allow the bargaining procedure to be determined endogenously and investigate how incentives for collective bargaining vary with transaction costs and heterogeneity. The previous results are not robust even when agents are substitutes. In particular, agents prefer individual to collective bargaining if they are heterogeneous and sufficiently patient. In the presence of transaction costs, substitutability of agents is no longer the sole determinant of collectivization. Rather, the degree of heterogeneity in production, in conjunction with the degree of substitutability between agents determine the incentives for collective action.