Monopsony
The microeconomic theory of monopsony assumes a single entity to have market power over all sellers as the only purchaser of a good or service.
Monopsony theory was developed by economist Joan Robinson in her book The Economics of Imperfect Competition (1933).
The term "monopsony" (from Greek μόνος (mónos) "single" and ὀψωνεῖν (opsōneîn) "to purchase fish")[4] was first introduced by the British economist Joan Robinson in her influential[1] book, The Economics of Imperfect Competition, published in 1933.
The lower employment and wages caused by monopsony power have two distinct effects on the economic welfare of the people involved.
[2] Secondly, it reduces the aggregate (or social) welfare enjoyed by both groups taken together, as the employers' net gain is smaller than the loss inflicted on workers.
According to this notion, the workers' economic surplus (or net gain from the exchange) is given by the area between the S curve and the horizontal line corresponding to the wage, up to the employment level.
[7] Following such definitions, the grey rectangle, in the diagram, is the part of the competitive social surplus that has been redistributed from the workers to their employer(s) under monopsony.
By contrast, the yellow triangle is the part of the competitive social surplus that has been lost by both parties, as a result of the monopsonistic restriction of employment.
As the diagram suggests, the size of both effects increases with the difference between the marginal revenue product MRP and the market wage determined on the supply curve S. This difference corresponds to the vertical side of the yellow triangle, and can be expressed as a proportion of the market wage, according to the formula: The ratio
has been called the rate of exploitation, and it can be easily shown that it equals the reciprocal of the elasticity of the labour supply curve faced by the firm.
by various means are a common feature of the applied literature devoted to the measurement of observed monopsony power.
The market failure can only be addressed in one of two ways: either by breaking up the monopsony through anti-trust intervention, or by regulating the wage policy of firms.
While it is generally agreed that minimum wage price floors reduce employment,[9] economic literature has yet to form a consensus regarding the effects in the presence of monopsony power.
[6] Some studies have shown that if monopsony power is present within a labour market the effect is reversed and a minimum wage could increase employment.
The line segment represented by A—B shows that there are still workers who would like to find a job, but cannot due to the monopsonistic nature of this industry.
Indeed, under competitive conditions any minimum wage higher than the market rate would actually reduce employment, according to classical economic models and the consensus of peer-reviewed work.
[9] Thus, spotting the effects on employment of newly introduced minimum wage regulations is among the indirect ways economists use to pin down monopsony power in selected labour markets.
This technique was used, for example in a series of studies looking at the American labour market that found monopsonies existed only in several specialized fields such as professional sports and college professors.
Robinson's original application of monopsony (1938) was developed to explain wage differentials between equally productive women and men.
In particular, Manning and others have shown that, in the case of the UK Equal Pay Act, implementation has led to higher employment of women.
Standard labor market models assume that workers have accurate information about their outside options and subsequently negotiate with their employer to raise their wages so they match outside offers or switch jobs.
However, a 2024 study of German workers in the Quarterly Journal of Economics found that they severely underestimated the wages that they would earn at other jobs.
This modern perspective of dynamic monopsony[6] first proposed by Allan Manning (2003), also results in an upward sloping labor supply curve, and is more practical as it incorporates multiple employers in a competitive market whilst also allowing for search frictions, and a costly search.
[15] The simpler explanation of monopsony power in labour markets is barriers to entry on the demand side.
However, numerous statistical studies document significant positive correlations between firm or establishment size and wages.
The company, however, would be unable to drive down wages via monopsonistic power if it were also competing against retail stores, construction, and other jobs utilizing the same labour skill set.
This finding is both intuitive (low-skilled labour can move more fluidly through different industries) and supported by a study of American labor markets which found monopsony effects were limited to professional sports, teaching, and nursing, fields where skill sets limit moving to comparably paid other industries.
Paramount among these are industry accreditation or licensing fees, regulatory constraints, training or education requirements, and the institutional factors that limit labour mobility between firms, including job protection legislation.
In line with the considerations discussed above, but perhaps counter to common intuition, there is no observable monopsony power in low-skilled labour markets in the US.
[13] Though there has been at least one study finding monopsony power in Indonesia due to barriers to entry in developing countries.
