Monopsonistic Markets

7 Key excerpts on "Monopsonistic Markets"

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  eBook - PDF

  Fundamentals of Labor Economics

  • Thomas Hyclak, Geraint Johnes, Robert Thornton, , Thomas Hyclak, Thomas Hyclak, Geraint Johnes, Robert Thornton(Authors)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  In this chapter we first look at the theory of wage and employment determination in monopsonistic situations. Next we identify where monopsony labor markets exist. Are they common or rare? Do they arise in certain types of markets and, if so, where? We study in detail two markets where monopsony is often thought to be common: the 1 Just as the word monopoly means “a single seller” (from the Greek words mono [meaning “one”] and polein [to sell]), the word monopsony was formed to mean “a single buyer.” However, in classical Greek the word opsonein means to buy fish or meat. So a monopsonist (taken at its literal meaning) refers to a single buyer of fish or meat products. See Robert J. Thornton, “How Joan Robinson and B. L. Hallward Named Monopsony,” Journal of Economic Perspectives 8(2) (2004): 257–261. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 212 Chapter 9 Monopsony and Minimum Wages markets for teachers and for professional athletes. Economists have expressed a re- newed interest in monopsonistic labor markets in recent years, and we examine why this is the case. Modern theories of monopsony draw heavily on the theory of job search (see Chapter 8) and are able to explain some findings on the labor market that can seem bizarre to people brought up on the theory of competitive labor markets. In particular, some recent findings on the economic effects of the minimum wage are comprehensible only when it is realized that labor markets can be monopsonistic.

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  Monopsony in Motion

  Imperfect Competition in Labor Markets

  • Alan Manning(Author)
  • 2013(Publication Date)
  • Princeton University Press

    (Publisher)

  However, it is unlikely that they would exercise this power in the long run because it would lead to costly problems of recruitment, turnover and morale’’ (pp. 213–14) ‘‘Improved communications, labour market information, and labour mobility make the isolated labour market syndrome, necessary for monopsony, unlikely at least for large numbers of workers’’ (p. 224) Hoffman (1986) 7 354 ‘‘A monopsonist is a firm that faces an upward-sloping supply curve for labor of a given quality. A university hiring economics instructors is most definitely not a monopsonist, because the relevant labor market is national and thus the number of other demanders is quite large’’ (p. 49) McConnell and Brue (1986) 9 607 ‘‘monopsony outcomes are not widespread in the US economy’’ (p. 150) Marshall, Briggs, and King (1984) 4 657 Fleisher and Kniesner (1984) 16 536 ‘‘monopsony does not appear to be a widespread phenomenon in the United States, but rather specific to a few industries’’ (p. 219) Hunter and Mulvey (1981) 4 403 Fearn (1981) 8 272 ‘‘many modern American labor economists assume generally that labor markets are competitive. The presumption that labor markets are monopsonies, however, remains in the public consciousness, particularly in union circles and in the legislatures. The situation may represent a classic ‘cultural lag’’’ (p. 117) These statistics might be thought to be a little unfair as many of these textbooks interpret monopsony literally as being a situation of a single employer of labor rather than the interpretation of an upward- sloping supply curve of labor that is used here.

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  Labor Markets and Employment Relationships

  A Comprehensive Approach

  • Joyce Jacobsen, Gilbert Skillman(Authors)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  Excess demand or supply would not only persist in this scenario, but would constitute a point of equilibrium, in the sense that no rational gain-seeking market actor is both willing and able to alter this condition. The assumptions of wage-taking behavior and flexible wage adjustment are thus both now seen to rely in part on the postulate that the total gains from labor exchange are independent of the wage rate. The economic significance of this assumption, and the possible consequences of relaxing it, are considered later in the chapter. 118 LABOR SUPPLY AND DEMAND MONOPSONY IN THE LABOR MARKET Pure monopsony Strictly speaking, monopsony is defined as a market setting in which there is only one buyer for a particular type or set of labor services offered by perfectly com-petitive sellers. More generally, it refers to situations of wage-setting market power resulting from limited competition among buyers. In all such cases, the expression of this power has potential implications for the distribution of avail-able surplus, as well as for the efficiency of labor market outcomes, and thus the total magnitude of that surplus available for distribution. First consider the case of pure monopsony power, in which there is only one buyer in an otherwise competitive labor market. As a point of departure, consider the situation depicted in figure 4.1. It shows a market supply curve for labor, S L , and the aggregate value marginal product of labor (VMP L ) curve for all firms oper-ating in the market. As discussed in the previous chapter, for given output prices this VMP L function corresponds to the market demand curve if labor buyers are wage-takers, and the intersection of S L and VMP L thus determines the equilibrium wage rate W c and quantity exchanged L c in a perfectly competitive labor market. The magnitude and distribution of welfare gains in this equilibrium are indicated by the areas marked A (representing consumer surplus) and B (representing pro-ducer surplus).

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  The Economic Theory of Costs

  Foundations and New Directions

  • Matthew McCaffrey(Author)
  • 2017(Publication Date)
  • Taylor & Francis

    (Publisher)

  It is common to distinguish between “classic” and “new” monopsony theory (Manning, 2008). Classic monopsony is the typical textbook version. In short, one buyer faces many sellers, so that the quantity supplied to this “monopsonist” is an increasing function of price. This stands in contrast with the perfectly competitive case in which the supply schedule confronting the buyer is perfectly elastic (the corresponding supply curve being perfectly flat) at the market equilibrium price. The buyer is one among many such that any attempt on his part to lower the price would result in the hiring of all units by its competitors at the current price. In other words, the buyer is a “price-maker” in the first case and a “price-taker” in the second.

