History
Monopsony theory was developed by economistEtymology
The term "monopsony" (from Greek μόνος (''mónos'') "single" and ὀψωνία (''opsōnía'') "purchase") was first introduced byStatic monopsony in a labour market
The standard textbook monopsony model of a labour market is a static partial equilibrium model with just one employer who pays the same wage to all the workers. The employer faces an upward-sloping ''labour supply curve'' (as generally contrasted with an infinitely elastic labour supply curve), represented by the ''S'' blue curve in the diagram on the right. This curve relates the wage paid, , to the level of employment, , and is denoted as an increasing function . Total labour costs are given by . The firm has total revenue , which increases with . The firm wants to choose to maximize profit, , which is given by: :. At the maximum profit , so the first-order condition for maximization is : where is the derivative of the function implying : The left-hand side of this expression, , is the '' marginal revenue product'' of labour (roughly, the extra revenue generated by an extra worker) and is represented by the red ''MRP'' curve in the diagram. The right-hand side is the ''Welfare implications
The lower employment and wages caused by monopsony power have two distinct effects on the economic welfare of the people involved. Firstly, it redistributes welfare away from workers and to their employer(s). 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. The diagram on the right illustrates both effects, using the standard approach based on the notion of economic surplus. 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. Similarly, the employers' surplus is the area between the horizontal line corresponding to the wage and the ''MRP'' curve, up to the employment level. The ''social'' surplus is then the sum of these two areas. 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. This is a net social loss and is called '' deadweight loss''. It is a measure of the market failure caused by monopsony power, through a wasteful misallocation of resources. 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 theMinimum wage
A binding minimum wage can be introduced either directly by law or through collective bargaining laws requiring union membership. While it is generally agreed that minimum wage price floors reduce employment, economic literature has yet to form a consensus regarding the effects in the presence of monopsony power. 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. This effect is demonstrated in the diagram on the right. Here the minimum wage is , higher than the monopsonistic . Because of the binding effects of minimum wage and the excess supply of labour (as defined by the monopsony status), the marginal cost of labour for the firm becomes constant (the price of hiring an additional worker rather than the increasing cost as labour becomes more scarce). This means that the firm maximizes profit at the intersection of the new marginal cost line (MC' in the diagram) and Marginal Revenue Product line (the additional revenue for selling one more unit). This is the point where it becomes more expensive to produce an additional item than is earned in revenue from selling that item. This condition is still inefficient compared to a competitive market. 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. This would represent the unemployment rate for this industry. This illustrates that there will be deadweight loss in a monopsonistic labour environment regardless of minimum wage levels, however a minimum wage law can increase total employment within the industry. More generally, a binding minimum wage modifies the form of the supply curve faced by the firm, which becomes: : where is the original supply curve and is the minimum wage. The new curve has thus a horizontal first branch and a kink at the point : as is shown in the diagram by the kinked black curve ''MC' S'' (the black curve to the right of point B). The resulting equilibria (the profit-maximizing choices that rational companies will make) can then fall into one of three classes according to the value taken by the minimum wage, as shown by the following table: Yet, even when it is sub-optimal, a minimum wage higher than the monopsonistic rate can raises the level of employment anyway. This is a highly remarkable result because it only follows under monopsony. 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. 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.Wage discrimination
Just like a monopolist, a monopsonistic employer may find that its profits are maximized if it ''discriminates'' prices. In this case the company pays different wages to different groups of workers (even if their MRP is the same), with lower wages paid to the workers who have a lower elasticity of supply of their labour to the firm. Researchers have used this fact to explain at least part of the observed wage differentials whereby women often earn less than men, even after controlling for observed productivity differentials. Robinson's original application of monopsony (1938) was developed to explain wage differentials between equally productive women and men. Ransom and Oaxaca (2004) found that women's wage elasticity is lower than that of men for employees at a grocery store chain in Missouri, controlling for other factors typically associated with wage determination. Ransom and Lambson (2011) found that female teachers are paid less than male teachers due to differences in labour market mobility constraints facing women and men. Some authors have argued informally that, while this is so for ''market'' supply, the reverse may somehow be true of the supply to individual firms. 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. Since the Act was effectively minimum wage legislation for women, this might perhaps be interpreted as a symptom of monopsonistic discrimination.Dynamic models of monopsony
More recent labor market models of monopsony have indicated that some monopsonistic power is likely present in otherwise competitive markets. Its cause can be linked to imperfect information as a result of search frictions. This may indicate companies operating under competitive market conditions have some limited discretion to manipulate wage rates without losing employees to competitors that is associated with the search friction in that market (ie how hard it is to find and secure another job). This modern perspective of dynamic monopsony 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.Empirical problems
The simpler explanation of monopsony power in labour markets is barriers to entry on the demand side. Such barriers to entry would result in a limited number of companies competing for labour (oligopsony). If the hypothesis was generally true, one would expect to find that wages decreased as firm size increased or, more accurately, as industry concentration increased. However, numerous statistical studies document significant positive correlations between firm or establishment size and wages. These results are often explained as being the result of cross-industry competition. For example, if there were only one fast food producer, that industry would be very consolidated. 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. However, monopsony power might also be due to circumstances affecting entry of workers on the supply side (like in the referenced case above), directly reducing the elasticity of labour supply to firms. 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. An alternative that has been suggested as a source of monopsony power is worker preferences over job characteristics. Such job characteristics can include distance from work, type of work, location, the social environment at work, etc. If different workers have different preferences, employers could have local monopsony power over workers that strongly prefer working for them. Empirical evidence of monopsony power has been relatively limited. 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. Though there has been at least one study finding monopsony power in Indonesia due to barriers to entry in developing countries. Several studies expanding their view for monopsony power have found economic and labor mobility in the US precludes any detectable monopsony effects with the notable exceptions of professional sports and (with some disagreement) nursing. Both of these industries have highly specialized labor conditions and are generally not substitutable. According to a 2020 review of the existing literature on monopsony in labor markets, there is some evidence of monopsony power in higher income industries due to contractual limitations (non-competes for example) though the author notes that the large majority of economists do not ascribe notable monopsony effects to labor markets.See also
* Bilateral monopoly * Canadian Wheat Board—a (formerly general, now limited) monopsony in agriculture * Captive supply * Market forms *References
Further reading
* * * * * * * * * * * * *Suresh Naidu and Eric A. Posner. 2021.External links
* {{Authority control * Market failure Monopoly (economics) Imperfect competition