The name is absent

post, there will be competition between firms to attract that employee. Each firm now
attempts to attract the better employee so as to offer a better product to its customer.

We shall again consider in turn different ownership structures. The main new difficulty
is to characterize the bargaining solution in each firm when there is competition between
firms for the best employee. As it turns out. the bargaining games under each ownership
structure can be straightforward!}’ adapted from the corresponding ones in the previous
section. As one would expect, the main effect of competition between firms for the best
employee is to strengthen the bargaining position of the best emplθ}^,ee and consequently
to widen the pay differential between good and bad employees.

Outside ownership

Consider first the situation where each firm is owned by an outside owner. The natural
adaptation of the bargaining game under outside ownership considered before is to let each
owner make a take-it-or-leave-it offer to their respective customers and to each employee
in the first stage. Employees and customers can then accept one of the offers or reject all
of them. If a firm has an offer accepted by it's customer and by at least one emplo}ee
the game ends for that firm. If the firm's offer is rejected by either the customer or by all
the employees then the game moves to a second stage (for that firm) where services can
only be provided outside the firm's premises. In this stage the owner of the firm is frozen
out and the employees make take-it-or-leave-it offers to the remaining customer(s). The
customer(s) then accept(s) or reject(s) the offer and the game ends.

As before, we can solve for the bargaining solution by backward induction:

• Suppose that Ei ɪ is the good employee ex post, and that both firms end up in stage
two of the bargaining game. Then Bertrand competition between employees results
in the following equilibrium payoffs: .employee En gets v —υ, each customer Ci gets
v. and the other employees E_lj get 0.

• If only one firm ends up in stage two then it is easy to see that equilibrium payoffs
are the same.

• These payoffs serve as outside options for the customers and employees in stage one.
Given that there is no competition between firms for customers and bad employees,
each firm can hold the customer and bad employee(s) down to their outside options
as before. But. Bertrand competition for the good employee ma}’ result in a higher
payoff for the employee E∏. Indeed, when f^, > 1 employee Ец then gets V-V

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