Monopsony

The term "monopsony" (from Greek μόνος (mónos) "single" and ὀψωνεῖν (opsōneîn) "to purchase fish") Robinson credited classics scholar Bertrand Hallward of the University of Cambridge with coining the term. ==History==

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 or prices for the labour or goods they are buying at a level lower than would be the case in a competitive market. In economic literature the term "monopsony" is predominantly used when referring to labour markets; however, it could be applied to any industry, good or service where a buyer has market power over all sellers. 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. ==Static 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. 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: :e=\frac{R'(w)-w}{w}\,\!. The ratio e 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. Thus the rate of exploitation is zero under competitive conditions, when this elasticity tends to infinity. Empirical estimates of e by various means are a common feature of the applied literature devoted to the measurement of observed monopsony power. Finally, it is important to notice that, while the gray-area redistribution effect could be reversed by fiscal policy (i.e., taxing employers and transferring the tax revenue to the workers), this is not so for the yellow-area deadweight loss. 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. The most common kind of regulation is a binding minimum wage higher than the monopsonistic wage. Minimum wage (which it can do due to a lack of competition) at A with a higher employment ''L'. However, in this example, the minimum wage is higher than the competitive one, leading to involuntary unemployment equal to the segment AB''. 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 (' 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: :w=\begin{cases}w_{min},&\mbox{if }w_{min}\ge\;w(L)\\w(L), &\mbox{if }w_{min}\le\;w(L)\end{cases}\,\! where w(L) is the original supply curve and w_{min} is the minimum wage. The new curve has thus a horizontal first branch and a kink at the point : w(L)=w_{min}\,\! 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. 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 underestimation of outside wages could contribute to monopsony power for employers. == 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. 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. 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) 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 ==