Monopsony

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A market in which there is only one buyer.

As with monopolies, the pure state is rare. Examples include some advanced weapons systems; most research (see external links) addresses factor markets, such as for employment.

Contents

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Description

Here is a diagram illustrating markets for productive factors. It is closely analogous to the diagram used for monopoly, except that it's upside-down and the lines are curved.

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Here, labor demand is convex because the same firm is facing a production function in which capital can be substituted for labor. When prices are high, then not only are customers restricted by budget, they have the option of replacing labor with equipment. Likewise, the supply curve is usually understood to become much less elastic as wages rise. Put another way, as wages and hours rise, leisure becomes more valuable to workers as well. Of course, these things are dependent on many things, such as the demand curves for many products, the exposure to foreign markets, and so on. But here, we're using the simple assumption that the demand curves for products are straight & diagonal, and that it's not difficult for managers to substitute capital for labor.

Now, what happens to the demand for labor in a monosonoid firm?

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The shaded rust-colored area represents producer surplus captured by the monopsonist from the employee. Note that labor demand for the firm is determined (as before) by the firm's production function, which reflects demand for its products.

Here, there's only one firm with a demand for a specialized type of labor; the most familiar real-life examples are regions. Since the monopsonoid's market dominance is felt in the input market, we would expect to see a deflection from the supply curve. The monopsonoid firm experiences a supply that represents the entire factor market, so when it increases its number of workers, it experiences an increase in marginal wages. This will affect its optimal hiring decision. Hence, it will consider its marginal unit labor cost, which is "inside of" the labor supply curve. It will hire based on the intersection of its internal "demand" for labor (blue line) and the marginal unit labor cost curve. As always, the supply curve will determine wage costs.

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Monopsony in Labor Markets

In treating labor markets, it is customary to use neoclassical assumptions of perfect competition and high levels of elasticity with respect to wages.[1] In this model, employers are price takers; they must pay the market wage or no one will consent to work for them. In conditions where searching is costly, or there is substantial "certification" required for employment, the conditions of monopsony become much more realistic.

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Notes

  1. ↑ According to Manning (2003), the implication of neoclassical theory is that if the employer drops wages by an infinitesimally small amount ("one cent"), then all the employees will leave the firm. Another, more kindly way of expressing it is that employers are "price takers," since there are supposedly many employers for each worker, and while slight unilateral wage reductions by employers seldom cause the entire labor force to leave, the assumption is that a firm paying below-market wages is in an unsustainable position, sustained only by frictions in the labor market. This is another example of a stylized fact.
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See Also

imperfect competition
monopolistic competition
oligopsony

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External Links



James R MacLean (13:31, 13 September 2007 (PDT))

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