Monopsony
Monopsony is a market structure in which there is a single buyer, or a dominant buyer, of a good, service, or factor of production. Monopsony is the mirror image of monopoly, which involves a single seller. A monopsonist can influence the price it pays by varying the quantity it purchases, typically paying less and buying less than would occur in a competitive market. Monopsony power is most commonly analysed in labour markets, where a single employer or a few employers dominate hiring.
Mechanics
In a competitive factor market, the price of the factor equals its marginal revenue product, and the buyer is a price taker. A monopsonist, facing an upward-sloping supply curve, recognises that hiring more workers requires raising wages not only for the new worker but for all existing workers. As a result, the marginal cost of hiring an additional worker exceeds the wage, and the monopsonist hires up to the point where marginal cost equals marginal revenue product. The resulting wage is below the competitive level, and employment is also lower.
The gap between the marginal cost of labour and the wage is the degree of monopsony power. The more inelastic the supply of labour, the greater the power. Monopsony reduces both wages and employment, generating a deadweight loss and transferring surplus from workers to the employer.
Sources of monopsony power
Monopsony power can arise from several sources. Geographic isolation, where a single employer dominates a local labour market, is a classic case, as in company towns. Concentration in an industry, where a few large employers account for most hiring, creates oligopsony power. Search frictions, in which workers face costs of finding alternative jobs, give employers wage-setting power even in markets with many firms, a phenomenon known as dynamic monopsony. Barriers to mobility, including non-compete agreements, occupational licensing, and the costs of relocation, reinforce employer power.
In product markets, monopsony can arise when a single buyer, such as a large retailer or a government, purchases a significant share of a supplier's output. Agricultural processors and defence procurement are often cited as examples.
Consequences
Monopsony has significant consequences for workers and for the economy. Lower wages reduce workers' income and can increase inequality, since workers in monopsonistic markets have limited alternatives. Lower employment reduces output and efficiency. Monopsony can also suppress investment in skills, because employers do not fully compensate workers for the productivity gains from training.
In some cases, monopsony may coexist with high consumer prices, if the employer also has market power in the product market, so that the gains from lower input costs are not passed on to consumers. In other cases, a large buyer may negotiate lower prices that benefit consumers, which is why monopsony is not always harmful and requires case-by-case analysis.
Policy
Policy responses to monopsony include antitrust enforcement to prevent excessive concentration in hiring markets, restrictions on practices that limit worker mobility such as non-compete clauses, and support for worker bargaining power through unions and minimum wages. Minimum wages can raise pay and employment in a monopsonistic labour market, contrary to the prediction of the competitive model, because they counteract the employer's wage-setting power.
Recent research has revived interest in monopsony, documenting employer concentration and wage-setting power across many labour markets, including in sectors previously thought to be competitive. This work has influenced policy debates about minimum wages, merger review in labour markets, and the regulation of labour market practices that restrict competition.
Monopsony and labour market concentration
Recent research has documented that labour markets are often more concentrated than previously assumed. In many local markets, only a few employers account for the majority of hiring, giving them wage-setting power. Studies in the United States and Europe have found that higher employer concentration is associated with lower wages, even after controlling for worker and job characteristics. This has led to a reassessment of the assumption that labour markets are competitive.
Measures of monopsony power include the concentration of hiring, the prevalence of wage-setting by a few employers, and estimates of the labour supply elasticity facing individual firms. The finding that these elasticities are often low suggests that employers have more power than the competitive model implies, with implications for minimum wages, merger review, and labour market regulation.
Monopsony and merger policy
Merger review has traditionally focused on product markets, examining whether a transaction would raise prices for consumers. A growing body of work argues that mergers should also be assessed for their effects on labour markets, since a merger between employers can reduce competition for workers and depress wages. Some authorities have begun to incorporate labour market effects into their analysis.
Assessing these effects requires defining labour markets, measuring concentration, and estimating the wage effects of changes in employer power. These tasks are challenging but increasingly feasible with detailed administrative data, and they represent an important frontier in competition policy.
Policy responses
Policy responses to monopsony include minimum wages, which can raise pay and employment in monopsonistic markets by counteracting employer power; antitrust enforcement to prevent excessive concentration; restrictions on non-compete agreements and other practices that limit worker mobility; and support for collective bargaining. Each instrument has advantages and limitations, and their appropriate use depends on the sources of monopsony power.
The evidence on minimum wages in monopsonistic markets suggests that moderate increases can raise pay without reducing employment, contrary to the prediction of the competitive model. This finding has influenced policy debates in many countries and illustrates how changes in economic theory can reshape the assessment of long-standing policies.