  Since the model typically deals with the market for a factor of production – usually labor factors facing the demand of a profit-maximizing employer – the consequences are as follows: the employer will hire or buy units of the factor until the monetary value of the marginal product of the factor equals its marginal cost. In perfect competition, this means that the employer hires up to the point where the marginal revenue product equals its price. Under less than perfectly competitive conditions, however, marginal cost is above the price for any quantity hired but the smallest, since the price rises for all units hired as the quantity of factors hired grows (except when dealing with the case of price discrimination). Therefore, the profit maximizing point will be reached with a lower amount of factors hired than would have occurred under perfect competition, and there will be a gap between the value of the marginal product and the price of the factor, the marginal revenue product being higher and the price being lower than they would be under perfect competition.

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  Microeconomics

  • David Besanko, Ronald Braeutigam(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Thus, each baseball team was a monopsonist in the baseball players market. As in this case, a monopsonist could be a firm that constitutes the only poten- tial buyer of an input. Or a monopsonist can be an individual or organization that is the only buyer of a finished product. For example, the U.S. government is the monop- sonist in the market for U.S. military uniforms. In this section, we study a firm that is a monopsonist in the market for one of its inputs. THE MONOPSONIST’S PROFIT- MAXIMIZATION CONDITION Let’s imagine a firm whose production function depends on a single input L. The firm’s total output is Q = f(L). You might, for example, imagine that L is the quantity of labor a coal mine employs. If the mine size is fixed, the amount Q of coal produced per month depends only on the amount L of labor hired. Imagine that this firm is a perfect competitor in the market for coal (e.g., it sells its coal in a national or global market) and thus takes the market price P as given. The coal company’s total revenue is thus Pf(L). The marginal revenue product of labor—denoted by MRP L —is the additional revenue that the firm gets when it employs an additional unit of labor. Since the firm is a price taker in its output market, marginal revenue product is the market price times the marginal product of labor: MRP L = P × MP L = P(ΔQ/ΔL). Now suppose that our coal mine is the only employer of labor in its region. Hence, it acts as a monopsonist in the labor market. The supply of labor in the coal company’s region of operation is described by the labor supply curve w(L) shown in Figure 11.18, telling us the quantity of labor that will be supplied at any wage. This curve can also be interpreted in inverse form: It tells us the wage that is necessary to induce a given amount of labor to be offered in the market. Since the labor supply curve is upward sloping, the monopsonist knows that it must pay a higher wage rate when it wants to hire more labor.

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  The Antitrust Paradigm

  Restoring a Competitive Economy

  • Jonathan B. Baker(Author)
  • 2019(Publication Date)
  • Harvard University Press

    (Publisher)

  20 As sellers, firms exercise market power in output markets by raising prices or altering other terms of trade adversely to buyers (their customers), rela-tive to what would prevail in a competitive market. 21 Seller market power is called monopoly power. 22 Monopoly power may be exercised on a range of competitive dimensions—most obviously by raising prices, but also, for 14 Market Power Paroxysm example, by reducing quality or convenience, modifying product features, and altering the geographic locations and product niches served. The definition of buyer market power is analogous. Firms exercise market power in their input markets when they lower prices or alter terms of trade adversely to sellers relative to what would prevail with competition. Buyer market power is called monopsony power. While seller market power has been more extensively studied, many of the reasons for concern about its ex-ercise also apply to buyers. I discuss the problem of monopsony more exten-sively in Chapter 9. 23 Below, I offer nine reasons to believe that market power is on the rise in the United States and that it is a problem for the national economy. None are decisive individually, but their potential infirmities are not the same. So collectively, they make a compelling case. Insufficient Deterrence of Anticompetitive Coordinated Conduct The Department of Justice uncovers criminal price-fixing and market- division cartels at a steady rate, year after year. 24 On the one hand, this demonstrates successful enforcement. On the other, it shows that cartels con-tinue forming in spite of substantial enforcement effort. Which is it? Evi-dence suggests that penalties for collusion, including treble damage awards to victims, are systematically low. 25 At the same time, there is little evidence suggesting that enforcement systematically chills procompetitive conduct or induces excessive expenditures on antitrust compliance.

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  Economics of Strategy

  • David Besanko, David Dranove, Mark Shanley, Scott Schaefer(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Monopoly The noted antitrust economist Frank Fisher describes monopoly power as “the abil-ity to act in an unconstrained way,” such as increasing price or reducing quality. 8 Constraints come from competing firms. If a firm lacks monopoly power, then when it raises price or reduces quality its customers take their business to competitors. It follows that a firm is a monopolist if it faces little or no competition in its output market. Competition, if it exists at all, comes mainly from fringe firms—small firms that col-lectively account for no more than about 30 to 40 percent market share and, more importantly, cannot threaten to erode the monopolist’s market share by significantly ramping up production and boosting demand for their own products. A firm is a monopsonist if it faces little or no competition in one of its input mar-kets. The analyses of monopoly and monopsony are closely related. Whereas an analysis of monopoly focuses on the ability of the firm to raise output prices, an analysis of monopsony focuses on its ability to reduce input prices. In this chapter we discuss issues concerning monopolists, but all of these issues are equally important to monopsonists. A monopolist faces downward-sloping demand, implying that as it raises price, it sells fewer units. This is not the same as having a stranglehold on demand. Even monopolists lose customers when they increase price. (If a monopolist raises price without losing customers, then profit maximization behooves it to raise price even further. Eventually, the price will increase to the point where it drives away some customers.) What distinguishes a monopolist is not the fact that it faces downward-sloping demand, but rather that it can set price with little regard to how other firms will respond. This stands in contrast with oligopolists, described below, who also face downward-sloping demand, but must be very mindful of how competitors react to their strategic decisions.

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