Monopsony
What is Monopsony?
A monopsony is a market structure with a single buyer and many sellers, giving the buyer market power.
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.
Monopsony: a worked example
A rural hospital is the only nursing employer for an hour in any direction. At $16 an hour, 10 nurses are willing to work, so total hourly labor cost is 10 x 16 = $160. Attracting an 11th means posting $18, and since everyone moves to the new rate the bill jumps to 11 x 18 = $198. That 11th nurse therefore costs 198 - 160 = $38 an hour. If she would add $30 an hour of revenue, the hospital stops at 10 nurses and pays $16, even while the 10th nurse brings in $34 of value an hour.
The mistake students make with monopsony
On the graph students correctly find the quantity where MRP crosses MRC, then read the wage off the MRC curve at that quantity. The wage comes from the labor supply curve instead, which sits below MRC, since the employer pays only what it takes to attract that many workers. The mix-up happens because in a monopoly diagram you do go up to the demand curve to find the price, so students expect the upper curve to give the answer here too.
Monopsony questions
Can a minimum wage increase employment?
A minimum wage can increase employment in a monopsony labor market, which is the one setting where a price floor adds jobs. Once the law fixes the wage, the employer can hire extra workers without raising pay for those it already has, so marginal resource cost equals the legal wage and hiring expands. Push the floor above the competitive wage, though, and the usual job losses return.
What is the difference between a monopoly and a monopsony?
A monopoly is a single seller and a monopsony is a single buyer, so the market power sits on opposite sides of the transaction. A monopolist holds output back to push the price up, while a monopsonist holds hiring back to push the wage down. Both create deadweight loss, because in each case the quantity actually traded falls short of the competitive quantity.
Does a monopsony pay workers less than they are worth?
A monopsonist pays a wage below the worker's marginal revenue product, which is what economists mean when they call monopsony wages exploitative. The gap is not simply greed. The firm faces the entire upward sloping supply curve, so hiring one more person raises pay for all, and it stops short. Competing employers in an open labor market bid the wage up to MRP.
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Related terms
Common comparisons
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