The Effect of Labor Unions on Firm Pricing Strategy

Using Nielsen retail scanner database, I examine the effect of labor unionization on firm’s product pricing volatility. I hypothesize that management of unionized firms will manipulate product prices in a manner that strengthens its bargaining position. Specifically, I predict that unionized firms will strategically increase product prices to lower sales and income numbers before labor contract negotiations, and subsequently offer more price discounts after the union contract negotiations to regain product market share. I further expect such effect of labor unions on product pricing will be less pronounced for (1) firms in states with right-to-work law but have no work stoppage provisions (i.e., weaker labor unions) and (2) firms who are constrained in cash. I also employ a regression discontinuity design to account for endogeneity issues. Overall, this paper sheds light on how management may use product price strategies to achieve a stronger bargaining position and offer new insight into how a company’s labor unionization can potentially affect the interests of its retail customers.