The monopsonist

A monopsonist is a single buyer in a market.

There are many examples of monopsonists exerting power in both labour markets and product markets.

For example, in many rural towns, one large firm may employ the majority of workers, and large super-market chains can exert monopsony power over their suppliers, forcing them to accept low prices.

Multi-national and trans-national firms may often locate in areas without any major competitors in the locality, and can set wages below any competitive market rate.

In London, Paris and New York - as in many major cities - single firms or public organisations run the metro system and can dictate pay and conditions of its train drivers.

Being a single employer of labour, monopsonists can exert their power in a market and can can influence wages and employment levels.

In particular, a monopsonist can set wages and employment levels below those in a competitive labour market.

Large supermarket chains can exert their buying power by forcing down the prices they pay to their suppliers. In this situation, supermarkets can exert their bargaining power in negotiations with suppliers, pushing for the lowest price possible. This may be especially difficult for farmers with perishable stocks as they may have a limited time during which negotiations can be concluded.

The monopsonist diagram

Graphically, if a single employer controls the market it will employ quantity QL2, where the marginal cost of labour (MCL) equals the marginal revenue product (MRP).

The monopsonist needs to increase the wage rate to attract additional workers into the industry, but the average wage is only W2. Hence the reward to labour is the area W2, e, QL2 and zero.


The impact of a union minimum wage

A trade union can set a minimum wage to counteract a monopsonist.

The minimum here increases wages (from W2 to W) and the level of employment (from QL2 to QL). It can raise the wage even further, to W1, but at the cost of lower employment (back to QL2). If it raises the minimum above W1, more jobs will be lost, even compared with the monopsonist.

Perfect competition

More on perfect competition.

Perfect competition

What are the disadvantages of oligopoly?

Game theory

How does game theory explain oligopoly?

Game theory

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