Productivity shocks in a union-duopoly model

We study the impacts of idiosyncratic productivity shocks when: firms have asymmetric productivities; firms and unions bargain over wages; and firms decide employment. The efficient firm pays a higher wage but has lower marginal production costs (due to its productivity advantage). Profits and worker surplus are higher at the efficient firm. A positive productivity shock affecting the efficient firm is always welfare improving; while if affecting the inefficient firm it may be welfare detrimental (if consumers' gain does not compensate the loss in worker surplus and industry profit). Consumer surplus increases more when the productivity shock affects the inefficient firm.