The easiest way to show what a monopson is to present it as a mirror reflection of a monopoly. On the market with a monopoly structure, there is only one producer and many recipients. However, in the case of monopson, the situation is reversed and there is only one recipient of goods or services and many producers supplying these products.
Monopson and the price of production factors
The marginal cost of an additional unit of factor of production exceeds its price. Increasing the amount of the production factor used, the company must take into account the fact that in this way it raises the price paid to all previously employed units of this factor.
Monopsony and the demand for work
We can call a monopsonist the only or potentially the only buyer of a good coming from a given branch of the economy.
The market for production factors is a monopsony market. The growing supply curve of these factors means that the company must always offer higher prices for the services of a given factor as its demand for this factor increases.
An enterprise with a monopsonist position directly affects the prices of production factors. Due to the fact that it is dealing with a growing supply curve of a given factor, it is forced to offer a higher price to attract more of it. The marginal cost of the additional unit of factor of production exceeds its price. By increasing the amount of the manufacturing factor used, an enterprise must take into account that in this way it will increase the price paid to all previously employed units of this factor. As long as the monopsonist acquires additional quantities of the production factor, its marginal expenditure on them is not lower than the marginal income of the factor.
For companies on the perfectly competitive market, when purchasing production factors, the marginal and average expenses for these factors are leveled out, which means that these purchases do not change the prices of the factor. This rule does not apply to monopsony, because it affects the price of the factor. The market line of supply of a given factor presents a given amount from the monopsony point of view. Monopson pays the same price for each unit of the factor, so its supply determines the average expenses for its purchase. He must spend more if he wants to buy more. However, the size of the factor's employment is determined by marginal expenditure. Raising the price of the next acquired unit means at the same time an increase in the prices of all acquired units, so the marginal expenditure curve is above the average expenditure curve.
A monopsony enterprise must take into account the fact that increasing employment will raise the pay rate. Due to the fact that all employees must receive the same rates, the marginal cost of an additional employee can not be reduced only to the wage offered to him, but must also take into account the increase in the wage fund of employees previously employed. In the case of monopsony, the marginal cost of labor exceeds the rate of pay and increases with the increase in employment. The company maximizes its profit when the marginal revenue (income) obtained by employing an additional employee will be equal to its marginal cost. If this is not the case, it means that the company has the wrong size of employment. The goal of monopsony is to reduce demandenterprises for work.
On the perfectly competitive market, employees receive higher wages than under monopsony.
Examples of monopsons
- dairies (taking into account a small area) buying milk from farmers.
- Manning, A. (2003). Monopsony in motion.
- Manning, A. (2003). The real thin theory: monopsony in modern labour markets. Labour economics, 10(2), 105-131.