Monopoly vs Monopsony
Monopoly and Monopsony are related concepts in AP Economics that students often mix up. A monopoly is a market structure with a single seller producing a unique product with no close substitutes and significant barriers to entry. A monopsony is a market structure with a single buyer and many sellers, giving the buyer market power. Here is how they compare side by side.
A monopolist is the sole provider of a good or service and faces the entire market demand curve, allowing it to set price above marginal cost. Because of high barriers to entry, other firms cannot enter the market to compete.
In a monopsony, the single buyer can influence the price of the product by changing the quantity it purchases. This allows the monopsonist to pay a lower price than in a competitive market. Monopsony power can arise in factor markets, such as a large employer in a small town.
Monopoly vs Monopsony: Selling Power vs Buying Power
| Monopoly | Monopsony | |
|---|---|---|
| Side of the market | The only seller, in a product market | The only buyer, in a factor market such as labor |
| Curve the firm faces | The downward-sloping market demand curve | The upward-sloping market supply curve |
| The marginal twin | Marginal revenue lies below demand | Marginal resource cost lies above supply |
| Decision rule | Produce where MR equals MC | Hire where MRP equals MRC |
| Where the price comes from | Move up to demand at the MR = MC quantity | Move down to supply at the MRP = MRC quantity |
| Distortion and who bears it | Output restricted, price above MC, buyers pay more | Hiring restricted, wage below MRP, workers paid less |
What a monopoly does to a market
A monopoly is the only seller, so the demand curve for the whole market is also the demand curve for the firm. Because it must lower price on every unit to sell one more, marginal revenue falls below price: with linear demand P = a - bQ the marginal revenue curve is MR = a - 2bQ, twice as steep. The monopolist finds the output where MR equals MC and then moves up to the demand curve to charge the highest price buyers will pay for that quantity. The result is a price above marginal cost and an output below the quantity at which price would equal marginal cost, and the gap between those two quantities is where the deadweight loss comes from.
What a monopsony does to a market
A monopsony is the only buyer, so the market supply curve of the resource is also the supply curve facing the firm, and it slopes upward. Paying a single uniform wage, the monopsonist has to raise the wage for everyone already hired in order to attract one more worker, so the marginal resource cost of that worker exceeds the wage itself and MRC lies above supply. With a linear labor supply curve W = a + bL, marginal resource cost is MRC = a + 2bL, the exact mirror of the monopoly marginal revenue result. The firm hires where MRP equals MRC and then drops down to the supply curve to pay the lowest wage that will attract that many workers, so employment and pay both end below the competitive level. The full diagram is worked through at /micro/factor-markets.
The mistake: reading the price off the wrong curve
The single most common error is treating the marginal curve as the price curve. In monopoly you find the quantity where MR equals MC and move up to demand; in monopsony you find the quantity where MRP equals MRC and move down to supply, never across to MRC. Once you see the two as mirror images the rest follows: a monopoly restricts what it sells to push price above marginal cost, while a monopsony restricts what it buys to push the wage below the marginal revenue product of labor. Both results depend on the firm charging or paying one uniform price, and both break down without it, since a perfectly price-discriminating monopolist produces the efficient quantity and a monopsonist that can pay each worker a different wage hires the efficient number, though it pays each of them no more than their reservation wage. That uniform-wage logic is also why a minimum wage behaves differently here, because one set above the monopsony wage and no higher than the competitive wage raises pay and employment at the same time.
Frequently asked questions
What is the difference between a monopoly and a monopsony?
A monopoly is a single seller facing many buyers, while a monopsony is a single buyer facing many sellers, most often a single large employer in a labor market. A monopoly restricts output to push price above marginal cost, and a monopsony restricts hiring to push the wage below the marginal revenue product of labor.
Why does marginal resource cost lie above the supply curve in a monopsony?
Because a monopsonist paying one uniform wage must raise that wage for every worker it already employs in order to attract one more, so the true cost of the extra worker is higher than the wage shown on the supply curve. With a linear labor supply curve, the marginal resource cost curve starts at the same intercept and rises twice as steeply.
Can a firm be both a monopoly and a monopsony?
Yes, a firm can be a monopoly and a monopsony at the same time, selling as the only producer of its output while buying as the only significant employer in its local labor market. The two kinds of power sit on opposite sides of two different markets, so nothing stops one firm from holding both.
Does a minimum wage always reduce employment?
No, a minimum wage does not always reduce employment: in a monopsony labor market, one set above the monopsony wage and no higher than the competitive wage raises pay and employment together, because the wage floor removes the firm's incentive to hold hiring down to keep the wage low. In a competitive labor market, a minimum wage above the equilibrium wage does reduce the quantity of labor demanded and creates a surplus of labor.
Live Monopoly graph. Drag the curves, or open the full version.
Live Factor Markets graph. Drag the curves, or open the full version.
Related comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated