ENTRY THREATS AND INEFFICIENCY IN 'EFFICIENT BARGAINING'

We study limit pricing in a model of entry with asymmetric information, where the incumbent firm's wage is endogenously determined through 'efficient bargaining' with its union. In the presence of entry threat, the incumbent firm-union pair may face a conflict between rent sharing and transmitting its cost information. When the wage is not observable to outsiders and employment is the only signalling instrument, over-employment features in all entry deterring contracts. When the wage is also observable, information transmission becomes easier. Most of the time, then, but not always, the efficient contract deters (induces) entry against the low (high) cost incumbent.