Monopsony

Monopsony is a market condition with a single buyer and multiple sellers. It is an imperfect market condition—the single buyer is the controlling entity. Similar to monopoly, where a single seller dominates and controls product price. In a monopsony, a single buyer determines the factor price.  

Factor price refers to the factor of production—the resources people use to produce goods and services. If there is a single employer in the labor market, the business can take undue advantage. Imposing a minimum wage directly or enforced by law can safeguard labor. Usually, fixed minimum wage reduces employment, but in a monopsonistic market, employment increases.

• Monopsony is similar to a monopoly; it hinders the competitive market and distorts prices. It results in lower wages for labor and huge profits for the dominant employer.
• In such a market, employers maximize profits by discriminating prices. The employer pays different wages to different groups of workers for the same work. Lower wages are paid to those workers who struggle to find employment elsewhere.
• One solution to low wages in such a market is the introduction of minimum wages for labor. Minimum wage, if set at an appropriate level, can result in both increase in wages for the labor as well as an increase in employment.

Monopsony is an imperfect market condition. It does not follow demand and supply when it comes to determining prices. Let us try to understand the factor pricing in monopsony and how it reduces the factor cost with the help of a graph.

1. As shown above, in a perfectly competitive market, the price of the factor (FP) would have been fixed. Here demand (D)/Marginal Revenue Product (MRP) is equal to supply (S).
2. Also, the MFC curve is steeper than the supply curve. This implies that any further increase in factor results in relatively much higher Marginal Factor Cost (MFC). The marginal factor cost is the increment to total costs paid for a factor of production resulting from a one-unit increase in the amount of the factor employed. 
3. The factor quantity at which the profit would be maximum will be at the point where marginal revenue is equal to the marginal cost, i.e. (FQm) in the curve.
4. The marginal cost of employing labour is the change in total labour costs from employing one extra worker. The marginal revenue of labor is the additional amount of revenue a firm can generate by hiring one additional employee. 
5. Further, plotting a line from point P to the Supply curve (S), the intersection determines the Factor price, which is FPm in this case. Here MFC=MRP or the quantity where profit is maximum. Factor price is the unit cost of using a factor of production, such as labor or physical capital.

This condition can exist in almost any kind of market and can affect the prices of various factors of production.

Following are real-time examples of monopsony:

1. Food supermarket retail brands like Walmart are the most common example of monopsony. A single retailer has a huge buying power due to his deep pockets. Thus, these retailers control the prices at which farmers sell their produce.
2. Another example could be China negotiating the prices of minerals. China buys them from low-income African countries. This again is down to China’s massive purchasing power.
3. Generally, the Government of a country uses its immense purchasing power to negotiate the price of the deals while purchasing technologies or equipment. Governments can act like a monopsony in the labor market. This is seen in the hiring of Federal employees as well.
4. If a country has only one electricity producing company, then that company can control or negotiate the buying price of coal.

Monopsony Power

A monopsony is usually a very large entity or a firm with huge buying power. In such a market scenario, very few alternatives are available to the suppliers and producers. This is the cause of immense bargaining power. Ultimately factor cost is reduced, and the company’s profit margin increases. Factor price is the unit cost of using a factor of production, such as labor or physical capital. 

Labor Market

Monopsony in the labor market occurs when one single entity or firm generates a lot of jobs in that particular market. As a result, one single business controls labor wages.

1. As can be seen in the figure, in a perfectly competitive market, the wage (W) would have been fixed where demand (D)/ Marginal Revenue of Labor (MRL) is equal to the supply of labor.
2. Also, the Marginal Labor Cost (MLC) curve is steeper than the supply curve. This implies that any further increase in labor costs much higher. We assume that an increase in the wage of each additional labor will eventually result in increased wages for all the laborers.
3. The quantity of labor where the profit would be maximum will correspond to the point where marginal revenue is equal to the marginal cost, i.e., FQm in the curve.
4. The wage of the labor can be determined by plotting a line from point P (MLC=MLR) to the supply curve (S). The intersection on the Supply curve determines the wage—Wm.

The concept of a minimum wage was introduced to rectify this. In an ideal scenario, fixing a minimum wage for labor should result in unemployment, but reverse effects are observed in the real world.

Let’s understand why this happens with the help of a graph.

From the figure:

1. The original wages and quantity of labor employed as per monopsony were at Wm and Qm, respectively (refer to the previous graph).
2. If the wages are now fixed to a minimum at W, the marginal cost of labor will remain constant. The marginal cost of employing labour is the change in total labour costs from employing one extra worker.
3. Therefore, employers will benefit maximum when the marginal labor cost is equal to marginal revenue of labor—denoted by point O1 on the curve. The marginal revenue of labor is the additional amount of revenue a firm can generate by hiring one additional employee. 
4. Plotting line from point O1 to its corresponding point on the Supply curve corresponds to point O, and thus the quantity of labor has increased from Qm to Q.
5. Again, if the minimum wage is further increased to W1, following the steps as mentioned in point 2, the quantity of labor will decrease back to Qm.

This has been a Guide to What is Monopsony & its Definition. Here we discuss its examples, monopsony in the labor market, and minimum wage. You can learn more about it from the following articles –

• Economics
• Monopolistic
• Cash Cow