Monopsony

In economics, a monopsony (from Ancient Greek μόνος (mónos) 'single' + ὀψωνία (opsōnía) 'purchase') is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. In the microeconomic theory of monopsony, a single entity is assumed to have market power over sellers as the only purchaser of a good or service, much in the same manner that a monopolist can influence the price for its buyers in a monopoly, in which only one seller faces many buyers. In economics, a monopsony (from Ancient Greek μόνος (mónos) 'single' + ὀψωνία (opsōnía) 'purchase') is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. In the microeconomic theory of monopsony, a single entity is assumed to have market power over sellers as the only purchaser of a good or service, much in the same manner that a monopolist can influence the price for its buyers in a monopoly, in which only one seller faces many buyers. Monopsony theory was developed by economist Joan Robinson in her book The Economics of Imperfect Competition (1933). Economists use the term 'monopsony power' in a manner similar to 'monopoly power' as a shorthand reference for a scenario in which there is one dominant power in the buying relationship, so that power is able to set prices to maximize profits not subject to competitive constraints. Monopsony power exists when one buyer faces little competition from other buyers for that labour or good, so they are able to set wages and prices for the labour or goods they are buying at a level lower than would be the case in a competitive market. A classic theoretical example is a mining town, where the company that owns the mine is able to set wages low since they face no competition from other employers in hiring workers, because they are the only employer in the town, and geographic isolation or obstacles prevent workers from seeking employment in other locations. Other more current examples may include school districts where teachers have little mobility across districts. In such cases the district faces little competition from other schools in hiring teachers, giving the district increased power when negotiating employment terms. Alternative terms are oligopsony or monopsonistic competition. The term was first introduced by Joan Robinson in her influential book, The Economics of Imperfect Competition, published in 1933. Robinson credited classics scholar Bertrand Hallward at the University of Cambridge with coining the term. 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, w {displaystyle w} , to the level of employment, L {displaystyle L} , and is denoted as an increasing function w ( L ) {displaystyle w(L)} . Total labour costs are given by w ( L ) ⋅ L {displaystyle w(L)cdot L} . The firm has total revenue R {displaystyle R} , which increases with L {displaystyle L} . The firm wants to choose L {displaystyle L} to maximize profit, P {displaystyle P} , which is given by: At the maximum profit P ′ ( L ) = 0 {displaystyle P'(L)=0} , so the first-order condition for maximization is where w ′ ( L ) {displaystyle w'(L)} is the derivative of the function w ( L ) , {displaystyle w(L),} implying The left-hand side of this expression, R ′ ( L ) {displaystyle R'(L)} , 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 marginal cost of labour (roughly, the extra cost due to an extra worker) and is represented by the green MC curve in the diagram. Notably, the marginal cost is higher than the wage w ( L ) {displaystyle w(L)} paid to the new worker by the amount This is because, by assumption, the firm has to increase the wage paid to all the workers it already employs whenever it hires an extra worker. In the diagram, this leads to an MC curve that is above the labour supply curve S. The first-order condition for maximum profit is then satisfied at point A of the diagram, where the MC and MRP  curves intersect. This determines the profit-maximizing employment as L on the horizontal axis. The corresponding wage w is then obtained from the supply curve, through point M.