Nova workboard

a blog from young economists at Nova SBE

Why strike?

Wages just as prices are supposed to indicate the value of a product or of the work offered. In that way they function as a summary of the supply and demand within a market and put them into equilibrium. Finally this leads to a Pareto efficient allocation which makes every economists’ heart jump in joy. But as all general concepts there are exceptions that need special attention. The German market for public transportation presents one of those exceptions. Instead of being in equilibrium the market is in strike. But what are the reasons for a strike?

To understand the reasoning one has to understand the speciality of these markets. In the market for public transportation in Germany there is only one monopoly supplier, Deutsche Bahn. This leads to strong market power on the customer side as well as on the employer side. To understand strikes we need to focus on the latter. The current strike is carried out by 20 000 train drivers. The Deutsche Bahn is by far the biggest, if not the only, possible employer for these people. Based on the lack of alternative work options, the train drivers are forced to accept nearly any wage offered by the Deutsche Bahn. The only other option is to train into a new job which is connected with great switching costs in the form of fees and time. This consequently increases their willingness to accept low wage offers. In technical terms this means that they are strongly inelastic when adapting to a wage decrease. Such inelasticity is the bases for market power.

The above situation changes when introducing labour unions. Knowing of the trouble caused by the monopoly market power, the workers form a union to fight for a higher wage. The introduction of a union changes the best option of each individual worker and in consequence will give him leverage in the negotiation. Before the union, every train driver strived for his personal best outcome by accepting the highest possible wage while highly prioritising to not end up unemployed. This puts him into competition with like-minded other train drivers. Deutsche Bahn, as the only demander of this work, exploits this competition to achieve minimal wages.

From a game theoretic perspective the previous outcome is considered a ‘Prisoners Dilemma’. Individually the train drivers choose to accept the wage offer even though they could all increase their benefit if they conjoined and declined until receiving better offers. The union thus works as one united supplier of labour. This way the market changes from a single demander of labour with multiple suppliers to a market with only one demander and one supplier. The market power thus turns back around. Sticking with the example of the Deutsche Bahn, the company is now in the same situation as the train drivers: To cover their demand of labour they only have one possible supplier to contact, the labour union.

Now we have a new market with unique characteristics, a bilateral monopoly. And with it the game theoretical perspective changes to what is called a ‘battle of sexes’. It is logical to assume that some agreement will be found, as both parties profit, but it is difficult to predict what the compromise will be. Both parties have grand market power upon the other while at the same time being fully dependent on the same. This leads to two possible outcomes – Nash equilibriums: either a shift of the wage in favour of the labour union or in favour of the company.

To influence the outcome of the game in favour of the labour union, they will want to change the game characteristics from simultaneously made decisions to sequential decision making. The new game can then be considered a Stackelberg duopoly. In this situation the party making the first move can influence the other towards his preferred outcome. By striking the union tries to achieve the first move. It can be considered a credible threat of declining an offer made by the company thus pushing the company towrads a higher offer.

Lars Uden #744

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Author: studentnovasbe

Master student in Nova Sbe

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