Monopsony is where only one
buyer exists in a market. Example: An isolated town where one company is the
only major employer. A firm operating in a competitive labor (or other
resource) market faces a perfectly elastic supply for each factor. A monopsony,
however, faces an upward-sloping supply curve. As usual, the profit
maximization rule is to continue hiring factors of production until the
marginal cost equals the marginal revenue. In a competitive resource market,
the marginal cost of labor is equal to the hourly wage because the firm is a
price taker and all hours of labor cost the same. Under monopsony, the firm
faces an upward-sloping supply curve (average cost curve). If the average cost
curve is increasing, then the marginal cost must be higher and increasing
faster. Example: A monopsony firm in equilibrium employs 100 men at $5.00/hr
each. Everyone who wants to work at $5.00/hr is employed by the firm. In order
to hire the 101st man, the firm must raise its wage to $5.50/hr.
However, if the firm raises wages it must do so for all employees. As a result,
by hiring the 101st man, the firm’s labor costs increase by
$55.50/hour. The firm will not hire the 101st man unless the value
of his marginal product exceeds $55.50/hour.
Exploitation of labor occurs
when the wage rate is less than the value of the marginal product of labor.
Under monopsony conditions, as shown, significant exploitation of labor occurs.
One way to counteract this is to form a trade union. If a union were to
represent all resource owners in a market, that union would have monopoly power.
Employers would have to deal with the union to hire units of the resource that
was unionized. Profit maximizing firms will employ a number of resources such
that marginal revenue is equated to the new, negotiated resource price. If the
negotiated price is higher than that which would have prevailed in a
competitive market, then fewer units of the resource will be employed. The
debate over unions revolves around this point. Unions clearly benefit the
employed by providing higher wages. However, the fact of higher wages probably
means that less people will be employed. Everyone agrees that unions cause a
redistribution of income. The question is: Is it from exploiting monopsonists
to workers, or from those who lose their jobs to those who keep them?
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